New Approach Assessing Housing Afford Ability Fibre 2008

8/3/2019 New Approach Assessing Housing Afford Ability Fibre 2008

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FiBRE

Findings in Built and Rural Environments January 2008

Corporate Proessional Local

A new approach to assessing housing aordability

www.rics.orgResearch

Sixty second summary

For an area o a town or city to beregarded as aordable, it needs tobe more than just relatively cheap.An area might be cheap compared toother areas because it is in a deprivedneighborhood, with no local amenitiesand ew job opportunities. To label suchareas aordable may be a mistakenapproach and lead to sub-optimalpolicy decisions.

This seemingly simple statement orms

the basis o work by researchers atthe Housing Aordability Initiativeat the Center or Real Estate at MITto explore alternative and richerapproaches to developing measureso housing aordability.

The index that they have developedis based on a new concept o areaaordability. Rather than viewingaordability as some ratio o income

to housing cost, it recognises thatthe price o a house is aected by itslocation, since this price includes thevalue o the services provided by thelocal amenities. Housing policy shouldbe about more than just providing basicliving accommodation, but should alsobe about ensuring that people haveaccess to jobs, are in sae areas, andhave decent schools.

Based on the Greater Boston areain the USA, the key innovation othis work is to account or locationalamenities when comparing houseprices across towns in a metropolitanarea, and to come up with a measureo aordability that more accuratelyand useully reects the quality oan area. A key implication o thiswork is the possibility o developinga menu o policy options to increaseaordability depending on the nature o

the aordability problem. For exampletowns that are not aordable becauseo inadequate schools may not be thebest candidates or additional housingbut or alternate orms o investment.Such investment would aim to improvethe overall desirability o the area orfrms and households, which may inturn improve school perormance.Also, towns that are categorized asunaordable by the index because they

are located ar rom jobs may not begood candidates or aordable housinginvestment. Building new units ar rom

jobs may also raise the cost o labour,thereby reducing the competitivenesso the region in attracting andretaining frms. This ability to producemultiple options or dealing with thelack o aordable housing shouldmake the index particularly useul topolicymakers who are looking or amore exible approach or dealing withaordability problems, especially inhigh-cost areas such as Boston.


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Introduction

For an area o a town or city to be regarded as aordable, it needs to

be more than just relatively cheap. An area might be cheap compared

to other areas because it is in a deprived neighborhood, with no local

amenities and ew job opportunities. To label such areas aordable

may be a mistaken approach and lead to sub-optimal policy decisions.

This seemingly simple statement orms the basis o work by Lynn Fisher,Henry Pollakowski and Jerey Zabel o the Housing Aordability Initiativeo Massachusetts Institute o Technology, USA, to explore alternative andricher approaches to developing measures o housing aordability. As LynnFisher says, We were concerned that ocusing on price would lead us

to the wrong conclusions about the aordability o an area. The newapproach that their work proposes is to look at a bundle o attributes thatan area possesses, such as school quality, access to jobs and environmental

quality, and to assess whether taking these into account makes a dierenceto whether an area can be regarded as aordable. Their initial results, basedon the Greater Boston area, suggest that this may be the case.



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will continue to uel economic growth

have made housing a priority o other

public and private organizations nottraditionally concerned with housing.

Access to housing is also a central

element o a growing disparity between

the haves and have-nots in society

with respect to various opportunities,

including education and saety. In some

places, judicial and legislative demands

require developers to provide housing

plans and/or a measure o an areas

housing aordability. For instance,

in Massachusetts, New Jersey,Caliornia and other states in the USA,

residential housing developers may

sometimes be able to override local

land use regulations i they agree toprovide aordable housing when local

areas ail to meet some measure o

aordability. Thus, an aordability index

can be a useul tool or state and local

governments and other housing-related

organizations. But it also means that it

is important that it comes up with the

right answer. Encouraging the provision

o seemingly aordable housing in

the wrong location does no-one any

avours in the long run.

During the period 1998-2005, house

prices in the Boston metropolitan area

nearly doubled. A check o the BostonGlobe, the main local newspaper,

shows that there has been, on average,

about one article a week that has

mentioned high housing costs or

high housing prices.

Why is this issue important? Firstly, its

important to note that housing policy

is an important part o the activities

o state and local governments.

The concerns about the ability o

metropolitan areas to compete orfrms, jobs and human capital that

The recent increase in house prices in many parts o the USA hashighlighted housing aordability issues, especially in high-cost coastalcities such as Boston.

Background


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Typical measures relate the income o

a hypothetical median household and a

hypothetical median cost dwelling.

Some commentators use the ratio o

an areas median income to median

house price to judge i an area is

aordable. However, this ratio contains

little inormation and is potentially

misleading. By disguising the variations

in both house prices and incomes in

an area, it does not really allow us to

assess the degree to which it caters

or a range o households. A high

income area may well on the surace

appear to be aordable to those whohave chosen to live there, but tells us

little about the overall distribution o

aordable housing. All it tells us is that

some towns are aordable to certain

parts o population but not to others.

Some people can choose to live incertain areas, and use their income to

buy amenity. But not everyone is in a

position to make that choice.

What then does it mean or a town

or other small geographic area to be

aordable? Lynn Fisher suggests that

we need to consider what proportion

o both owner-occupied and rental

housing in an area is aordable to a

particular type o household, defned by

income and household size. She alsosuggests that, or whichever group o

the population we are looking at, the

benchmark fgure that is aordable

is no more than 30% o income spent

on housing.

So, the new element o the work by

Lynn Fisher and her colleagues is

to go beyond simply thinking about

aordability in terms o housingexpenditure as a ratio o income.

As they say, Inexpensive housing

that is located a long way rom job

opportunities may not be particularly

aordable, as it provides ew job

opportunities and long commutes,

making it difcult to pay the mortgage.

In considering what the key location

issues to ocus on were, they decided

on job opportunity, school quality and

saety provision.

The most usual way o thinking about aordability is in terms o houseprices and incomes, normally at the metropolitan area level.

What do we mean by affordability?


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The technique that the researchers

used is to develop an area aordability

index or all the 140 towns in the

Greater Boston area. This measuresthe proportion o units in a town that

are aordable by a particular income

group. The researchers ocus on

housing or moderate income working

households those making just

below the median household income

or the region (the examples below

ocus on households making 80% o

area median income). This provides

us with a ranking o towns according

to the proportion o houses that areo a certain proportion o income o

our target population. In its raw state,

this does not take into account any

locational amenities, so the next step is

then to adjust this initial distribution to

take into account the job opportunities,

school quality and saety provision in

the town. The model that they have

developed enables them to price these

amenities and then use the use these

prices to adjust housing expenditures.

Using data provided by the Warren

Group, they calculated the adjustment

values that would be needed or job

accessibility, school quality and saety

quality o an area. The results are

shown in Table 1 (see page 06).

Using Greater Boston as the case study area,what insights does this new approach provide?

The case study


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The three that they identifed as being

most signifcant were accessibility to

jobs in the area, the quality o local

schools as measured by the numbero students achieving a sufcient or

advanced score in the Massachusetts

mathematics and English exams, and

a measure o local saety.

The researchers measured a towns

saety by conducting a principal

components analysis on the ollowing

variables: violent crime, property crime,contaminated sites per square mile,

and the percentage units within hal

a block o buildings with bars on

the windows.

The ull set o coefcients used to

construct the housing aordability

index is listed right.

The researchers adjusted the actual house prices to take account o bothbuilding-specifc actors o the houses in an area and the external actors.

How was the affordability index created?


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Table 1 Greater Boston House Price Hedonic Statistics

(Dependent Variable: Ln(Imputed Rent))


Condominium

Variable Parameter Estimate Standard Error

Age 10 to 30 -0.0899*** [0.0056]

Age 30 to 50 -0.185*** [0.0067]

Age Greater Than 50 -0.113*** [0.0071]

Bathrooms 2 Condo 0.0676*** [0.0051]

Bathrooms 3 Plus Condo 0.0785*** [0.0064]

Bedrooms 0.0164*** [0.0032]

Living Area 0.000800*** [0.000021]

Living Area Sq. -0.0000109*** [0.00000062]

Town House -0.00262 [0.0088]

Density 0.0000342*** [0.0000055]

PCT Open Space 0.0000368*** [0.0000098]

Ln (Accessibility) 0.104*** [0.031]

Ln (School) 0.477*** [0.062]

Saety -0.0241** [0.010]

Year Dummies 0.0447** [0.018]

Constant 6.463*** [0.31]

Observations 22525

Number o town ID 266

R-squared 0.657

Robust standard errors in brackets

*** signifcant at 1%; ** signifcant at 5%; * signifcant at 10%

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Based on this, they were then able

to re-calibrate the unadjusted area

aordability index, to take accounto these actors, and to work out

the fnancial cost or beneft o these

actors. This then alters the amount

o stock in a town that can truly be

regarded as aordable. What did

they fnd?

I we take some examples o towns

that moved signifcantly between the

initial unadjusted and the fnal index,

it will make the point clear. Adjusting

or amenities can make a substantialdierence in the aordability rankings

o towns. For example, Haverhill is

ranked 5th by the unadjusted index

but only 21st when adjustments are

made, particularly or school quality

and saety. Lowell (school quality and

saety) alls rom 1st (unadjusted) to

19th (adjusted). On the other hand,

Watertown rises rom 51st (unadjusted)

to 17th (adjusted) and Waltham rom

33rd (unadjusted) to 5th (adjusted)

on the strength o their accessibility to

jobs. The top fve aordable towns are,

in order, Marlborough, Milord, Hudson,

Dracut, and Waltham. Only one o these

- - Dracut - - is even in the top ten in

the unadjusted indices.

Overall, once we account or job

accessibility, school quality and saety

provision, the adjusted total stock

represents 85% o the unadjusted

aordable stock in other words,

while some housing was adjusted to

appear more aordable and other units

were adjusted to be less aordable

on the basis o their location in the

metro area, on net these adjustments

result in a 15% decrease in units that

should be considered aordable to the

household type studied. In part, this is

due to the act that the adjustments

are not uniorm across space. In act,

the 15 most accessible towns show

a small increase o about 2% in theprovision o aordable housing, while

the remaining 126 towns contribute

Figure 1 Unadjusted Aordable Housing Units as Share o Total Town Stock

For All Household earning 80% o Boston Area Median Income. Weighted by Size.

a 16.5% decrease to the total

aordable stock.

To illustrate the eect o adjusting

the aordability index or accessibility,

school quality, and saety provision, the

maps in Figure 1 shows the unadjusted

index and Figure 2 is the adjusted

index. What stands out in particular is

the dramatic decline in aordability

that some o the southernmost towns

experience once adjustments are made.

As an additional example o how the

index can be used, consider two types

o workers that are quite importantto a metropolitan area: nurses and

frefghters. In Massachusetts the

median income or a two person

household with at least one member

working as a nurse is $52,000.Similarly the median our person

household with at least one frefghter

earns $103,000. These incomes

compare to median incomes o

$72,000 and $94,000 or all two and

our person households in the Boston

Metro Area, respectively. According

to this new index, the two households

described above ace very dierent

realities. With a total available stock o

approximately 1,200,000 housing units

in the Greater Boston Metropolitan

Area, only about 80,000 units would be

aordable to the two person nursing

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Figure 2 Adjusted Aordable

Housing Units as Share o Total Town

Stock For All Household earning

80% o Boston Area Median Income.

Weighted by Size.

Based upon the MIT/CRE Amenity-Based Aordability Index or 2 person

Nursing Households and 4 person Firefghting Households. Median

incomes or each amily calculated rom the 2000 Census 5% PUMS

data or the State o Massachusetts and inated using the percent change

in per capita personal income rom BEA table AMSA04.

household. In contrast, over 400,000

units would be aordable to the our

person frefghter household. The topaordable towns or the two person

nursing household include: Waltham,

Amesbury, Marlborough, Watertown

and Arlington among others. The our

person frefghter household will fnd

the highest concentration o aordable

options in towns such as Carver,

Tewksbury, Holbrook, Billerica and

Wilmington. These dierences reect

the eects o greater rental stocks

and better accessibility to employment

that create more aordable options to

households with lower incomes. This is

shown in Figure 3.

08

Figure 3 Key Worker - Most Aordable Towns


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There are a number o potentially valuable policy implications rom this work.

Policy implications

First, the index provides an improved

methodology or assessing the

inventory o housing that is aordable

to dierent households at a certain

level o quality, allowing policymakersto better understand the aordability o

towns relative to their peers in a more

comprehensive manner. Leading on

rom this, one implication o this is that

policies that set a single rent or price

as aordable to a household earning

a certain level o income ail to account

or the opportunity costs and benefts

o residing in any given location.

For example, in the density override

program in place in Massachusetts,

developers must oer an aordable

unit o newly developed housing at

a rent o approximately $1100 per

month or a 4 person household.

This rent is set regardless o location.

Thereore, applying these adjustments

to monthly rent based on employment

and school opportunity and open

space, a unit in Wilmington would be

worth approximately $100 more than

a unit in Everett (which, although it has

good access to jobs, has low schoolquality) but approximately $200 less

than the same unit in Belmont (which

has above-average schools and good

access to jobs). I $1100 was a frm

cut-o or the expenditure that a

household should make on housing,

then the aordable unit provided in

Everett or a sticker price o $1100

a month is, in act, not aordable to

the targeted household. A household

incurs an additional $100 in costs permonth rom living in Everett despite

the amount they write in their rent

check each month. The cost incurred

at that particular location is the net

eect o poor schools and open space

amenities less the gains rom being

located near many job opportunities.

Likewise with respect to the town

rankings, it is not sufcient simply

to point to the least aordable

places. I, or example, a non-proft orpublic entity wants to direct housing

investment to some o these least

aordable places, where should

investment go? I a household

has a fxed amount to spend, then

accounting or job accessibility, school

quality and saety makes a dierence

to how much the house is actually

worth to the targeted households. This

suggests that there needs to

be dierent policy responses in

dierent areas o low aordability

within a region.

For example, towns that are not

aordable because o inadequate

schools may not be the best candidates

or expenditure on additional housing

but or alternate orms o investmentthat would seek to improve the overall

desirability o the area or frms and

households which may in turn improve

school perormance. As an extreme

case, consider the town o Lawrence.

The cost o having the lowest quality

schools contributes to a drop in the

rankings rom 46th on the unadjusted

index to 119th on the adjusted index

a huge drop. Economic development

may be as important as additional

housing investment in this place

because, as it stands, there is an

extraordinarily high opportunity cost or

households who locate in Lawrence.

Thereore, the aordability o the area

might be improved not by building

additional housing but instead by

improving the school system and other

public amenities and other economic

development eorts.

Equally, some towns are categorized

as unaordable by the index because

they are located ar away rom jobs.

Such places with high job accessibility

costs are not good candidates or

aordable housing investment, either.

From a regional perspective, spreading

out households ar away rom jobs may

also raise the cost o labour thereby

reducing the competitiveness o

the region.


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About the study

This work was carried out by Lynn Fisher and

Henry Pollakowski o the Department o Urban

Studies and Planning, Massachusetts Institute

o Technology, USA, and Jerey Zabel o the

Economics Department, Tuts University, USA,

supported by a excellent team o research

assistants. The Warren Group and the Central

Transportation Planning Sta (CTPS) o

Boston assisted with data contributions. It

was awarded the RICS best paper prize at the

2006 Asian Real Estate Society conerence

held in Vancouver, British Columbia, Canada,

on June 30 to July 3, 2006.

The ull working paper on which this FiBRE is

based is available at:

http://web.mit.edu/cre/research/

hai/a-index.html

Alternatively, the high amenity but

unaordable towns should be seriously

considered as places that are worthy

o additional aordable housing

investment. In act, these are exactlythe places where high market rate unit

prices or rents are most likely to be

able to subsidize the aordable units

in mixed-income developments. This

can occur under programs such as

Chapter 40 B in Massachusetts when

existing zoning is sufciently restrictive.

This program provides density

overrides to developers who agree to

set aside 25% o a projects units or

moderate income households. While

the aordable units are only 25% othe total, the legislation also works to

augment the supply o new multiamily

housing units. Given the strong town-

level regulation over zoning, most new

multiamily rental housing in the Boston

area gets built in this manner.

One fnal comment rom Lynn Fisher,

What this aordability index suggests

is that not all places are equal. While

policies that require towns to bear their

air share o a regions aordablehousing may be politically popular,

the implications or households, the

regional economy and society generally

are less avourable than a policy which

better accounts or the implications o

location. It should be o no surprise to

anyone that location matters, and that

location is thus an important eature in

understanding the linkages between

housing, opportunity and regional

economic success.

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RICS (Royal Institution o Chartered Surveyors) is the leadingorganisation o its kind in the world or proessionals in property, land,construction and related environmental issues. As part o our role wehelp to set, maintain and regulate standards as well as providingimpartial advice to Governments and policymakers. RICS has140 000 members who operate out o 146 countries, supported by

an extensive network o regional ofces located in every continentaround the world.To ensure that our members are able to provide the quality o adviceand level o integrity required by the market, RICS qualifcationsare only awarded to individuals who meet the most rigorousrequirements or both education and experience and who are preparedto maintain high standards in the public interest. With this in mind itsperhaps not surprising that the letters RICS represent the marko property proessionalism worldwide.

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New Approach Assessing Housing Afford Ability Fibre 2008