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 to 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. We also consider 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. We propose a new quantile based measure which indicates that the housing affordability problem may be systematically worse than suggested by standard median measures.
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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number
2008-09.
Find related papers by JEL classification: C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation E25 - Macroeconomics and Monetary Economics - - Macroeconomics: 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, and Regional Economics - - Production Analysis and Firm Location - - - Housing Supply and Markets
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