What is housing affordability? The case for the residual income approach

TLDR

Affordability is debated across semantic, substantive, and definitional dimensions, and the residual income approach is argued to be conceptually sound and historically rooted in U.S. and U.K. discussions. The article aims to raise awareness and support for the residual income approach to housing affordability indicators and standards in the United States. It outlines two key design issues for operationalizing a residual income standard: choosing a normative standard for non‑housing items and determining how to treat taxes.

Abstract

Abstract This article seeks to increase the awareness of and support for the residual income approach to housing affordability indicators and standards, especially in the United States. It begins with an overview of various semantic, substantive, and definitional issues relating to the notion of affordability, leading to an argument supporting the conceptual soundness of the residual income approach. The concept is then briefly set into the historical context of U.S. and British debates on affordability measures. This description is followed by a discussion of two of the principal issues involved in crafting an operational residual income standard: the selection of a normative standard for nonhousing items and the treatment of taxes. The article concludes by considering some of the potential implications of the residual income paradigm for the analysis of housing problems and needs, for housing subsidy policy, and for mortgage underwriting practice. Keywords: AffordabilityLow‐income housingResidual income