each decile. The same progressive method was also used in technical assistance provided to Mongolia and was tested against the market reality and found to be acceptable.

That said, the modified EIR is recommended as a fallback method when data sources do not allow for the modified RIM, described next.

# 4.2 Modify the Residual Income Method

In countries with relatively good quality household income and/or expenditure data, in particular those with either a recent HIES, LSMS, or equivalent household survey, a modified version of the RIM is recommended. This would provide a more nuanced perspective on the affordability situations of different household types across different income segments. Where income data is unavailable or unreliable, expenditure could be used as a proxy for income. This may be termed the Residual Expenditure Method (REM), where residual expenditure (i.e., total expenditure on non-housing items, or _after_ -housing expenditure) is used as a proxy for RIM’s residual income (i.e., income remaining after expenditure on housing). Essentially, if residual expenditure is less than the basic minimum non-housing standard for that household type, the household may be considered to be housing-cost-burdened.

The robustness of the REM hinges upon two building blocks as described below: (i) estimating the residual non-housing expenditure and (ii) establishing a proxy non-housing budget standard.

**_Estimate the residual non-housing expenditure_ .** The REM approach estimates the non-housing expenditure aggregate in a direct manner: The non-housing aggregate is simply a summation of all recurrent expenditures that are not related to housing. This is in contrast to the traditional RIM model, in which residual income is estimated by excluding housing costs from total income. Similar to the poverty methodology used officially, the nominal aggregate is then adjusted for spatial differences in cost of living and transformed using an adult equivalence scale.

**_Establish a proxy non-housing budget standard_ .** Given that most developing countries do not have an official budget standard, it is necessary to establish proxy living standards for non-housing expenses in order to use the RIM (or REM). It may be possible to use a single non-housing standard across all income groups based on proxies from existing poverty measurements. For example, based on LSMS, HIES or their equivalent, a minimum living standard for food and non-food items (including housing) can be estimated. It may be possible to extrapolate the non-housing expenditure per capita – and accordingly the non-housing budget standard per capita – from this data. This non-housing budget standard per capita can then be used to extrapolate non-housing budget standards for households of different types (e.g., single person household, couple, couple with 1 dependent, couple with 2 dependents etc.) using equivalence scales.

Ideally, it would be better to develop two non-housing budget standards: a low-cost standard for individuals in the bottom income quintiles, and a moderate-cost standard for those in higher-income quintiles. This is because expenditure decisions of low-income persons and households are likely to be different from middle-income groups with regard to what is considered a basic acceptable quality of, for example, education or health care.

# 4.3 Adopt Suitable Equivalence Scales

While there has been considerable research by statistical and other agencies trying to estimate appropriate values for equivalence scales, there is no single accepted global standard. “The choice of a 14