Affordability Model Methodology

The actual affordability model uses a typical Building Society annuity formula to calculate the maximum price a household with a median household income can afford to pay, assuming a typical interest rate (5.75% 2001-2003), a 95% mortgage (loan to value ratio) and a 25 year repayment period. 30% of household income is considered the maximum reasonable proportion of income which can be used to service mortgage payments. This figure is compared with what is considered to be a typical affordable house: a house priced at the upper boundary of the first quartile of house prices (25th percentile) in that district or sector (i.e., low cost home ownership). The model places emphasis on changes over time and makes reference to key variables of house prices, incomes, mortgage term and interest rates.