Quasi-Normative Approach to Housing Affordability

Martin Lux

Introduction:

The financial (rental) affordability of housing has become a common way of summarising the nature of the housing difficulty in many market-based housing systems. During 1980's the term "housing affordability" became very popular among policy makers and during 1990's the growing number of housing researchers were engaged into the study of this concept and its methodology, mostly in very critical way (Bramley 1991, 1994, Hallet 1993, Hancock 1993, Stone 1990, Whitehead 1991, Hulchanski 1995, Hills et al. 1990, Freeman, Chaplin and Whitehead 1997, Linneman and Melbolugbe 1992, Maclennan and Wiliams 1990).

There are two main types of affordability measure: the rent to income ratio (rent burden) and the residual income measure. The first vary according to whether gross or net income is used, whether dwelling rent or rent net of housing allowance is used, and whether utilities or charges are included in the rent [1].The latter is calculated as net income, less the rent, less a minimum income amount laid out in the country's welfare system (Income Support in Great Britain). According to Hulchanski (1995) both measures are used in six possible manners: description, analysis, administration of subsidies, definition of housing need, prediction of the ability to pay the rent or mortgage and selection criteria. The first three could be considered as "quite valid" (p. 475), the rest are all invalid uses. Though using the rent to income ratio for administration of subsidies helps to target housing subsidy to lower income households (and it is quite valid), "the decision as to where to draw the line, that is, what specific definition of eligibility is to be used for a subsidy programme, is a subjective judgement. It cannot be based on an objective scientific determination." (p. 477). Many other housing scientists agree with Hulchanski by making the distinction between actual affordability (what tenants pay) and normative affordability (what tenants should pay) (Hancock 1993, Oxley and Smith 1996). "There is much criticism of the use of affordability measures for these normative purposes." (Freeman, Chaplin, Whitehead 1997, 22).

By their words, the science cannot offer the answer on question "what tenants should pay". In developed market economies of 90's with traditional respect on individual freedom and property this fact would not induce drastic state intervention for higher affordability that would change completely the structure and functioning of housing market. The situation is quite different in transitional countries of the Central and Eastern Europe. The sharp decrease in state subsidies for municipal (formerly state) rental housing; the sharp growth in housing prices; the maintenance of non-targeted rent regulation and the low level of rental construction after 1990 resulted in lower housing affordability and growing social tensions on Czech housing market (Lux, Burdova 2000). On the one hand, the state refused to subsidise new housing construction; on the other hand, the governments decided to maintain strong tenant protection and rent control in the overwhelming majority of municipal and private rental flats. Low level of controlled rents caused that the doors for newly arising households looking for affordable rental housing are closed and the scale of black market rental contracts grew rapidly. Free market or black market rents in most regions of the Czech Republic are at artificially high level. Thanks to the slow process of rent deregulation and "soft" conditions on households living in rent controlled sector private investment to rental housing did not occur at all. The average rent to income ratio was 6 % in rent-controlled sector in the Czech Republic 1999, that is much lower than in countries of the European Union. According to "subjective judgement" of politicians the rent to income ratio on the level higher than 6 % would be "unaffordable". This kind of policy has, however, radical consequences for housing market in the first stage (lack of financial means) and social consequences in the second stage (social injustice). The housing science needs therefore to create new concept of housing affordability that would be based on the evaluation of economic aspects of different levels of housing affordability measures. This concept would have some normative features but its base lies in the statistical and "objective" analysis of impact of different housing policies on housing market. The analysis of housing affordability should not follow traditional path of normative welfare state argumentation but should be more connected with economic efficiency analysis. We call it quasi-normative approach to housing affordability.