Housing Standards 2002/03: Financial Affordability and Attitudes towards Housing

1. Financial affordability of housing in the Czech Republic

Introduction

In a number of developed economies the concept of housing affordability has gradually become an useful instrument used to evaluate the housing conditions. While in the post-war period housing policymakers emphasised the issue of the availability of housing, after the resolution of the housing shortage and subsequent redefinition of housing targets the interest of theoreticians and practitioners shifted toward the affordability of housing. One of the most frequently quoted definitions of financial affordability of housing says that "Affordability is concerned with securing some given standard of housing (or different standards) at a price or a rent which does not impose, in the eyes of some third party (usually government) an unreasonable burden on household incomes." (Maclennan and Williams 1990:9, quoted in Hui 2001, Lux 2002)

In principle we can distinguish three basic approaches to analysing the financial affordability of housing (Garnett 2000): the indicator approach, the referential approach, and the residual approach. The indicator approach takes advantage of indicators used to measure the housing cost burden; indicators usually take the form of the ratio of housing cost to household income. Hulchanski (1995) claims that "[A] household is said to have a housing affordability problem ... when it pays more than a certain percentage of its income to obtain adequate and appropriate housing." (quoted in Hui 2001) Indicators may differ according to the way the housing costs and household income (the two variables that enter the equation) are defined. Probably the most frequent indicator used to assess the financial affordability of rental housing is the rent-to-income ratio.

The referential approach does not define any limit value of the housing cost burden but refers to a situation either in a different housing sector (e.g., rent should be defined at the rent level in the private rental sector) or the necessity of ensuring housing for certain groups of the population (e.g., rent should be defined in such a way that low-income families of employees with more children could afford it).

The residual approach is based on the evaluation of the "residual income", which equals the total household income less housing costs. For example, Grigsby and Rosenburg postulate that "Affordability should be defined in terms of the adequacy for other household needs of income remaining after deducting housing costs." (quoted in Hui 2001) Each of these approaches, however, needs at least some normative definition of a limit which, if exceeded, indicates the fact that the existing housing is financially unaffordable for a given household. Defining such a limit (e.g., in the form of a maximum measure of the housing cost burden or a minimum amount of a residual income) is probably the most problematic aspect because it is difficult to justify it with respect to economic or social theory. All the aforementioned methods must also deal with methodological issues such as:

• a low housing cost burden may be the result of the low quality of housing;
• the referential category and the residual income poorly reflect the actual living conditions of people who are above the defined limit value;
• a pure analysis of housing costs does not take a sufficient account of housing itself, of the protection of lease rights, of the costs following from the unavailability of cultural and healthcare facilities, the costs of commuting to work etc.;
• the total amount of net household income does not fully represent the actual financial situation of the household.

The development of the financial affordability of existing rental and ownership housing in the Czech Republic over the course of the 1990s has been studied using the traditional concept of the housing cost burden measure. Other indicators (price-to-income ratio, mortgage repayment burden) have been added for the evaluation of ownership housing affordability. The following definition has been used for the calculation of values of the housing cost burden (Lux, Burdová 2000):

Burden measure = monthly housing costs of a household (rent, basic costs, total costs) /total monthly net income of a household * 100 (%), where:

1. basic housing costs of a household = total of expenditures for rent, central heating, hot water, electricity, gas, liquid and solid fuels, water rate and sewerage rate and other utilities.
2. total housing costs of a household = total of the basic housing costs of a household and expenditures for construction and flat maintenance, construction needs, repairs and maintenance of investment household equipment, repayments of credits for a house or flat, and the real estate tax.

Ratios have been calculated using data from the 1990 - 2001 Family Budget Surveys (FBS). These are annual surveys aiming at capturing financial and in-kind flows in the management of a selected sample of households. A household, i.e., a group of people living and running a household together, constitutes the reporting unit and the selection unit of the FBS basic sample. The selection of households is conducted using the quota selection method, which may result in the levelling of various extremes (particularly the exclusion of high-income households). The basic selection criteria include the social group of a household, the number of dependent members (the number of members in the case of pensioner households), and the net income per person (in single-member pensioner households, sex is also a selection criterion). In the Family Budget Surveys the number of households in each social group is not determined in proportion to their representation in the total population, and therefore weights are used to compensate for this.