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Measuring housing affordability: Looking beyond the median

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Author Info
Gan, Quan
Hill, Robert J.

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Abstract

We 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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Publisher Info
Article provided by Elsevier in its journal Journal of Housing Economics.

Volume (Year): 18 (2009)
Issue (Month): 2 (June)
Pages: 115-125
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Handle: RePEc:eee:jhouse:v:18:y:2009:i:2:p:115-125

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Web page: http://www.elsevier.com/locate/inca/622881

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Related research
Keywords: Housing affordability Affordability at risk Affordable limit Mortgage market Housing boom Price-to-income ratio Skewness;

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References listed on IDEAS
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  1. Piazzesi, Monika & Schneider, Martin & Tuzel, Selale, 2007. "Housing, consumption and asset pricing," Journal of Financial Economics, Elsevier, vol. 83(3), pages 531-569, March. [Downloadable!] (restricted)
    Other versions:
  2. Englund, Peter & Quigley, John M. & Redfearn, Christian L., 1998. "Improved Price Indexes for Real Estate: Measuring the Course of Swedish Housing Prices," Journal of Urban Economics, Elsevier, vol. 44(2), pages 171-196, September. [Downloadable!] (restricted)
  3. Vigdor, Jacob L., 2006. "Liquidity constraints and housing prices: Theory and evidence from the VA Mortgage Program," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1579-1600, September. [Downloadable!] (restricted)
  4. Simone Manganelli & Robert F. Engle, 2001. "Value at risk models in finance," Working Paper Series 075, European Central Bank. [Downloadable!]
  5. Robert J. Hill & Daniel Melser, 2008. "Hedonic Imputation And The Price Index Problem: An Application To Housing," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 593-609, October. [Downloadable!] (restricted)
  6. Edward L. Glaeser & Joseph Gyourko, 2002. "The Impact of Zoning on Housing Affordability," NBER Working Papers 8835, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Jonathan McCarthy & Richard W. Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17. [Downloadable!]
  8. Diewert, Erwin, 2007. "The Paris OECD-IMF Workshop on Real Estate Price Indexes: Conclusions and Future Directions," UBC Departmental Archives diewert-07-01-03-08-12-12, UBC Department of Economics, revised 31 Jan 2007. [Downloadable!]
  9. John M. Quigley & Steven Raphael, 2004. "Is Housing Unaffordable? Why Isn't It More Affordable?," Journal of Economic Perspectives, American Economic Association, vol. 18(1), pages 191-214, Winter. [Downloadable!] (restricted)
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  10. Luci Ellis, 2006. "Housing and Housing Finance: The View from Australia and Beyond," RBA Research Discussion Papers rdp2006-12, Reserve Bank of Australia. [Downloadable!]
  11. Souphala Chomsisengphet & Anthony Pennington-Cross, 2006. "The evolution of the subprime mortgage market," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 31-56. [Downloadable!]
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