their income on loan repayment. Those with income below 1.2 times the ‘basic food basket’ of expenses, are not required to pay for social housing.<sup>13</sup>

# 3.2 Residual Income Method (RIM)

The residual income method (RIM), as championed by Michael Stone of the University of Massachusetts, measures how much money is available for housing expenses at the _household level_ after other essential expenditures have been taken into account (as measured by a defined non-housing ‘budget standard’ – see Box 3). According to Stone, Burke and Ralston (2011), if there is an insufficient amount of money left for housing expenses after meeting this budget standard, a household has an affordability problem. The RIM recognizes that shelter (formal housing) makes the largest and least flexible claim on income for most households. Non-housing expenditures, including for essential items such as food and healthcare, are therefore limited by how much income is left after paying for housing. This is the household’s residual income, which expresses the household’s _ability to pay_ for housing after accounting for essential nonhousing costs. Households for whom the squeeze between income and housing cost leaves them unable to meet their non-housing needs are deemed to be facing “shelter poverty” (Stone, Burke and Ralston 2011; Heylen 2018).

Stone et al (2011) describe the RIM as “a sliding scale of housing affordability—with the maximum affordable monetary amount and fraction of income varying with household size, type, and income. Indeed, it implies that some households can afford nothing for housing, while others can afford more than any established ratio.” The RIM thus provides a more precise and nuanced instrument for assessing housing affordability. It can help inform the design of housing subsidies to make them more equitable and efficient and provide a way to refine residential mortgage underwriting to reflect a more accurate assessment of risk (Valdez 2009).

It is uncontested that the RIM is conceptually sounder than any of the ratio-based benchmark approaches to measure housing affordability. However, what remains as one of the main challenges in the adoption and operationalization of the RIM is the complexity of developing a budget standard appropriate to specific contexts and locations. A budget standard is a list of goods and services that a family of a specified size and composition would need to live at a designated level of well-being, together with the costs of those goods and services (Fisher 2007). Although every household has its own unique characteristics, it is possible to define some socially agreed assumptions of what constitutes a minimum, adequate, or decent standard of living. A budget standard indicates the level of income a specific family living in a specific place at a specific time needs to achieve a particular standard of living. It is derived by specifying every item needed by the family, pricing each item, and summing to produce the overall budget. “For housing, food and most other items, data from consumer expenditure surveys, expert opinion and, in some cases, opinion surveys and focus groups are used to establish a minimal standard... The physical standard for each item is then priced to determine a total (after-tax) minimal budget” (Stone 2006). In principle, any household with an income equal to or greater than the total budget should be able to meet its basic needs, including housing, at the physical quantity and quality represented by the budget standard (Saunders and Bedford 2017). The budget standard thus attempts to move beyond relative comparisons of economic well-being and derives the absolute amount of resources that households need to meet their basic needs. The core question that forms the basis of the budget standard is: How much income does a family need to live at a designated level of well-being? (Vranken 2010)

> 13 Ley No. 6129 de la Ciudad Autónoma de Buenos Aires. Boletín Oficial de la Ciudad Autónoma de Buenos Aires 5537.

10