Measuring housing affordability: Looking beyond the median
AbstractWe draw a distinction between the concepts of purchase affordability (whether a household is able to borrow enough funds to purchase a house) and repayment affordability (the burden imposed on a household of repaying the mortgage). We operationalize this distinction in the context of a new methodology for constructing affordability measures that draws on the value-at-risk concept and takes account of the whole distribution of household income and house prices rather than just the median. Empirically we find that the distinction between purchase and repayment affordability can be pronounced. In the Sydney prime mortgage market over the period 1996-2006, repayment affordability deteriorated very significantly while purchase affordability remained quite stable. This difference can be attributed to the loosening of credit constraints in the mortgage market which it seems has carried through primarily into higher house prices rather than an improvement in purchase affordability. We also show how median house-price-to-income ratio measures of affordability can be extended to take account of the whole distribution of income and house prices, and how as a result of differential skewness in the house price and income distributions the housing affordability problem may be significantly worse for lower income households than suggested by standard median measures.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Housing Economics.
Volume (Year): 18 (2009)
Issue (Month): 2 (June)
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Web page: http://www.elsevier.com/locate/inca/622881
Housing affordability Affordability at risk Affordable limit Mortgage market Housing boom Price-to-income ratio Skewness;
Other versions of this item:
- Quan Gan & Robert J. Hill, 2008. "Measuring Housing Affordability: Looking Beyond the Median," Discussion Papers 2008-09, School of Economics, The University of New South Wales.
- C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
- E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
- E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
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