Introduction

This chapter is concerned with the conceptual bases and measurement issues associated with different affordability indicators that have been proposed. At one level, at least in the private market, housing cannot be unaffordable in aggregate or the price of dwellings would simply fall. But this does not mean that the outcomes are acceptable either to individuals or to government. The outcome may be damaging especially for those on lower incomes because they cannot then live what we, as a society, regard as a reasonable life or indeed realize their economic potential. Some would argue that this simply means income should be supplemented. But there are both practical reasons and matters of principle which make it more usual to approach the problem directly. In this context, in the literature, adequate housing is often regarded as a ‘merit good’ – one that government, as our agent, should address by ensuring people can afford to be adequately housed. But this raises the issue of how affordability is to be measured and different measures relate to different ways of achieving that objective. This chapter considers the options that might be used, including new approaches.

There is a widespread perception that housing in the United Kingdom is unaffordable, but unaffordable by whom? The issue is one of distribution. Perhaps the most widely quoted statistic – not only in the UK – is the ratio of house prices relative to earnings or incomes, despite the fact that fewer than two-thirds of households are owner occupiers. In 2018, house prices in England, according to official statistics, were on average eight times earnings and, for many, this simple summary indicator epitomizes the extent of the housing crisis; it does not appear plausible that prices relative to earnings could be sustained at these levels. But, in fact, there is very little support for the use of price to earnings ratios in the academic literature and, indeed, for any measure that concentrates on averages alone, because different groups experience different conditions. Furthermore, different affordability measures are required for households in each tenure. More generally, there is a recognition that affordability consists of a set of interrelated elements, which include not only price, but also physical adequacy and overcrowding, and expenditure indicators alone can be highly misleading.