Affordable housing has become one of the most hotly debated social problems of our time, yet there is no consensus on how to identify when it exists, let alone its root causes and how to fix it.
If we cannot reach agreement as to what we are referring to when we speak of affordable housing, we risk pursuing solutions to the wrong problem, incorrectly prioritising scarce resources and confounding the issue further.
Submissions to the Senate Enquiry into Housing Affordability, which reported in May 2015, clearly demonstrate this dilemma.
The most commonly used definition of housing affordability is probably the so-called 30% test. This admittedly rough rule of thumb treats accommodation as affordable if the costs (rent in the case of those renting, or mortgage costs in the case of home owners) account for no more than 30% of the householder’s gross income. This test is known as the “30/40” rule as it applies mainly to those in the bottom 40% of the income distribution, recognising that lower income earners are the most vulnerable to housing stress.
Another frequently used test is the home price ratio, representing the relationship between home prices and median incomes. In more affordable times (before 2001), median home prices in most Australian capital cities represented a multiple of “only” up to about 5 times median annual incomes.
Today, that multiple has risen to over 12 times in many parts of Sydney and Melbourne, a level which makes illusory the prospect of home ownership for large parts of Australian society – even at current historically low interest rates.
Both the 30% and home price ratio test have the merit of simplicity, but fail on other counts. Neither takes account of variability in other key costs of living (food, clothing, education, healthcare, transport, child care, to name but a few). Such costs vary significantly across individual major cities, let alone across different parts of Australia.
The home price ratio test is even cruder than the 30% test and, relating as it does to home ownership, is of only passing interest to the burgeoning proportion of people who have been priced out of buying, and can only look to rent.
These common tests of affordability also fail to address other key questions as to when housing is unaffordable. Is the property within reasonable proximity to jobs, and a feasible commuting cost and time? Does it afford residents reasonable access to basic infrastructure (education, healthcare, public transport) and social and cultural amenities? Does it meet minimum occupancy standards, in terms of size, quality and amenity?
A negative answer to any of these questions means the housing is surely not affordable in any meaningful sense. To suggest otherwise would be a cruel mirage to home seekers.
We need a comprehensive housing affordability index, one which references localised costs and incomes, has versions relevant to both owners and renters, takes account of all main costs of living (not just housing) and which factors in the obvious need for housing to be located within reasonable proximity to jobs, key infrastructure and services.
Some attempts in Australia to come up with a housing affordability index include:
- The Housing Affordability Index (HAI), produced by the Housing Industry Association (HIA);
- The biannual Rental Affordability Index (RAI), produced by a partnership of SGC Economics & Planning, National Shelter and Community Sector Banking;
- A map of housing affordability by postcode, produced by City Futures Research Centre (part of UNSW); and
- Biennial Surveys by the ABS of housing costs across different parts of Australia, down to the level of capital cities.
These initiatives are welcome and provide a valuable contribution to our understanding of housing affordability, but each has its limitations.
The HIA and RAI rely heavily on the 30% (or “30/40”) rule of thumb test to determine the threshold of housing affordability, the limitations of which have already been outlined. The City Futures map, while localised, does not address other (non-housing) costs of living, nor access to key infrastructure and services.
Given these inadequacies, what we are actually debating when we refer to affordable housing remains ambiguous.
If we are to have any hope of solving the burning issue of housing affordability, we need a more nuanced test than the 30% (or 30/40) rule of thumb, as only such a nuanced test can hope to generate broad governmental and community agreement on these definitional questions.
Surely, it is in everyone’s interest to address these threshold questions. What is called for is a national bipartisan debate, involving all relevant stakeholders, to reach agreement on how to define the problem and identify its root causes. If we can achieve this baseline consensus, we will be well on our way to finding effective ways of addressing one of the most fundamental issues of our time.
Oliver Frankel was Non-Executive Director, Woolcock Institute of Medical Research (2012 to 2016) and Museums and Galleries NSW (2011-2015); General management roles at NRMA Motoring & Services (2006 – 2014) and Trafalgar Corporate Group (2001-2005); Partner at Linklaters, solicitors, in London during 1990s and before that lawyer at Allens (Sydney) and White & Case (NY).
Oliver Frankel is a former corporate finance and M&A lawyer, who has spent the second half of his career in finance, investment and management. Most recently, he has taken a strong interest in how to address the affordable housing crisis.
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