Concepts and measurement of housing affordability

09th October 2023

Housing affordability expresses the relationship between housing costs and household income. Any serious analysis of the housing situation in Malta must start from the fact that the homeownership rate has remained stable at slightly above 80% for more than a decade. Around 70% of owners do not have any outstanding mortgages and a substantial share even own a second property. On the contrary, some groups such as low-income households and first-time buyers are widely thought to experience affordability problems because of the rise in property prices.

These basic facts underline an important point – any metric to assess housing affordability should focus on the distribution of outcomes across households rather than just focus on economy-wide averages. In general, there are two basic methods to measure affordability.

The house price-to-income ratio and the rent-to-income ratio are the most common indicators to track affordability over time. These indicators form the conceptual basis for the so-called ratio method, which focuses on whether households spend an unacceptable portion of their income on their housing. Typically, a ratio of 25% or 30% is assumed as a threshold for being cost-burdened by housing.

One of the main limitations of using a ratio is that affordability is assumed to be independent of the level of income. That is, a low-income household may still find itself with insufficient resources even if it only pays 25% of its income on housing, whereas a high-income household can afford to pay a higher percentage of its disposable income on housing and still be able to make ends meet easily.

The ratio method can be refined by considering the financing conditions facing borrowers. This is especially important since most house purchases are financed by a home loan. Here we make a distinction between purchase affordability (i.e. the ability of borrowers to obtain the necessary funds to purchase a property given bank regulations and conditions) and repayment affordability (i.e. the overall burden of repaying the mortgage over its lifetime). Thus, purchase affordability calculates the minimum income required to purchase a property, taking into consideration factors such as the price of the dwelling, the age of the borrowers, the interest rate on the mortgage, the downpayment required and the debt-service-to-income ratio. Anyone of us who has ever applied for a home loan immediately recognise the importance of these factors.

The second approach evaluates affordability by considering whether households can cover their housing costs after meeting their basic needs. This method, known as residual income, tends to be more appropriate for low-income households. However, one of the biggest hurdles of this approach concerns the definition of a non-housing budget standard. This means that studies based on the residual income approach are not conducted on a regular basis and tend to be country specific, making cross-country comparison quite difficult. The report by Caritas on the minimum essential budget for different categories of low-income households falls within this strand of the literature.

What data sources can we rely on to measure affordability?

First, surveys. The Survey on Income and Living Conditions (EU-SILC), published once a year, collects harmonised statistics from all EU countries on income, material deprivation and housing problems, among others.

This survey identifies the categories that suffer the most from housing cost overburden. The most vulnerable categories tend to be low-income households, especially those involving single individuals (that can include first-time buyers or those with a relationship breakdown later in life), single parents with dependent children and large families. Public policies focusing on making housing more affordable should target these categories.

The EU-SILC also provides a wealth of information on housing adequacy and quality. Especially relevant indicators include: the size of housing (e.g. to compute the overcrowding rate and the average number of rooms per person) and measures of housing deprivation (e.g. the percentage of the population with a leaking roof, lack of toilets or showers, or those unable to keep their house with an adequate temperature). To complement these objective indicators, the survey also asks subjective questions, such as the extent that housing costs constitutes a financial burden to the household.

Another key requirement is the availability of good quality and granular statistics on property prices, rents, and income. At the micro level, property prices and rents depend on several factors including the location, the size and type of dwelling, the characteristics of the neighbourhood and property-specific amenities. This level of detail is crucial because economy-wide averages miss a lot of the heterogeneity that we observe in the property market. Since 2020, we have comprehensive information on registered rents from the rent register of the Housing Authority, which complement the advertised listings from estate agents. Unfortunately, such granular and timely information on the income distribution is more difficult to come across.

Finally, the introduction of several schemes intended to provide rental assistance to low-income households, assist in homeownership or to support their purchasing power also give us a glimpse into characteristics of categories that are more prone to face housing affordability difficulties. For instance, the first-time buyers scheme provides valuable insights into this category – the type of properties they purchase, the price and locality, and whether they purchase a property on their own or with their partner – which up to a few months ago was not available. Other schemes like those offered by the Housing Authority, such as those that cover the initial downpayment, the equity sharing or the provision of social loans, offer equally interesting insights.

The application of these concepts for the Maltese scenario will be discussed in more detail in the online conference ‘Malta Sustainability Forum’ organised by APS Bank on ‘Affordable Housing Solutions’. The event will be held on 12 October 2023, 17:30-19:30. To register, kindly visit maltasustainabilityforum.com.

Dr Brian Micallef is the Executive Head of Policy at the Housing Authority. The views expressed in this article are those of the author and should not be interpreted to reflect the views of the Housing Authority.