[1100 Words; 4 Minute Read]
“Decent, affordable housing is fundamental to the health and well-being of people and to the smooth functioning of economies” (Woetzel et al., 2014).
Housing affordability is a common concern for an increasing number of people around the globe (Voith and Wachter, 2009) and there are strong arguments to suggest that affordability is contributing to inequality across individuals and groups at various spatial scales (Baker et al., 2016; Ben-Shahar et al., 2019). In terms of characteristics, housing affordability can be understood either normatively, as individuals and households ought to be able to afford the purchase or rental of a house (Kuang and Li, 2012), or positively, where empirical evidence illustrates what affordability looks like from a quantitative perspective (Meen and Andrew 2008). For clarity, this post is not directly looking at the supply of ‘affordable housing’ but more so on ‘housing affordability’. We are aware that any market supply of affordable housing needs reflection on what construes affordability in terms of structure, process and context (Whitehead and Yates, 1998). Whilst simultaneously recognising that affordable housing can be realised in some part if costs of building are reduced through supply-side drivers, such as cheaper technologically advanced building materials or even building deregulations (Glaeser and Gyourko 2003; Woetzel et al., 2014). Housing affordability is distinct but not mutually exclusive from affordable housing.
To measure housing affordability some studies compare affordability ratios over time, where the ratio of house prices to wages (i.e. house price affordability) and the ratio of rental prices to wages (i.e. house rental affordability) fits with affordability typologies (Stone, 2006). Other affordability measures include residuals (such as residual disposable income after housing costs have been subtracted from gross incomes) and costs (such as total housing costs); see Bourassa et al. (2006) or Gan and Hill (2009) or (Meen and Whitehead 2020). The affordability debate can be framed around drivers and dynamics; as well as the wider systemic, cyclical, and structural considerations. Within the context of New Zealand, post-2000 market dynamics have been influenced more significantly by regulatory, economic, financial and demographic drivers such as changes to LVRs, interest rates, access to finance, migration and the availability of housing.
General drivers of housing affordability include exponential house price growth (Squires and White, 2019), housing capital accumulation (Harvey, 2012), the financialisation of housing (Aalbers, 2016), and the growing interdependencies between finance and housing (Cerutti et al., 2017). Interdependencies between housing and other areas of the economy exist and may be driven by particular mechanisms, such as globalization, neoliberalism, privatisation and ‘regulated deregulation’. The effects of these mechanisms are attenuated by rising mortgage debt and reinforced by more technical financial mechanisms, such as; greater reliance on credit ratings/scorings, the creation of new financial markets, securitisation of mortgage loans, subprime and predatory lending. Broader drivers of housing on the economy also include entry into the market of private equity firms and hedge funds, the emergence of social housing bonds, and other financial derivatives used by public/social housing and housing associations (Hutchison et al, 2016).
Further drivers of house price affordability include changes in demography, income distribution, housing supply, tenure, and financial deregulation (Bramley, 1994). More prominent drivers in recent times include the impact of housing market investors who purchase and rent out (or renovate and resell) multiple properties to generate income flows but in turn fuel house price growth (Jordà et al., 2017).
Society affords greater self-esteem to those who own a house rather than renting a property, and this encourages people to drift towards owner-occupation as the tenure of choice (Foye et al., 2017). Government policies across the globe have frequently been used to encourage owner-occupation; their initiatives to deregulate housing stock provisions, including public or social housing stocks, have moved the discursive narrative and subsequently resources towards a more market-orientated policy focus to apportion the housing stock and to alleviate housing affordability concerns (Whitehead, 1991; Hulchanski, 1995).
When interrogating housing affordability issues, it is critical to explore the relationships between types of housing tenure, wages and mortgage interest rates. Some studies indicate that wages, and income inequality in particular, play an important role in propelling different measures and levels of affordability (Matlack and Vigdor, 2008). Gini coefficient measures of housing affordability inequality illuminate the presence of more pronounced affordability burdens among minority and underprivileged groups (Ben-Shahar et al., 2018). Wage levels are a useful starting point for gauging affordability but they should be treated with caution due to differences between rental affordability and purchasing affordability. This is partial because the correlation between what a household can afford and what the same household can borrow to purchase a house is not straightforward (Jewkes and Delgagillo, 2010). Reflective studies remind us that the interpretation of household-level wage data can be complex not least because households may be occupied by single or multiple earners with such household compositions changing markedly over time (Gyourko and Linneman, 1993).
Interlaced with these wage level understandings of housing affordability is the observation that housing choices function in separate or intertwined markets of homeownership and rental accommodation (Dieleman, 2017). Market risk affects tenure choices and creates interdependences between house price and rental affordabilities (Sinai and Souleles, 2005). Those on low incomes tend to be affected the most by housing affordability problems (Bogdon and Can, 1997) and data trends highlight that rent burdens have recently been at an all-time high (Collinson, 2011). Thus, if the majority of low-income earners are renters, then rental affordability is of particular interest to policymakers, as is its connection with house price affordability. Given house price affordability difficulties, rental housing typically becomes the tenure only option (at least in the short term) for the young, the disabled, the elderly, people in highly mobile professional sectors, and low-wage working families (Ben-Shahar et al., 2018). Housing market analysts should focus on both homeownership and the rising importance of the private rental activity in the broader housing market, but the current public policy architecture does not facilitate active consideration of public policy-makers on the private rental sector (Hulse et al., 2015).
The main housing-related public policy remains the role of interest rate setting. Extant research suggests that interest rate fluctuations figure prominently in any explanation of movements in house price/rent ratios (Damen et al., 2016). Higher mortgage rates are thought to dampen the housing market and subsequently affect house price affordability (Zhu et al., 2017) and thus policy recommendations tend to suggest that governments should play a leading role in dealing with house price change by adjusting interest rates on new mortgages (Hubbard and Mayer, 2009). The extent to which governments choose to do so is arguably and largely a question of politics rather than economics.
This post extracts and distills some concepts and theory from an earlier academic journal publication. Please cite as: Squires, G. and Webber, D. (2019). ‘House price affordability, the global financial crisis and the (ir)relevance of mortgage rates’ in Regional Studies, Regional Science, Vol. 6, No. 1, pp. 405-420