the minimum food requirement within the reference group. This allows the development of a reasonable estimate of non-food, non-housing expenditure for those who are just meeting the minimum food requirements.

This method hinges critically on the choice of a reference group, which determines the expenditure patterns and scaling factors (food shares) that are used. The assumption is that the consumption patterns of this group provide an adequate representation of what is required to escape the condition of poverty. Thus, the reference group should include households that are neither among the poorest nor the wealthiest in a country, ideally reflecting the needs of those who are at or above the existing subjective minimum threshold. One way to ensure this is to select from among households in the lower ‘middle’ of the distribution of income or expenditure. In practice, this implies excluding households in the bottom decile and sometimes the bottom quintile of the distribution of expenditure. Similarly, it is not recommended in practice to include households that are much above the median expenditure level.

Similar to the 2014 poverty line estimation in Pakistan, the minimum residual non-housing threshold is based on the expenditure patterns of the second, the third, and the fourth decile of consumption expenditure (i.e., the 10<sup>th</sup> to the 40<sup>th</sup> percentile). Based on this reference group, the minimum threshold for residual (non-housing) expenditures in urban areas in Pakistan is estimated as Rs.3,715.7 per adult equivalent per month in 2018-19.<sup>25</sup> Alternately, this means that a family of five, with three children, requires a minimum of approximately Rs.16,347 per month leftover after paying for housing expenses. Based on this affordability threshold, 25.2 percent of households in urban Pakistan can be considered to be living in unaffordable housing conditions (see Table 2).

The estimations of housing affordability vary based on changes to the reference group. Changing the reference group signifies a change in the typical ‘basic’ food basket, the prices faced to consume it, and the share of non-food (non-housing) budget relative to food spending. All of these have a bearing on the resultant housing affordability rate. This is shown empirically in Figure 2 (which shows that scaling factors also vary based on the reference group) and Table 1 (which summarizes how the choice of reference group influences the resultant housing affordability rate).

In practice, the choice of reference group is an important lever for policy makers to determine the housing affordability rate for different parts of the welfare distribution. For example, a more ambitious reference group may be better suited to measuring housing affordability for many middle-income households that might not face destitution or poverty but might still experience large and inelastic housing costs. As highlighted in Table 2, changing the reference group between the 20-40 percentiles and 20-50 percentiles yields differences in affordability of 4-5 percentage points, ranging from 35.1 percent to 38.9 percent.

> 25 These values are spatially deflated using a Paasche index.

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