particular equivalence scale depends on technical assumptions about economies of scale in consumption as well as value judgements about the priority assigned to the needs of different individuals such as children or the elderly” (OECD, n.d.). The modified-OECD equivalence scale appears to be the most widely used among the different equivalization methodologies for household income. It assigns a weight of 1 point to the first adult in the household, 0.5 points to each additional person aged 15 years or older, and 0.3 points to each child under the age of 15 (OECD, n.d.). Equivalized household income is then derived by dividing total household income by the sum of the equivalence points allocated to the household.

However, for the purpose of housing affordability calculations using the progressive EIR and the RIM or REM, two sets of equivalence scales will be needed: (i) one based on housing _plus_ non-housing costs for the progressive EIR, and (ii) another based on only non-housing costs for the RIM or REM.<sup>16</sup> In countries where there are no equivalence scales, perhaps a standard scale could be developed and applied. Given the variations in the definitions of equivalized and non-equivalized income, it is recommended that results of affordability analyses be presented in both forms, where possible.

4.4 Summary of Application of the REM in Urban Pakistan Using data from the Pakistan Household Integrated Economic Survey (HIES) 2018/19, the REM was used to estimate housing unaffordability for households in urban areas of the country (see Annex 1). The results from the application of the REM were juxtaposed with the results from the conventional EIR approach to compare robustness of the two methods.

As described in previous sections, the RIM approach is often limited in its ability to measure housing affordability in low income and developing country contexts due to the lack of reliable income data as well as appropriate budget standards (i.e., the minimum food and non-food expenditure that is necessary to maintain a good standard of living). As with most developing countries, in Pakistan data on incomes is difficult to collect and not particularly informative to gauge welfare, owing to high informality, seasonality (relevant for large agriculture sectors) and irregularity (such as reliance on foreign remittances) of incomes, as well as widespread production for home use. Therefore, consumption expenditure is used as a proxy for household welfare in Pakistan.

The REM approach in Pakistan relies on two key components to estimate housing affordability: (i) households’ non-housing consumption<sup>17</sup> aggregate, as a proxy for residual income, and (ii) a minimum socially acceptable standard for non-housing residual expenditures, or a ‘non-housing poverty line.’ This differs from the traditional RIM method in two ways. First, to determine households’ current level of wellbeing, it uses survey-based household consumption data as a proxy for household residual income. Second, in place of a predetermined budget standard, the Cost of Basic Needs (CBN) method is adapted to establish a minimum threshold of non-housing needs. Putting the two together allows us to identify households living in unaffordable housing conditions. Households are considered to be living in

> 16 The logic behind this is that the economies of scale embedded in general household consumption patterns (housing and nonhousing) are not necessarily the same as those with only housing consumption or only non-housing consumption. For example, a couple arguably needs less than twice the amount of a single person to achieve the same living standard, because the couple can share some costs, notably of housing. Further, a single person and a couple are likely to have the same (or similar) housing needs/costs, whereas the non-housing consumption for a couple is likely to be significantly greater than a single person. Hence, adjusting income _before_ housing costs will yield different equivalent income compared to adjusting _after_ housing costs. These economies of scale are also likely to vary across the income distribution, as well as between countries.

> 17 Household consumption and expenditures are used synonymously.

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