Author: Albert Ahiadu
Housing is often too expensive for the average household to purchase outright. In developing countries like Ghana, people often resort to mortgages, informal loans, housing associations, incremental housing or simply renting. Regardless of the preferred method, it is important to keep track of how much is spent because it is usually the priciest expense. Factors such as household size, housing benefits, regional variances (differences in housing cost because of the location) and quality of housing all complicate affordability, but these are a few of the measures popular around the world.
- Rent-to-income ratio
This measure is most significant for renters, and simply involves viewing rent in proportion to income. This percentage informs on how much is being spend on housing as well as other expenses. Traditionally, spending no more than 30% of gross income on housing is deemed affordable.
- Housing price-to-income ratio
Another popular gauge of affordability is the ‘housing price-to-income ratio’. This ratio captures how many years of a household’s annual salary can pay for housing, highlighting how long a family can expect to pay off housing if they choose to either build themselves or take a mortgage facility. The UN estimates that the ratio is approximately 2.5 in developed economies, but can be as high as 10 in Ghana, a developing country.
Affordability is a bigger socio-economic issue for poorer families because they generally have less disposable income to spare. Consequently, spending too much on housing will inevitably leave these with less money to spend on other essential expenses – food, utilities, transport, education for the children, savings and planning for retirement. Most households in Ghana do not consciously keep track of how much they spend on housing, but the implications of it demand attention and requires you to ask; am I spending too much on housing?
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