How to Measure Home Affordability Best?
You are definitely on tricky terrain if you have made up your mind about comparing housing costs and home affordability. Though there are hundreds of figures and stats to guide you, it is like dealing with abstractions and it is not hard to explain why. An article on the website StreetNews has an interesting take on the subject.
Interest rates, a faulty indicator
Interest rates can never be a precise barometer because they are bound to fluctuate all throughout the tenure of your mortgage. So, if you infer affordability taking into account the very low mortgage rates prevailing now, your figures will suffer a rude jolt when the interest rates correct themselves and reach the high levels of the past.
Household income is also an unreliable yardstick
Using household income as an indicator may bring about problems of a similar nature. Household income is slated to rise over the course of the loan and this brings forth a critical question: Which household income of what particular year should you use as an indicator? I am sure even median income values won’t help. Moreover, the article maintains there is always the dilemma of whether to use single income households or dual income ones as a yardstick.
International comparisons are too abstract in nature
Different structures of tax regimes, different levels of land scarcity (development-ready land) and infrastructure make international comparisons an unrealistic pursuit. Furthermore, different capital cities across the world may not be packed with similar kind of housing models. For instance, Australia leans towards detached dwellings whereas Asian giants like Hongkong, Singapore and Japan are more inclined towards apartment units.
Rent/purchase model of comparison (a unique approach for sure)
The article takes a detour from traditional methods and talks about the rent versus purchase model as a smart indicator for measuring housing affordability. It focuses on driving a parallel between the rent structures and the median home values of different capital cities.
For instance, you will be helped a great deal if you rent your investment property in Sydney (where median home values are the highest) and buy another property in Melbourne or Adelaide or Darwin. However, you will be close to a crisis if you rent elsewhere and buy in Sydney. The inherent idea is simple: you will not be able to cover the cost of mortgage with the rent if you buy in an expensive area and rent in a relatively cheaper place.
You can read the original article here.
I think it is a beautifully constructed article and takes quite an innovative stance on the measurement of home affordability. However, the fact that the word affordability is very closely linked with time and the economic dynamics of a particular decade being always different from another makes for a really difficult comparison.
Imagine this situation: What if certain counter-cyclic movement or unexpected development inflates rental yield or punctures median price values? Won’t the purchase/rent ratio shift rapidly and in the process upend any comparative statistic?