The measurement of affordability is important to understanding who has housing affordability issues; the spatial variation of these issues; and the extent of the problem in the community. This understanding is essential to ensuring that policies can effectively address the issue of housing affordability. Opinions on housing affordability are also widely reported on in the media. Therefore how we measure affordability is of critical importance so that policy decisions can be based on evidence rather than conjecture. Although housing affordability has commonly been measured as a simple ratio of income to housing costs, this paper presents an argument for the use of a different measure of housing affordability – the residual income measure - that is not commonly used in Australia. The residual income measure is based on the amount leftover from a household’s income (the residual income) once all other necessary household expenditures are accounted for. This measure varies for different household types. Measuring housing affordability using this “new” method produces a different picture of housing affordability for home purchases than when using traditional ratio methods. This has implications for our understanding of what is happening in the housing market, the housing industry and implications for creating effective policy to tackle the issue of housing affordability. This paper begins by describing ratio measures of affordability and their limitations. It then outlines the rationale for the residual income measure of affordability, and the methodology used to operationalize this measure using two affordability indicators developed by (insert text) to investigate housing affordability for home purchasers. Two sets of results comparing housing affordability for home purchase in Melbourne using the ratio and residual income methods are then reviewed. The first looks at the maximum affordable housing costs (mortgage repayments) for different incomes. The second determines the maximum affordable dwelling price for each income range (measure one) and thirdly household income required to purchase or rent a property at the median price for any given area is examined (measure two). Key differences between household types and incomes are highlighted.