Housing is usually deemed unaffordable when it consumes more than a set percentage of a household's monthly income. The Eurostat[1] and the OECD[2]  follow this threshold approach and define households overburdened with housing costs as those spending more than 40% of their disposable income on housing.

However, this indicator fails to capture financial hardship, particularly among lower-income households. In fact, lower-income households may be spending less than 40% of their income on housing and yet failing to meet adequate consumption levels for other goods. As a response, the residual income approach ascertains housing (un)affordability by defining a minimum level of consumption for a set of goods according to particular household types. The residual income approach builds on consumption data to define the minimum level of income necessary for a household to survive after housing costs. The main shortcoming of this approach is that relies on subjective measures of what constitutes the necessary minimal expenses for a household.

These two definitions of affordability navigate two tensions 1) between housing and other types of consumption and 2) between the individual conceptions and what is affordable and what government considers to be affordable (Haffner & Hulse, 2021). More recently, scholars have emphasized the multi-faceted nature of affordability to include commuting and transport costs together with energy costs (Haffner & Boumeester, 2015). Other approaches focus on supply-side measures, for instance on the share of the housing stock that a household can afford (Chung et al., 2018).

Evolutions in the measurement of affordability bear witness to the complexity of housing systems. Affordability is not only dependant on housing consumption but also housing supply, particularly in inelastic markets where providers have considerable power. At the same time, displacement pressures and rising energy costs in an older and inefficient stock add pressure on households to access affordable housing.

References

Chung C., Evangelou N., Geyer J., Quint R., Keith I., Coates D., Daula T., Frumkin S., Leventis A. v, Doerner W. M., Roderer D., & Barba M. (2018). A New Home Affordability Estimate: What Share of Housing Stock Can Families Afford?. FHFA Staff Working Papers 18-04, Federal Housing Finance Agency.

Haffner M., & Boumeester, H. (2015). Housing affordability in the Netherlands: the impact of rent and energy costs. Journal of Housing and the Built Environment, 30(2), 293–312. https://doi.org/10.1007/s10901-014-9409-2

Haffner M., & Hulse K. (2021). A fresh look at contemporary perspectives on urban housing affordability. International Journal of Urban Sciences, 25(S1), 59–79. https://doi.org/10.1080/12265934.2019.1687320

[1] https://ec.europa.eu/eurostat/web/products-datasets/-/tessi165

[2] https://www.oecd-ilibrary.org/sites/624ee022-en/index.html?itemId=/content/component/624ee022-en#section-d1e6271