Explaining the inexplicable: measuring housing affordability in Melbourne, Australia

Housing affordability is a major problem for Australia and New Zealand. One of the key issues is how best to measure it. The prevailing measure of housing affordability or stress in Australia and most other countries is some variation of a benchmark method whereby some percentage of housing costs is compared to household or personal income. In Australia it is normally taken as 30% of the 40th income quintile (the 30/40 rule). This paper reports on the application of the residual income or budget standard method as an alternative way of understanding a range of problems relating to housing affordability. The method determines the amount of income left over for housing costs (hence the residual title) after a minimum standard of adequacy has been met by way of other expenditures. The paper outlines in preliminary form the method used in modelling the residual income for a range of household type and for both home purchase and private rental and then illustrates the usefulness of the concept via applications to the Melbourne housing market. While there is some fine-tuning of the method, early findings suggest that for some household types, the 30/40 rule overstates their lack of affordability and for others understates it. The findings also help explain how, despite high house prices in Melbourne (median of around A$500,000), these dwellings are still affordable for many households, and why singles and childless couples are becoming large players in the home purchase market while many families are being trapped in private rental