Relationship Between Income And Household Prices

Introduction

This review focuses on both theoretical and empirical literary works by scholars to explain the relationship between income and household prices. Considerable amount of work has been done to prove that there is a relationship between income and housing price units. Also, studies in this area have been conducted extensively in various parts of the world. However, most of these studies focused on income in general. This study seeks to focus on the income of public sector works in the Greater Accra Region.

The study effectively investigated the impact of housing unit prices viz-a-viz income of public sector workers in the Greater Accra Region.

This review was undertaken by searching for relevant literature in specialized data sources from Research Gate, BASE, Google books and Wolfram Alpha. In addition to this, Google Scholar searches were conducted and the prevalent keywords included affordable housing, public sector income and housing unit prices.

Theoretical Literature

The theoretical literature presents and attempts to explain theories that relate to the research question or hypothesis, or proposition or subject matter in general (Alabi, 2009).

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The theoretical literature reviewed theories related to prices of housing units and public sector workers. The review also examined affordable housing and a brief on Ghana's housing industry.

In recent times, the Ghanaian housing market has gone through remarkable transformation. Thanks to innovation and increased governmental involvement in the housing market. Perhaps not coincidentally, the last century has witnessed a substantial change in the Ghanaian Public sector wage distribution, ushering in a period of relatively mild income inequality that has persisted into current times.

Households headed by individuals at the low end of the skill distribution generally paid rents that appear quite reasonable by more modern standards, and consumed a quantity of housing per household member that appears quite generous by these standards.

The numerous benefit of quality affordable housing to public sector workers and the nation at large is extremely massive; it impacts on the economic, socio-cultural and political life of people; it provides shelter for sleep; serve as a shield against elements of the weather and other hazards; it affects efficiency and stability of a whole economy and financial markets; and hence has a significant impact on the productivity and growth of all nations (Boamah, 2011).

Suffice to say, affordable housing offers households the ability to consume other basic necessities of life such as food and clothing and also meet any recurring expenses in their daily lives. This is due to the fact that, funds which would have hitherto be spent on housing/accommodation is now available to public workers to expend on other pressing needs. Affordable housing invariably reduces financial pressures on public workers and further improves standard of living due to savings in disposable income.

Affordable housing as defined by the Ministry of Works and Housing in the 2015 National Housing Policy is "the ability of a household to spend up to thirty percent (30%) of its gross annual income on the rent or purchase price of housing where the rent or purchase price includes applicable taxes and insurances and utilities. When the annual carrying cost of a home exceeds thirty percent (30%) of household income, then it is considered unaffordable for that household."

The above definition as contained in Ghana's 2015 housing policy is suggestive that any housing rental charges which takes more than 30% of one's yearly income in Ghana is not affordable and as such, more of one's disposable income is spent on housing/accommodation. This definition is subjective in that, one can be spending more than 30% of his/her annual income on rent but on a comparative basis, it might be affordable due to differences in geographic location and market values.

According to Angel (2001), affordable housing is a housing with costs at or below a fixed price point, sometimes arbitrarily set, and deemed to be accessible to those on lower incomes. Such costs or below the fixed price could be set by government or upon consultations with stakeholders in the housing sector. A variation on this definition uses public subsidies as a factor for determining what constitutes affordable housing. It is instructive that, the word "affordable" is relative and as such a house that might be affordable in one jurisdiction might not be same in another, all things being equal.

Abongo (2009) posits that affordable housing includes not just the inert structure known as a house but then the scope of some aspects of the environment which enhance living, making it more acceptable and satisfactory. It is not appropriate to be in an affordable house located in flood prone areas where you can not move freely after a down pour, inaccessible terrain and very difficult to access basic utilities. Therefore, affordable housing must include good access routes, sanitation and access to basic human needs such as water.

The increasing demand for affordable housing has forced Government to collaborate with the Private sector to channel state resources to meet the ever-increasing housing deficit in Ghana. According to Gidding (2007), housing is a key component in human development. Without housing, one is left at the mercy of perilous environmental conditions detrimental to one's physical and emotional being. No one can have a "sound" sleep in an open and uncovered place during rainy season, this posits the relevance of housing to the human species.

The rise of housing affordability problems, and the concurrent increase in income inequality, have attracted the attention of numerous researchers over the past decade. Previous research has identified many possible causes of the increase in inequality. Public sector employment, a source of high-paying jobs for moderately skilled workers, declined due to numerous reasons but mainly economic hardships, international trade patterns and immigration have also been implicated by some studies (Feenstra and Hanson, 2001; Borjas, 2003).

The potential role of rising inequality as a cause of housing affordability problems has heretofore been only cursorily studied. The role of a public sector worker's own income in determining ability to afford housing is well supported by empirical evidence and not often disputed.

In many metropolitan areas, growth in the housing sector failed to keep up with population growth, leading to scenarios where the market price of housing units vastly exceeded the marginal cost of constructing those units. A considerable amount of recent research (Glaeser and Gyourko, 2003;

Glaeser, Gyourko and Saks, 2005a, 2005b) suggest that zoning laws and other housing market regulations lie at the root of these trends.

Supply-side and demand-side explanations for the decline of housing affordability are not mutually exclusive. Indeed, they are complementary. Inelastic supply need not lead to price increases if demand is stable or declining. Similarly, the impact of demand growth on prices depends on the elasticity of supply. Given the recent explosion of studies associating housing price appreciation with inelastic supply, it seems appropriate to us to consider anew the potential for trends in the demand for housing - particularly the renewed interest in central-city housing on the part of affluent households (Vigdor 2002) - in reducing the affordability of housing units to less-affluent government workers.

Public Sector Workers Income inequality and housing prices in theory

It is now incredibly difficult for most public sector workers to purchase a house in Ghana because of the record-high house prices, but we can still see a lot of mansions and houses under construction and been sold out quickly. This situation indicates two problems: high house prices and income inequality. The objective of this study is to identify whether income inequality is the main drive of rising house prices. This section begins by discussing housing markets in partial equilibrium. In this model, under reasonable assumptions, increases in income at the high end of the distribution lead to higher housing costs and reduced consumption at the low end. We then present a simple closed economy general equilibrium model, which suggests that the connection between public sector workers income inequality and housing market outcomes is not universally clear.

Recently, the increasing record-high house prices have been a major issue of public concern and become the leading source of public dissatisfaction in, particularly in the city of Accra.

Because of the high house prices and unchanged income, it is now increasingly difficult for people to buy houses in Accra. According to the statistics from the Bank of Ghana Housing Market article, study shows that a basic characteristic of the price structure of real estate properties in Ghana is the quotations in foreign currency, notably the US dollar despite the stability of the domestic currency over the last five years. According to ··most semi-detached houses cost between $30,000 and $90,000 while detached houses are priced between $50,000 and $110,000. Clearly, these are prices over and above the reach of the ordinary Ghanaian salaried worker. On the causes of persistent house prices, majority of respondents (19 out of the 22) cited high cost of building raw materials (about 86% of the respondents). This is followed by high cost of land as second highest reason behind appreciable increases in the house prices in Ghana, which makes it impossible for the poor to afford these facilities. The housing survey also revealed that domestic interest rate trends affect activities of the sector directly since most housing projects are normally financed partially by bank loans from the domestic financial institutions. The high cost of loans impacts negatively on housing projects, which indirectly feeds into the final price of houses in the country.

Defining Affordable Housing

According to Milligan et al (2004) The term 'affordable housing' describes housing that assists lower income households in obtaining and paying for appropriate housing without experiencing undue financial hardship. The United States Department for Housing and Urban Development, (2016), argues housing to be unaffordable when households spend more than 30% of their income on their housing needs. The Canadian mortgage and Housing Corporation (2010) also affirms the above assertion by saying housing is considered to be unaffordable when households spend more than 30% of their gross income on their housing needs. Again, Ghana's Ministry of Works and Housing (2015) describes affordable housing as "the ability of a household to spend up to thirty percent (30%) of its gross annual income on the rent or purchase price of housing where the rent or purchase price includes applicable taxes and insurances and utilities".

From the above definitions; we can define affordable housing as a housing which makes it possible for other basic needs of life to be met. When one does not spend more than 30% of annual disposable income on rent, he/she can afford basic necessities of life such as food and clothing.

It includes the ability of households to consume housing that permits reasonable standard of living; ability of mortgagors to effectively meet mortgage obligations, and households' access to adequate standard of housing without denying them access to other basic necessities of life. It is instructive that the benchmark of 30% is not universal and there are exemptions to it in some specific jurisdiction. More importantly, what is considered affordable in one jurisdiction cannot be same in another.

Approaches to Affordable Housing

Generally speaking, there are two broad approaches to affordable housing worldwide. According to ADB (2009), these are Universal and Targeted approaches. The universal approach is aimed at providing affordable housing to all the citizenry and has their welfare as supreme. Such nations include; Netherlands, Denmark, Sweden, and Singapore. The targeted approach is based on market forces and as such, specific interventions are made to assist low-income earners to have affordable housing. This is true in the case of Ghana, the European union, Canada, Malaysia and the United States of America were specific interventions are made by the state or either through private collaborations to deliver affordable housing.

According to Begum (2015), an enquiry into the affordable housing practices in different continents provides a generalized understanding of varied options available and approaches adopted all over the world to address the affordable housing problem, these include: massive state housing of the communist regimes, social housing of the post-communist and welfare regimes of the central and eastern European countries, market interventionist social approach of the western European countries, market approach of capitalist and mixed economic regimes etc.