Housing affordability - short life working group: final report 2022 to 2024

Background to the Short Life Working Group

Remit and Terms of Reference

The 2022 terms of reference for the SLWG described the group’s purpose to be:

“[bringing] together stakeholders and experts from across Scotland’s housing sector with the aim of reaching a consensus on a shared understanding of affordability. The group is intended to be a short-life working group with members playing an active role in realising the shared understanding of housing affordability for Scotland.”

In practical terms, the group’s responsibilities involved:

• Critically reviewing the main working definitions of affordability and the different uses of affordability in policy and practice.
• Agreeing the process of consensus-building.
• Commissioning and co-designing focus group work.
• Agreeing a set of provocations by different speakers at regular SLWG meetings.
• Test out and debate a shared understanding of affordability for Scotland.
• Agreeing draft recommendations for Scottish Ministers.

The group’s activities were to be guided by four principles:

• A human rights-based approach i.e. housing is not affordable if its cost threatens or compromises enjoyment of other human rights. The other three elements are sub-components of the human right to housing:
• A person-centred perspective i.e. affordability is viewed from the standpoint of the household rather than the marketplace.
• Equality and anti-discrimination at the heart i.e. women, minority ethnic people, young people, disabled people, migrants and refugees should have equal access to affordable housing and barriers to this should be understood and addressed.
• A system-wide approach which considers the interactions between the social rented sector, private rented sector and owner occupation, balancing affordability, decarbonisation, quantity and quality of provision.

These principles reflect the underlying values of Housing to 2040 and wider government goals and aims. However, they are not independent of each other, and this arguably raises challenges for the nature and meaning of housing affordability. A specific illustration is the system-wide approach identified above. A system-wide approach is intimately related to the housing strategy’s focus on a well-functioning housing system^[2]. Although Housing to 2040 does not fully define such a housing system, it clearly speaks to both market and non-market sectors working sufficiently harmoniously – so it is difficult to wholly abstract affordability from market circumstances entirely, even if we seek to focus in on people-centred attributes and not rely solely on the market to determine affordability.

At the same time, we reject the simplistic notion that any housing that is being paid for by a household must be, by definition, affordable to that household. Rather, we think rising and high housing costs that are placing households under strain, or locking others out of specific markets, are a sign of imperfection and even market failures which require wider and different interventions – which, through future iterations of the housing system, can in turn reduce the extent of non-affordability. Systems thinking around the concept of a well-functioning housing system (e.g. O’Sullivan, et al, 2004) takes account of the interaction of all tenures, multiple stakeholders, land, planning and place, but also quality/quantity of provision and decarbonisation. The other great value that thinking in systems provides for the current task is that it helps us think analytically in wider terms about the consequences, strengths and weaknesses of different ways of understanding and measuring affordability (Gibb and Marsh, 2019).

Why this Approach?

Why was there a demand in Housing to 2040 for this shared understanding and why does it remain so in 2025? We have seen that the Government’s agenda is underpinned by realising the right to adequate housing and this means that a shared understanding of affordability, as a target and a threshold, is critical to its achievement. Housing costs are a key trigger for the Government’s priority objective of reducing child poverty, and in the setting up of a separate working group to develop a minimum income guarantee, following on from earlier work to redefine fuel poverty in residual income terms - all closely relate to the shared understanding of housing affordability.

More immediately, the housing system is facing considerable pressures arising from the cost-of-living crisis, a serious new supply downturn and rapidly rising private rents for new tenancies. And, at the same time, the Scottish government and 13 local authorities have now^[3] announced a local housing emergency with action plans to follow, all after SOLACE/ALACHO (2023) warned in the summer of 2023 of the scale of problems facing the homelessness and temporary accommodation systems. To deepen these difficulties, large budget cuts compounded over the last two years have added to the external pressures inhibiting the delivery of the affordable supply programme and the meeting of affordable housing need across Scotland (Dunning, et al, 2020).

These sorts of problems, in different ways, impact on the affordability of housing. The pressure grows and the call for a clear and consistent approach to what we mean by, and what we can do, regarding increased housing unaffordability – becomes more urgent.

Why is a single shared understanding of affordability so intractable? There are in fact several problems that must be surfaced and decisions taken to progress towards our goal. When a property is let by a social landlord or indeed in other rental tenures, the financial structure of the project may well be deemed initially affordable (against some benchmark). But it needs to also remain affordable in terms of both rent increases and the underlying drivers that push rents up e.g. rising costs, further development, investing in decarbonising retrofit and long-term repairs, among other factors. While this may seem to some to be fundamental asset management decisions, rents may also be altered and reshaped by different future policy priorities, too. The Regulator seeks to balance the continuing affordability of rents with the retention of financial viability. This is challenged by new policy requirements e.g. retrofit standards and by external shocks such as inflation and interest rate increases.

The Right to Adequate Housing was recognised in the 1948 Universal Declaration of Human Rights and in the 1966 International Covenant on Economic, Social and Cultural Rights. The Right contains freedoms and entitlements. Moreover, for shelter to be adequate, it must meet the following criteria: - security of tenure - availability of services, materials facilities and infrastructures - affordability [the UN (n.d.) states ‘housing is not adequate if its cost threatens or compromises the occupants’ enjoyment of other human rights‘: - habitability - accessibility - location, and - cultural adequacy.

Young (2021) focuses in on the housing affordability dimension and proposes three potential measures of housing affordability that would provide a sense of progressive realisation of this dimension of the right to adequate housing. These were: - Households required to spend more than 25% of income on housing costs - Households with after-housing costs (AHC) residual income below appropriate minimum income standards - Households that experience housing cost induced poverty.

There are challenges with all three of these measures (Young, 2021, 31-36) but they speak both to our own direction of travel regarding a shared understanding and fit with the UN Rights-based approach.

A second fault line is whether the focus is narrowly or broadly drawn i.e. how wide a view of housing costs does one take – just the rent, or also utilities, service charges, council tax or indeed other elements (we discuss this further later). There are plausible arguments in either direction, for instance, whether to take a broad view of all-home related expenses or, rather, should the housing cost term be focused only on those elements that landlords have control over, or where other policy levers cannot impact on helping with wider housing-related elements of cost (e.g. the council tax reduction scheme). Equally, there are fundamentally different ways to measure and think about income – both a threshold income level or standard that should not fall below an after-housing costs level, and this might be linked to a minimum income guarantee or the living wage or something else. Or more pragmatically, it could be thought of in relative poverty terms as a fixed proportion of the median income.

A third challenge is whether the focus is on all housing or just rented housing. Is owner-occupation different and should the focus there be on accessibility to mortgage finance, the regulatory burden on lending e.g. the size of deposits for first time buyers and stress tests, or does the re-appearance of high interest rates re-emphasize the importance of affordability to existing owners, too? Should the focus be on short term non-affordability or longer term more chronic issues? Again, this may point the analysis in different directions. We return to these themes later. These points also direct us to debate different fundamental approaches to thinking about affordability e.g. cost to income ratio measures versus residual income.

Practically, what is a ‘shared understanding’? It is the presence of sufficient consensus around an approach and its subsequent use for policy. It is a definition that has a shelf life (though presumably it also would embody a mechanism for periodic refresh of no more than 10 years, acknowledging the volatility of housing outcomes and that therefore the measurement and suitability of underlying assumptions of the shared understanding that should be more regularly revised e.g. within 5 years.

Our underlying approach starts from the recognition that shared understanding is elusive because respondents adopt normative positions, what affordability ought to be, and we need to develop consensus or at least accept a tolerable minimum difference around propositions to do with acceptable norms about limits or thresholds regarding where affordability tips into non-affordability. This also involves making decisions over fundamentally different approaches, for instance, how much do we rely on empirical data informing decisions over thresholds, or alternatively, how important are extraneous concepts like income standards. The approach also needs to be feasible and fit for purpose – is there the basic information or data required to assemble the affordability test?

An important question that surfaced during the working group’s discussion was the purposes that the shared understanding will be put to, and related, how would an agreed new standard impact on decisions already made? The recognition that housing in certain sectors and places is becoming less affordable in Scotland^[4], implies that any new standard, if seeking to bring consistency and improvement in outcomes, is likely to be challenging for existing providers (who already must manage multiple policy goals e.g. retrofit funding sourced from their finite affordable rental income). Our approach is not to be retrospective and therefore to not seek to identify affordability failures, but rather to view the shared understanding as a policy assumption going forward for new development, future interventions and the like, and that, fundamentally, Government should view the agreed policy assumption as a target to be progressively realised over a period of time (as would be the case with the human right to adequate housing). Reflecting the importance of affordability, this approach could then be incorporated in the National Performance Framework (NPF) and progress monitored.

Our pragmatic way forward has been to draw on evidence from diverse sources: past literature, commentary and analysis; evidence from our meetings and discussions; and, new primary research, both qualitative and quantitative. We then sought to work through the key decisions from this material debating the quality of the arguments used benchmarked against our objectives and working group principles. To repeat, this will not produce an objective silver bullet answer to a shared understanding of affordability – but will iterate us towards some form of consensus, though we do not expect universal approval or acceptance, at least initially. If this is transparent and defensible and due diligence is subsequently undertaken (for example, with respect to some of the wider consequences of arriving at such a threshold), then we will have made genuine progress.