To measure housing affordability, we traditionally use the shelter-cost-to-income ratio (STIR). Using this ratio, if shelter costs take up 30% or more of a household’s before-tax income, their housing is considered unaffordable.
The STIR approach of calculating affordability has its disadvantages. Because it’s a ratio, it doesn’t reflect differences in income that make up the actual dollar amount of the 30% for different households. If a household’s housing takes up less than 30% of its before-tax income, the STIR approach says the household’s housing is affordable.
But what if this household has a very low income? In some cases, it wouldn’t matter if housing took up only 15% of the household’s before-tax income. If the household doesn’t make much money, its housing could still be unaffordable.
And what about the opposite case? For a household with a very high income, spending 30% or more of it on housing could still leave a lot left over for other things. The STIR approach fails to take such cases into account.
The residual income approach
We’ve just published a study, done together with academia, which proposes a different approach to measuring housing affordability: the residual income approach.
According to this approach, a household has housing affordability problems if it doesn’t have money for certain goods and services after paying for housing. Which goods and services? For our study, we used the non-shelter portion of the Market Basket Measure (MBM). And what’s the MBM? Basically, it’s a set of goods and services a household would need to maintain a modest, basic standard of living.
The STIR approach only tells us what percentage of income a household is spending on housing. The residual income approach, meanwhile, tells us whether a household can still afford necessary goods and services after it pays for housing. As a result, the residual income approach can be considered a better way of measuring housing affordability.
Socio-economic inequalities: certain groups face greater challenges
Our study produced many interesting findings revealing the socio-economic inequalities in housing. Here are a few:
- On average, immigrants face more severe housing challenges than non-immigrants.
- For all measures used in the study, urban households tend to experience more problems related to affordability than rural households.
- Seniors have a higher incidence of affordability problems and housing-induced poverty than the rest of Canadians.
- Homeowners tend to fare better than renters.
- Non-couples tend to face greater difficulties than couples. This can largely be explained by differences in age and tenure between the two household types. Non-couples are generally younger and more likely to be renters.
A guide for future research and policy
In this study, we applied both the STIR approach and the residual income approach. Because of this, we were able to look at the prevalence, depth and severity of housing affordability problems for various segments of the population.
Because of this, we’ve given policy makers the beginnings of a useful tool. One that shows a range of affordability problems and where they’re concentrated in the population. This could allow policy makers to concentrate their efforts where they’re needed most.
Still, more research will be needed to explain the reasons behind our findings.