There are three methodologies adopted internationally to estimate housing affordability:
(i) Expenditure Method or Housing Cost Burden: The ratio of housing expenditure to household income is used to measure affordability. Housing expenditure covers all the costs related to housing including rentals, mortgage repayments, utilities and maintenance costs. Housing units can be classified as affordable if the ratio is less than some cut-off value. The choice of this cut-off is judgemental; however, as a thumb rule, it is taken to be 30 per cent.
(ii) Median Multiple Indicator: Under this approach, the median house price is divided by median household annual income to derive housing affordability.
Demographia International, an organisation which conducts survey across countries for affordable housing, considers price to income ratio below 3 to classify housing units as affordable
(iii) Housing and Transport (H+T): In this method, transport costs are also included with housing costs to measure affordability.
The underlying idea is that congestion in cities has led to rise in human settlements at long distances from the city centre, which has resulted in increase in costs and time spent in commuting.
Need for Affordable Urban Housing in India
As per the Report of the Technical Group (TG-12) on Estimation of Urban Housing Shortage (2012), there has been a huge gap in demand and supply of urban housing in India.
The economically weaker sections (EWS) 56 % housing shortage
low income group (LIG) 40% housing shortage
Total = 96% of the total housing shortage in India
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