House price to income ratio

(a)Name: House price to income ratio.
(b)Brief Definition: This indicator is defined as the ratio of the median
free-market price of a dwelling unit and the median annual household income.
(c)Unit of Measurement: Ratio

(a)Agenda 21:  Chapter 7:  Promoting Sustainable Human Settlement Development.
(b)Type of Indicator:  State

(a)Purpose: This indicator is a key measure of housing affordability,
providing information on the overall performance of housing markets and
important insights into several housing market dysfunctions, indicative of a
variety of policy failures.

(b)Relevance to Sustainable/Unsustainable Development:  This is a key
indicator measuring human settlements sustainability by determining housing
affordability, and therefore the impact of market forces and housing policies
on the living conditions of people.  It is strongly influenced by government
land use policy and is particularly relevant to urban areas.

(c)Linkages to Other Indicators:   There are close links between this
indicator and a number of other socioeconomic Driving Force and Response
measures. These would include: infrastructure expenditure per capita,  percent
of population in urban areas, increase in urban population, population
density, area and population of informal settlements.

(d)Targets:  International agreements have not established specific national
and global goals for this indicator.

(e)International Conventions and Agreements:  This indicator is one of ten
"key" housing indicators approved by the Commission on Human Settlements
(Resolution 14/13), to be collected in all countries and in a number of cities
in each country, to measure progress towards meeting the objectives of the
Global Shelter Strategy. Countries are to use the indicators to provide the
basis for their country reports for the Second United Nations Conference on
Human Settlements (Habitat II).

(a)Underlying Definitions and Concepts:  Two intermediate measures are
required: median house price and median annual household income.

i)Median household income:  Household income is defined as gross income from
all sources, including wages, salaries, incomes from businesses or informal
sector activities, investment income, and, where information is available,
income in kind such as consumption of agricultural product which might have
been sold. 

ii)Median house price:   The median-priced house is that house which has 50%
of the houses priced below it, and 50% of the houses priced above it.  Housing
value is defined as the price at which a house would be sold if placed on the
market for a reasonable length of time by a seller who is not under pressure
to sell. 

(b)Measurement Methods: The following methods for calculating household
incomes and the median price house are suggested. 

Many countries may have recent household surveys containing information on
median household incomes or expenditures which can be used directly.
Expenditures data rather than incomes data may be used to estimate incomes if
these data are more readily available.  In fact, for lower income earners or
where incomes are routinely concealed, expenditures may be a better measure
of income than reported incomes. Mean household incomes, although less
preferable, are often easier to obtain as a recent estimate (for example, by
dividing household income or household expenditure in the National Accounts
by the number of households).

If a survey is available, which has mean and median incomes, but which is too
old to yield good estimates of household income, the ratio of median to mean
incomes may still be used to obtain a new median, because the distribution of
incomes does not change as rapidly as incomes themselves.

The calculation of the price of the median-priced house should, include all
housing, both new and old, and both formal and informal. If, for example, the
majority of the housing stock is informal, and the informal housing stock is
generally cheaper than the formal housing stock, then the median priced house
will probably be an informal unit.  For blocks of apartments or
multiple-family dwellings which are usually sold as a single building, the
value of one dwelling unit should be estimated as a pro rata share of the
total sale price.  This is particularly relevant for countries in Africa where
the majority of housing is of this type.

The following methods are available for estimating the median price.

i)Method 1:  Where the informal sector is small and data is reliable, median
house price can be determined directly from published (formal) sales figures
or from recent surveys.

ii)Method 2:  If recent average prices are available, they can be converted
to median price by using a median/mean ratio from an older household survey.
In much of the research done on housing markets in developing countries, it
has been found that median prices are generally about 70% of the average. This
figure is higher when housing is more equally distributed and lower when
housing is more unequally distributed.

iii)Method 3:  If no direct data are available, then prices need to be
estimated for each sub-market. Estimate the percentage of all housing units
and price range per unit. The median should then be estimated, using a graph,
representing the different sub-markets. In some cases, the price ranges of
several different kinds of dwellings may overlap around the median, so that
the median dwelling could be of either type.

(c)The Indicator in the DSR Framework:  This indicator is a measure of housing
affordability, result of housing demand and housing supply, determined by the
overall housing policy framework. As such, this indicator represents a State
measure in the DSR Framework.  

(d)Limitations of the Indicator:  Results for this indicator may vary
considerably if collected at the city, national, urban/rural levels, given the
variations in land availability and type of human settlements and activities.
Although median house price is more indicative of general housing
affordability than mean price, some population subgroups may find housing much
less affordable than the median. Also, although rents generally reflect house
prices, rents may be much more or less affordable than this indicator would
show, depending on rental market regulation and the availability of rental
housing. Various levels of data collection are necessary to provide a full
picture of housing affordability. In some countries such as China, no formal
housing market exists and a meaningful value for the indicator is difficult
to estimate.

The influence of the financial markets are not reflected by this indicator. 
It is a measure of what the market will pay, rather than a measure of the cost
to build housing.

(e)Alternative Indicator Definitions:  Another key and complementary measure
of housing affordability is the rent-to-income ratio, defined as the ratio of
the median annual rent of a dwelling unit and the median household income of
renters. It may be very relevant in some countries and cities where rental
housing is a common tenure type.

(a)Data Needed to Compile the Indicator:  Median household income;
median-priced house.

(b)Data Availability:  Reliable data are generally available for many
countries. Median household income can be extracted from household surveys and
the median-priced house estimated based on market research. Such estimates
from respondents correspond closely to actual market values. This indicator
has been collected in 53 countries (one city per country) by the Shelter
Sector Performance Indicators Programme in 1992 (UNCHS, World Bank). It is
being collected worldwide by the United Nations Centre for Human Settlements
(UNCHS) Indicators Programme in preparation for the Habitat II Conference.

(c)Data Sources:  Primary data sources exist at the individual urban area. 
This indicator is reported in the Housing Indicators Programme report listed
in section 7 below.

(a)Lead Agency:  The lead agency is the United Nations Centre for Human
Settlements (Habitat).  The contact point is the Director, Programme
Coordination, UNCHS; fax no. (254 2) 624 266.

(b)Other Organizations:  The World Bank

World Bank. Housing: Enabling Markets to Work. A World Bank Policy Paper.
Washington D.C., 1993.

UNCHS (Habitat), World Bank.  The Housing Indicators Programme. Report of the
Executive Director (Volume I). UNCHS, Nairobi, 1993. 

UNCHS (Habitat). Monitoring the Shelter Sector. Housing Indicators Review.
UNCHS, Nairobi, 1995.

LEAD AGENCY: HABITAT