Towards a More Nuanced Approach to Measuring Housing Affordability

The inability to afford a decent shelter has a detrimental effect on people’s lives, their well-being and productivity, and the broader economy. Given the pervasiveness of the problem on a global scale, housing affordability is increasingly taking center stage in public discourse. Yet, there is little agreement on the definition of housing affordability and how to measure it. This paper draws on academic literature and lessons from government housing programs to evaluate how accurately conventional measures differentiate affordability levels by income segment, household composition, and tenure. With the objective of more accurately measuring the affordability of housing at the household and aggregate levels, the paper recommends testing (i) a progressive housing Expenditure-to-Income ratio, calibrated by income segment, and (ii) a modified Residual Income Method that uses household expenditure instead of income as well as a simplified budget standard for non-housing expenses. Application of the latter methodology in urban Pakistan highlights a significant underestimation of housing unaffordability using conventional approaches, especially for the lowest income groups. Moreover, the case study indicates that conventional approaches to the measurement of affordability may not adequately reveal the differences in affordability across income segments and household compositions.