Housing affordability is one of those phrases everyone uses but few people define.

Politicians across parties agree that housing should be more affordable. Let’s figure out what that means. 

The most common affordability measure is the price-to-income ratio.

Organisations like Demographia popularised the simple comparison between the median house price and the median household income.

If a typical home costs three times the typical income, housing is considered affordable. If it costs more than eight annual incomes, the market is considered severely unaffordable. That’s most of Australia now. 

It’s a useful metric because it is simple and comparable across countries. But it ignores two critical factors – deposits and interest rates. 

A second way to measure affordability is the deposit hurdle. In many markets, the hardest part of buying a home is no longer servicing the mortgage but saving for a comically large deposit.

Organisations such as the Grattan Institute measure how long buyers must save to secure a 20 per cent deposit. An Australian median household now needs to save well over a decade for a median house. 

A third measure looks at mortgage repayments relative to income.

In Australia, a common benchmark is that housing becomes financially stressful when repayments exceed 30 per cent of household income. The Australian Housing and Urban Research Institute, for example, uses this threshold to identify households in housing stress. 

Some economists go further and measure affordability through the share of homes a median-income household could afford.

In the USs, the National Association of Home Builders calculates a “housing opportunity index” estimating the proportion of homes on the market that are affordable to the typical household.

Finally, there is the residual income approach, used in international housing research. Instead of focusing on ratios, it asks a simple question – how much money does a household have left after paying housing costs? 

Combining these metrics, housing affordability isn’t one problem but three hurdles. You must save the deposit, qualify for the loan and service the mortgage. If one hurdle is out of reach, home ownership remains out of reach.  

What can government do to make housing more affordable? 

The first lever is income growth. In an economy with more high-paying jobs, more people find housing........

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