Towards a More Nuanced Approach to Measuring Housing Affordability : Evidence from Pakistan

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