How do you measure housing affordability?
There are few things that are more important to us than having a roof over our head, or having 4 walls around us for that matter, especially if you happen to live in Iceland which is literally at the edge of what's inhabitable.
It's no wonder then that housing affordability and availability is a hotly debated topic. If you follow the headlines you'd be forgiven for thinking that housing affordability is a new problem or a result of the 2007-2008 financial crisis.
The reality is that this is not a new problem.
I know from my day job being in charge of property valuation and economics for Registers Iceland, having looked at decades of data, that the reality is that affording housing has always been an issue.
The question to ask isn't whether affordable housing is an issue but how much of an issue it is? To do this well we need a quantitative measure. We are blind if we just measure prices since expensive housing isn't a problem if people can afford it.
Currently only 13% of families can afford a median house in San Francisco
If you are familiar with economic indicators you'll have heard about the Gini index or Gini coefficient [1]. In simple terms the Gini index measures the income inequality. If the index is 0 then everyone gets the same income and if the index is 1 then 1 person gets all the income and everyone else gets nothing.
The truth is somewhere in between, with measures typically ranging from 0.2 (lowest) to 0.6 (highest). This index tells us how equal a society is and more equality is considered better [2].
However, it doesn't tell us if that income is enough to afford housing or how many people can afford housing.
For that we need a different measure.
There are a few affordability indexes out there. The US has the composite Housing Affordability Index (HAI) [3] which is published monthly by the National Association of Realtors (NAR) and it also has the California Housing Affordability Index [4].
The HAI is 100 when 50% of families can afford a median house and above 100 when more than 50% of families can afford a median house. The California Housing Affordability Index measures the amount of income needed to buy a given type of house. It is measured down to the county level. Currently only 13% of families can afford a median house in San Francisco!
These measures are great but they do what all statistics have a tendency to do, describe everybody using a measure that applies to almost nobody (the median).
We can get a clearer idea of what is happening in people's lives by exploring different income segments. To do this we need two sets of data: Information about annual household income by different income segments and the price of a typical house.
Since most people require mortgages, what is affordable is of course also determined by interest rates. The affordability indexes take them into account but by doing so they mask the bigger picture since lower interest rates make it easier to afford higher mortgages with the same income.
The reality is that for a large number of households getting a roof over their head is becoming increasingly more difficult, despite what the indexes show.
To illustrate my point, let's look at two graphs I've created.
Buying a home in Iceland
The first graph shows the average home price [5] in Iceland divided by the average household income. Housing in Iceland is roughly 40% single family and 60% condo so the prices I use reflect this.
The dataset for income in Iceland [6] is on the individual level so I multiplied that number by 1.6 to get an approximation of household income. The results are therefore not 100% accurate; however the principle and relative cost still applies.
The lines correspond to households of different income levels.
20% means that 20% of households have a lower income than this and 80% means that 80% of households have a lower income than this. We can see what a stark contrast there is between the top 80% and the bottom 20%.
The average home is less than 2 times the annual income of the top 80% where as it's around 10 times the average income of the bottom 20%. This has been rising over time with the exception of a small drop after the most recent economic crisis.
Buying a home in the United States
To illustrate this point further let's see what has happened in the United States using the same methodology.
In 1970 the lowest 20% of earners needed about 7 times their annual income whereas today they need nearly 13 times their annual income to buy a home.
In the US I can access data on household income [7], but since I don't know the single family home to condo ratio I have stuck with the average sales price of a single family home [8].
In the US the same trend applies. In 1970 the lowest 20% of earners needed about 7 times their annual income whereas today they need nearly 13 times their annual income to buy a home.
This is almost a 100% increase, relatively speaking.
This demonstrates how important it is to take a larger view than a simple index. No amount of interest rates cuts is going to help the poorest groups especially since they are as likely to push prices up as they are to help get people on the property ladder.
Other areas than just sales prices can be investigated using this methodology. We could look at earnings relative to construction cost [9-12] or to rental prices. Or we could investigate different segments such as first time buyers or minority groups.
These will have to wait for a possible future blog.
What is the reality where you live? Are there groups that you feel are being left behind in the property market or ignored by official statistics?
Ingi Finnsson is passionate about data, economics and cities. He loves complex data but he loves complex data made simple more. He spends his days making real estate valuation models.
Sources:
[1] Gini rankings
[4] California Association of Realtors, housing affordability index
[8] Median average house prices USA
[9] Cost of building a house USA
[10] Construction Price index USA
[11] Cost of building a house Iceland
[12] Construction Price index Iceland
[13] Calculating the HAI
[14] Calculating the affordability index
Technology Solutions Professional
7 年So, according to whats mentioned, renting a property for reasonable time frame would level the playing field for those seeking to actually purchase afterwards. Of which index would it be considered building a credit score? Sure looks like all of them...Would someone please elaborate further? ??