Introduction
There are many indicators that measure housing affordability, where their calculations vary depending on the objective. One indicator that is commonly used to measure affordability within the market is the ‘median multiple’. As the name implies, it is a ratio between two medians—median house price and median household income.
This article elaborates about the ‘median multiple’; what it is, what it is not, as well as additional considerations that need to be made when using the measure.
How the median multiple is measured and why it is important
The attractiveness of median multiple as a measure is the simplicity of the calculation. To get the median multiple of a country, take the median free-market house price, then divide it with the annual median household income (gross). The median is used, rather than the average, because the median is unaffected when the distribution of household income or house prices are skewed—such as the existence of high-income households or luxury housing.
For example in 2019, Malaysia’s median house price was RM289,646, and the median household income was RM5,873. To get the median multiple, divide RM289,646 by the annual income of RM70,476, which equals to 4.1.
To understand what the number ‘indicates’, the median multiple can be grouped into four affordability categories. A median multiple of 3 and below signals that the housing market of an area is affordable.
It assesses housing affordability based on house price and income variations, and does not include the role of financing
It is important to note that the median multiple isolates the role of financing in its calculations, and only accounts house price and income. Other commonly used housing affordability measures, such as housing cost burden and residual incomes include financing elements—hence the ability of households to purchase a home is based on the housing loan they can qualify for.
What the median multiple is and what it is not
It is a measure for market affordability, NOT individual household affordability. Firstly, in understanding indicators for home buyers affordability, it is important to differentiate between market affordability and individual household affordability. The median multiple is an indicator that assesses market affordability, rather than individual household affordability.
The appropriateness of using the median depends on the distribution
To recap, the median multiple measure uses the median value to describe house price and household incomes. The median is a measure of ‘central tendency’, which is the use of a single value to describe a set of data by identifying the central position within that set of data—also called summary statistics. While the median multiple is a sensible measure to compare housing affordability between markets, it could not distinguish between two markets that have the same median value but different distributions of this value.
It is a measure of affordability, NOT quality of housing
The median multiple is meant to measure affordability; it estimates a housing market’s affordability using house price-income ratio. It is not meant to measure housing quality, as the indicator does not account for other factors that could enhance household’s quality of life such as the characteristics of dwellings as well as individual preferences.
Geographical or contextual factors that affect the interpretation of the median multiple
Consideration 1: Extent of informal housing out of the total housing market. One of the issue that we uncovered in our earlier report, Making Housing Affordable is that the extent of the informal housing sector varies between states. For Malaysia, 60% of the housing market is from the formal sector.
Consideration 2: Analysis should be based on the local context. Obviously any market affordability analysis would depend on the local context, due to how local conditions can vary between them.
Functional conurbation as a better scope of measurement
The previous analysis uses state and district boundaries in assessing housing affordability, mainly due to household income and house price data being limited to that form. However, a more correct assessment of housing market affordability should be based on the functional boundary of conurbation areas, or functional conurbations, rather than administrative boundaries.
Concluding remarks
An ‘indicator’ should be treated as a sign or signal that shows something exists or is true or as a guidance to perform analysis with improved clarity. It is undeniable that median multiple affordability indicator is indeed a very useful tool in housing affordability analysis however, users need to be aware of its intended purpose and limitations.
