Measuring Housing Affordability: Looking Beyond the Median

27 Pages Posted: 2 Dec 2008

See all articles by Robert J. Hill

Robert J. Hill

UNSW Australia Business School, School of Economics

Quan Gan

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Date Written: April 28, 2008

Abstract

We draw a distinction between the concepts of purchase affordability (whether a household is able to borrow enough funds to purchase a house) and repayment affordability (the burden imposed on a household of repaying the mortgage). We operationalize this distinction in the context of a new methodology for constructing affordability measures that draws on the value-at-risk concept and takes account of the whole distribution of household income and house prices rather than just the median. Empirically we find that the distinction between purchase and repayment affordability can be pronounced. In the Sydney prime mortgage market over the period 1996 to 2006, repayment affordability deteriorated very significantly while purchase affordability remained quite stable. This difference can be attributed to the loosening of credit constraints in the mortgage market which it seems has carried through primarily into higher house prices. We also consider how median house-price-to-income ratio measures of affordability can be extended to take account of the whole distribution of income and house prices. We propose a new quantile based measure which indicates that the housing affordability problem may be systematically worse than suggested by standard median measures.

Keywords: Housing affordability, Affordability at risk, Affordable limit, Mortgage market

JEL Classification: C43, E25, E64, R31

Suggested Citation

Hill, Robert James and Gan, Quan, Measuring Housing Affordability: Looking Beyond the Median (April 28, 2008). UNSW Australian School of Business Research Paper No. 2008 ECON 09, Available at SSRN: https://ssrn.com/abstract=1310294 or http://dx.doi.org/10.2139/ssrn.1310294

Robert James Hill (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Quan Gan

The University of Sydney - Discipline of Finance ( email )

Discipline of Finance
University of Sydney
Sydney, NSW 2006
Australia

HOME PAGE: http://sydney.edu.au/business/staff/quang

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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