The biggest financial effort most people make in their lives is to buy a home, whether it's to live in or to rent for extra income. But did you know that there’s a indicator for that effort? We’ll explain it here.

The affordability rate shows the average number of years that a household would take to pay for a home if they put their entire income towards it. It’s commonly used to understand how affordable homes are in a given area (especially by country or by city or town). It’s easy to calculate: you take the average housing price in an area and the average annual salary of the people living there.

Imagine we want to know how affordable it is to live in different countries. First, we look at the average salary of each country's inhabitants. Next, we find the average housing price.

Even if our salary is above or below average or we want a special kind of home, this ratio shows us how many years a person will spend paying for a home with their salary. According to the European Commission’s study “Euro Area Housing Markets: Trends, Challenges & Policy Responses”, Luxembourg has the highest affordability ratio at 16 years; however, in Spain and Portugal, it falls to around 12 years.

There are also price-to-income ratios that show us how affordable housing is by country. According to Statista, the housing price-to-income ratio is 126.2% in the US; 123.9% in Chile; and 116.1% in the UK.

Still, because a country’s economy, supply and demand, and extraordinary occurrences like a pandemic have an effect on salaries and housing prices, these numbers tend to change over time. 

What is financial wellness?

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It’s the satisfaction of having a healthy balance of income, expenses, savings and debt.

Affordability rate: From theory to practice

Can the affordability rate apply in real life? The answer is “no”. It is useful to compare how affordable areas are to live in; but it’s not realistic because it means a household's entire yearly salary goes towards paying for a home. That would be unsustainable since a household needs to spend money on food, bills, transport, not to mention savings to raise our financial well-being.

No one can commit 100% of their pay to paying a mortgage; in fact, it’s recommended to not spend more than 30% on a mortgage or rent. 

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