The affordability of house purchases across the distribution: a Lorenz-style approach

I propose a method that can assess the affordability of properties purchased with mortgages in Ireland between 2003 and 2014 across all points of the joint distribution of house prices and population incomes. The method allows... [ view full abstract ]

I propose a method that can assess the affordability of properties purchased with mortgages in Ireland between 2003 and 2014 across all points of the joint distribution of house prices and population incomes. The method allows for Lorenz-style curves of housing affordability to be constructed, as well as Gini-style metrics for distribution-wide affordability, which differ in important ways from aggregate measures such as the ratio of average house price to average income. The method suggests that the housing market crash in Ireland from 2008 to 2012 was associated with dramatic improvements in affordability for Irish households, controlling for falls in income across the income distribution. The analysis can also provide insights such as the disproportionate improvements in affordability relative to the pre-2008 era for households below the 40th percentile of population income. Aggregate measures are necessarily driven by developments at the right tail of the price distribution, and may give the erroneous conclusion that the experience of those purchasing the most expensive properties in the market gives a representative view of the experience of all those considering purchasing housing. The method presented here allows for a full view of the heterogeneous experience of all households.