The Residual Income Approach to Housing Affordability: The Theory and the Practice

The residual income approach to housing affordability is one that looks at what different household types can afford to spend on housing after taking into account the other necessary expenditures of living. It is an alternative to benchmark measures of affordability as used in social housing rent setting in Australia (the 25% rule) or assessing the overall affordability in the wider housing market (the 30/40 rule) as commonly used by a range of housing affordability researchers in Australia. This Positioning Paper does two things. Part A provides an overview, using existing literature, of the various semantic, substantive and definitional issues around the notion of affordability, leading to an argument in support of the soundness of the residual income approach. This overview is set in the historical contexts of discussions about affordability measures in the US, UK and Australia. Part B is methodological; it shows for various household types and income ranges, both for home purchase and rental, how the residual income method can be operationalised and its potential policy applications. This is still work in progress and there may be minor refinements to the method by the time of the production of the Final Report. However, we are confident that the method is sufficiently robust at this point to indicate its substantial potential as a problem identification and policy tool