Measuring Housing Affordability: A Composite Approach

The term housing affordability has come into popular usage in the last two decades replacing housing need at the centre of debate about the provision of adequate housing for all. This is largely necessitated by the need to deal with the increasing evidence of housing crisis (housing market failures) brought about by current pro-market reforms within the housing sector in many countries. Despite its growing relevance, there is still no common consensus on how best to conceive and measure housing affordability. However, it is increasingly becoming evident that a more integrated approach to using different housing affordability measures could provide better analytical platform in housing affordability research and policy discourse. This paper advocates for composite approach methodologies that approximate effectively the varied dimensions of housing affordability into an aggregate affordability measure. Such an approach was subsequently employed to assess the magnitude of Nigerian urban housing affordability problems. The technique modified and recombined both the shelter-poverty affordability measure and housing expenditure-to-income ratio (adjusted with housing quality) into a composite affordability index using relevant data from the Nigeria Living Standards Survey 2003-2004 (NLSS) database. Findings indicate that the aggregate approach captures the diverse aspects of housing affordability more than conventional housing affordability ratios. Debilitating contextual issues of poverty and poor quality housing characterising most developing countries were also captured and factored into the aggregate affordability measure. Thus, it exposes the wider dimension of housing affordability problems (especially in developing countries). At a broader level, such conception of housing affordability could contribute to sharpen the current housing policy reform orientation debates in order to minimise situations where policy reforms options are implemented in many developing countries without their fundamental premise appearing to be thought through both in terms of import and implications. The author is grateful for the support of the Pat Cam Awards Fund at the Centre for Urban and Regional Studies (CUR), University of Birmingham. Measuring Housing Affordability: A Composite Approach Workshop: Housing and Sustainable Urbanisation in Developing Countries (W17) Author: Okey Ndubueze 2 Introduction The term housing affordability has come into popular usage in the last two decades replacing ‘housing need’ at the centre of debate about the provision of adequate housing for all (Whitehead 1991; Swartz and Miller 2002). According to Fallis (1993), this move could be attributed to the increasing adoption of more market-oriented reforms within the housing sector in many countries. Consequently, increasing concerns over rising levels of homelessness, housing costs, mortgage defaults and foreclosures, trap of ‘negative equity’ experienced by households, declining neighbourhoods, and over-heated housing markets have concertedly pushed housing affordability into the centre of housing policy discourse since the early 1990s (MacLennan and Willians, 1990; Whitehead, 1991; Boelhouwer and van der Heijden, 1992; Linneman and Megbolugbe, 1992; Lefebvre, 1993; Bramley, 1994; Freeman, et al, 1997; Katz et al. 2003). While the current housing affordability debates tend to be focused on countries with developed market economies, most of the issues surrounding the debate even holds more relevance for developing countries that are caught in the crossroads of pro-market economic and housing reforms. This is especially so given the increasing tendency by International lending agencies such as the World Bank to coerce these countries to pursue these pro-market policy reforms. However, the evident increase in urban housing affordability problems and decline in housing conditions for the majority of urban dwellers (UNCHS; 1997b and 2001), seem to raise serious doubt about the efficacy of the market approach (Baken and Linden, 1993; Jones, 1996; UNCHS, 1993 and 1996a). Within the context of the challenge to ensure access to adequate housing for all, hardly can any indicator be more useful than housing affordability in offering valid insights on the appropriateness of housing policy prescriptions/ interventions. Beyond reflecting the performance of the housing sector, housing affordability uniquely establishes the relationship between people and housing in monetary terms, and at a deeper level expresses the link between social and economic system and the quest for satisfaction of basic human needs that is not merely monetary (Stone, 1993). Therefore, how analytical indicators and normative standards of housing affordability are conceived and measured are indeed very important. The current situation, where conventional housing affordability measures are narrowly conceived to emphasise particular aspects and dimensions of housing affordability is less than satisfactory. A move towards a more integrated approach in measuring housing affordability may be more beneficial in contributing to the current debate. That need justifies the purpose of this study. The Problem of Definition The term (housing) afford–ability simply implies the ability to afford housing. However, beyond this point, any attempt to precisely define and grapple with the concept becomes slippery. Linneman and Megbolugbe (1992, p.371) conceded, “talk of housing affordability is plentiful, but the precise definition of housing affordability is at best ambiguous. ” A survey of literature reveals a lack of consensus among academics and housing development experts on how it should be defined and measured. This may be attributed to the fact that housing affordability is a contested issue in which different groups struggle to impose their own definition and solution to the problem. While economist tend to overtly emphasise objectivity, utility and conceptual clarity in attempts to define housing affordability, sociologists have rather tended to focus on social inequality concerns and the capacity of housing affordability research to capture the ‘real’ housing experience of underprivileged households (Gabriel, et al 2005). This ambiguity is also not unconnected to the different understandings and contentions of the root causes of housing affordability especially the extent to which it can be attributed to inadequate household income or inadequate housing (Gabriel, et al 2005). One of the most helpful definitions of housing affordability was offered by MacLennan and Williams (1990, p.9) as being “concerned with securing some given standard of housing (or different standard) at a price or a rent which does not impose, in the eye of some third party Measuring Housing Affordability: A Composite Approach Workshop: Housing and Sustainable Urbanisation in Developing Countries (W17) Author: Okey Ndubueze 3 (usually the government) an unreasonable burden on household incomes. ” Bramley (1990, p. 16) further specified that “households should be able to occupy housing that meets well established (social housing) norms of adequacy (given household type and size) at a net rent which leaves them enough income to live on without falling below some poverty standard. ” As observed by Hancock (1993, p.129) these two definitions are concerned with standards of housing consumption and more importantly, they capture the notion of opportunity cost, which she regarded as the essence of housing affordability i.e. what has to be foregone in order to obtain housing and whether that which is foregone is reasonable or excessive in some sense. Hancock further observed that in these definitions, housing and basic non-housing goods are taken as merit goods i.e. goods whose consumption has a socially desirable minimum within the society. According to her, “any rent would be affordable, which leaves the consumer with socially-acceptable standard of both housing and non-housing consumption after rent is paid” (Hancock, 1993, p.144). Differently put, affordability implies the ability of households to pay the costs of housing without imposing constraints on living costs (Stone, 1993). Putting these elements together, Freeman, et al (1997, p.2) asserted that housing affordability concentrates on the relationship between housing expenditure and household income and defines a (relative or absolute) standard in terms of that income above which housing is regarded as unaffordable. Affordability considers not just housing but also what quality of housing that is consumed and whether the household has enough income remaining for other necessities of life after offsetting their housing cost. Generally, these definitions tend to invoke, with different levels of emphases some or all of the following three issues standards of socially acceptable housing, housing cost and quality of life (King, 1994). Within these contexts, adequacy of shelter and residual income are considered the core components of the definition of housing affordability. Such definitions inherently involved value judgments about not only the quality and merit-goods attributes of housing but also about the relationship between housing expenditure and housing income and acceptance of the view that housing should represent no more than a given element within that income. (DTZ; 2004, p.17). In order to operationalise these definitions, the standards are usually defined in a relative way (i.e. when defined in relation to existing situation of households in general) or in a normative way (i.e. when defined by an independently determined value). The use of normative standards, which are often defined in terms of ratios has been subject to a wide range of criticisms (Baer, 1976; Marks, 1984; Stone, 1993; Hancock, 1993; Bramley, 1994; Hulchanski, 1995; Glaeser and Gyourko, 2003). The problem is that there is hardly any consensus around need-type standards (such as living standards) on whi