• housing costs;
  • market failure;
  • housing policy
  • H20;
  • H12;
  • R31;
  • R38

This article discusses the concepts of housing affordability and policies for increasing housing affordability. Most current measures of housing affordability used in Australia are based on the acquisition costs of housing. They define housing costs in nominal rather than in real terms and include mortgage repayments that are properly regarded as savings. Moreover, they do not account for household choice over type of house or household composition. The first part of this article proposes that measures of housing affordability should be based on real housing user costs or rents. Turning to policy issues, this article argues that housing affordability is essentially a household income problem made worse by government restrictions on housing supply. High housing costs do not reflect housing market failures. To reduce housing costs, the government should allow more housing in established and Greenfield areas. The government may also improve housing affordability by subsidising housing for low-income households. However, subsidies to urban infrastructure nearly always raise the price of land rather than reduce the price of housing. Also, the Australian government’s proposed national housing and rental affordability funds are poorly defined and likely to be ineffective.