Business, Legal & Accounting Glossary
Affordable housing is a term used to describe dwelling units whose total housing costs are deemed “affordable” to a group of people within a specified income range. Although the term is often applied to rental housing that is within the financial means of those in the lower-income ranges of a geographical area, the concept is applicable to both renters and purchasers in all income ranges. This article focuses on the affordability of owner-occupied and private rental housing as social housing is a specialised tenure.
In the United States and Canada, a commonly accepted guideline for housing affordability is a housing cost that does not exceed 30% of a household’s gross income. Housing costs considered in this guideline generally include taxes and insurance for owners and usually include utility costs. When the monthly carrying costs of a home exceed 30–35% of household income, then the housing is considered unaffordable for that household.
Because of supply and demand, the most “affordable” places are where there is the least demand relative to supply. Where the supply of available housing is less than the demand, low- and moderate-income households often struggle to obtain housing that is affordable. In these housing markets, rising land values often outpace rising incomes. Such housing markets often have a limited supply of residential land, or a number of regulations that make it difficult or costly to increase housing supply at rents affordable to consumers at income ranges below the local average.
Measuring demand is complicated, and subject to different views. It can be measured in terms of the costs for housing, housing type (such as apartments vs. single-detached homes, or the size and configuration of units, including number of bedrooms) and location for housing (relative to commercial/employment centres, transportation infrastructure, schools and other community resources.) A key element in measuring housing demand is differentiating between the “ability to pay” that some households have, and the “willingness to pay” of households for certain housing types in certain locations. When a place has attributes that trigger high degrees of “willingness to pay”, prices often rise due to the finite supply, thereby changing that place’s relationship to household “ability to pay”. When a place has attributes that make it undesirable, the willingness to pay is reduced and the price falls. This explains why some places within an otherwise unaffordable area (measured in the aggregate) remain very affordable, such as a distressed inner-city neighbourhood in an otherwise expensive city.
In the United States, a key element in determining affordable housing is acceptable commuting time/distance. In Southern California, for example, a household’s inhabitants must decide whether to pay more for housing to keep commuting time and expense low, or to accept a long and/or expensive commute in order to obtain “better” housing.
A primary factor in housing affordability is household income. The most common approach is to consider the percentage of income that a household is spending on housing costs.
Another method of studying affordability looks at the regular hourly wage of full-time workers who are paid only the minimum wage (as set by their local, regional, or national government). The hope is that a full-time worker will be able to afford at least a small apartment in the area that he or she works in.
Other countries look at those living in relative poverty, which is usually defined as making less than 60% of the median household income. In their policy reports, they consider the presence or absence of housing for people making 60% of the median income.
The other major factor is the measurement of housing costs.
Many U.S. studies, for example, focus primarily on the median cost of renting a two-bedroom apartment in a large apartment complex for a new tenant. These studies often lump together luxury apartments and slums, as well as desirable and undesirable neighbourhoods. While this practice is known to distort the true costs, it is difficult to provide accurate information for the wide variety of situations without the report being unwieldy.
Normally, only legal, permitted, separate housing is considered when calculating the cost of housing. The low rent costs for a room in a single-family home, or an illegal garage conversion, or a college dormitory are generally excluded from the calculation, no matter how many people in an area live in such situations. Because of this study methodology, median housing costs tend to be slightly inflated.
Costs are generally considered on a cash (not accrual) basis. Thus a person making the last payment on a large home mortgage might live in officially unaffordable housing one month, and very affordable housing the following month, when the mortgage is paid off. This distortion can be significant in areas where real estate costs are high, even if incomes are similarly high, because a high income allows a higher proportion of the income to be dedicated towards buying an expensive home without endangering the household’s ability to buy food or other basic necessities.
Furthermore, the absolute availability of housing is not generally considered in the calculation of affordable housing. In a depressed or sparsely settled rural area, for example, the predicted price of the canonical median two-bedroom apartment may be quite easily affordable even to a minimum-wage worker – if only any apartments had ever been built.
An article in the November 2007 issue of Atlantic Monthly reported on a study of the cost of obtaining the “right to build” (i.e. a building permit, red tape, bureaucracy, etc.) in different U.S. cities. The “right to build” cost does not include the cost of the land or the cost of constructing the house. The study was conducted by Harvard economists Edward Glaeser and Kristina Tobio. According to the chart accompanying the article, the cost of obtaining the “right to build” adds approximately $600,000 to the cost of each new house that is built in San Francisco.
A common measure of community-wide affordability is the number of homes that a household with a certain percentage of median income can afford. For example, in a perfectly balanced housing market, the median household (and the half of the households which are wealthier) could officially afford the median housing option, while those poorer than the median home could not afford the median home. 50% affordability for the median home indicates a balanced market.
A community might track the percentage of its housing that is affordable to households earning 60% of median income. In addition to the distress, it causes families who cannot easily find a place to live, lack of affordable housing is considered by many urban planners to have negative effects on a community’s overall health. For example, lack of affordable housing can make low-cost labour more scarce, and increase demands on transportation systems (as workers travel longer distances between jobs and affordable housing). A number of studies and articles focused on U.S. cities (Los Angeles, CA, Sarasota, FL) seek to link housing cost increases and declines in enrollment at local schools.
Numerous policies in the U.S. and abroad have been designed to address the problem of inadequate supplies of affordable housing. Sophisticated secondary market mechanisms, inclusionary zoning, and land banking are three prominent tools, as well as tax and fiscal policies that result in reducing the cost of mortgages and the cost of borrowing. Other more recently promoted policy tools include relaxation of prohibitions against Garage apartment and reduction of the amount of parking that must be built for a new structure.
Affordable housing is a controversial reality of contemporary life, for gains in affordability often result from expanding land available for housing or increasing the density of housing units in a given area. Ensuring a steady supply of affordable housing means ensuring that communities weigh real and perceived ivability impacts against the sheer necessity of affordability. The process of weighing the impacts of locating affordable housing is quite contentious and is laden gentrification.
Comprehensive data for the most affordable and least affordable places in the U.S. is published each year by an affordable housing non-profit organization, the National Low Income Housing Coalition. The NLIHC promotes a guideline of 30% of household income as the upper limit of affordability.
Under this definition, most people in the United States have secured affordable housing arrangements. In 2001, the median household paid $658 per month in total housing costs. A total of 20% of households are deemed to be living in unaffordable housing: Nine per cent of all households are renters in unaffordable housing, and eleven per cent of all households are homeowners with high housing costs.
In the 2000 U.S. Census, the median homeowner with a mortgage (70% of homeowners and 48% of census respondents) spent $1,088 each month, or 21.7% of household income, on housing costs. The median homeowner without a mortgage (30% of all homeowners (80% of elderly homeowners) and 20% of respondents) spent $295 per month, or 10.5% of household income, on housing costs. Renters in 2001 (32% of respondents) spent $633 each month, or 29% of household income, on housing costs.
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This glossary post was last updated: 1st May, 2020 | 104 Views.