Published on 01/04/2021
Housing affordability refers to the ability of a household to meet its housing costs, such as servicing a mortgage or renting, without compromising other needs.
One of NHFIC’s core responsibilities is conducting research into housing affordability in Australia. The following research builds on our State of the Nation’s Housing 2020 report, expanding the Lorenz curve analysis on affordability for renters and potential first home buyers in Sydney to cover Australia’s major capital cities*. The data is at 30 June 2020.
Housing affordability can be measured in different ways, with each metric having advantages and limitations.
One of the ways our State of the Nation’s Housing 2020 report measured housing affordability was using Lorenz curves. In standard economics, a Lorenz curve is used to graph the distribution of income or wealth. But they can also be used to assess the distribution of housing affordability for people and households at different income levels.
Lorenz curves have the benefit of being able to assess the dwellings that are available for people of various income levels at different property price points. It provides a richer insight than relying on simple (average) price-to-income ratios which do not account for important spatial and distributional aspects of affordability.
The horizontal axis in these Lorenz curves track the proportion of people in the population ranked according to their income (in this case, by income quintile) and the vertical axis shows the corresponding cumulative proportion of dwelling stock that is deemed affordable.
In the charts, ‘affordable’ is deemed to be mortgage or rental payments equating to 30 per cent or less of household disposable income.
If the dotted line is close to, or above the 45-degree line, it means rents or mortgage payments for certain home values are more favourably distributed for different income levels (basically, it is good for affordability). If the Lorenz curve is below the 45-degree line it demonstrates that rents or home values are more unfavourably distributed and less of the property stock is affordable for certain income levels (i.e. it is bad for affordability).
As with any metric, Lorenz curves come with limitations. For example, they cannot determine whether affordability for the lower income renters has changed at a more granular percentile level (particularly as we are using income quintiles). These curves also do not show whether renters in higher income quintiles are actually renting stock in lower price quintiles (which if they were, would reduce the amount of stock for lower income renters). Also, these curves capture relationships at a particular point in time, and therefore don’t capture movements in prices and incomes over different periods.
Nonetheless, these charts provide important spatial and distributional insights that can’t be achieved through typical average measures.
This chart graphically shows private rental affordability across Australia’s major cities (excluding Canberra and Darwin*). The Lorenz curves graph the proportion of rental properties available for different income levels. 'Affordable' is deemed to be rental payments equating to 30 per cent or less of household disposable income.
This chart graphically shows affordability for potential first home buyers across Australia’s major cities (excluding Canberra and Darwin*). We assume that potential first home buyers are the cohort of renters aged 24-39. ‘Affordable’ is deemed to be mortgage repayments equating to 30 per cent or less of household disposable income.
* Due to the sample size, NHFIC was unable to obtain reliable income data for Darwin or Canberra.