The residual income approach to housing affordability is one that looks at what different household types can afford to spend on housing after taking into account the other necessary expenditures of living.

It is an alternative to benchmark measures of affordability as used in social housing rent setting in Australia (the 25% rule) or assessing the overall affordability in the wider housing market (the 30/40 rule) as commonly used by a range of housing affordability researchers in Australia.

This Positioning Paper does two things. Part A provides an overview, using existing literature, of the various semantic, substantive and definitional issues around the notion of affordability, leading to an argument in support of the soundness of the residual income approach. This overview is set in the historical contexts of discussions about affordability measures in the US, UK and Australia.

Part B is methodological; it shows for various household types and income ranges, both for home purchase and rental, how the residual income method can be operationalised and its potential policy applications. This is still work in progress and there may be minor refinements to the method by the time of the production of the Final Report. However, we are confident that the method is sufficiently robust at this point to indicate its substantial potential as a problem identification and policy tool.

As a literature review, Part A of this Positioning Paper may be seen as contributing to the broad knowledge base of those interested in affordability research, but does not have an explicit policy focus. Those with just a concern for policy alone could extract the key information from the executive summary and then move to Part B.

Part A begins with two frameworks for understanding the key direction and debates in the literature. The first is in terms of the semantic and substantive arguments about the term ‘housing affordability’ and the second with those around the actual measurement of the relationship between housing costs and income, notably the two broad and computational approaches ‘ratios’ and ‘difference’, which are the formal foundations of measurement. This executive summary focuses on these two frameworks emerging from a synthesis of the literature rather than on the literature itself.