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

The Affordability Context: Different Meanings and Uses

The way most people think about the meaning of affordability originates in debates largely in the early 1990s. As we noted earlier, to paraphrase Maclennan and Williams (1990), housing affordability can be conceived of as what a third party considers to be an intolerable burden placed on a household because of their high housing costs relative to their income. Just taking that sentence – we see several areas where we would need to come to an agreement to proceed: how do we define intolerable burden and what kind of income (gross, net, disposable, suitably filtered by other important dimensions like the gender pay gap), what kind of housing costs (gross, net of benefits, inclusive of property-tied costs like elements of fuel and tax, etc.), and how we account for the household (do we equivalize to reflect household composition and specific needs^[5]), not to mention housing conditions and quality. There is much scope to split hairs (but also introduce more fundamental disagreement).

Key authors in the international debate (Hulchanski, Stone, Bramley, Littlewood, Wilcox and more recently Meen and Whitehead, among others – see references) have argued for decades over the preferred approach to define and understand affordability, usually seeking to find a measurable approach and then to empirically examine its performance in the actual housing system. For brevity’s sake we can here focus on the leading alternatives.

• Rent to income (housing expenditure to income) ratios. The notion of 25% as a threshold of unaffordability was mentioned earlier, though this seems to have given way to higher upper thresholds of 30% or 33.3%. Authors have also linked this to a quality/conditions threshold, too (e.g. Bramley, 2012). An obvious point, not always raised, is which households are we talking about? Is this a typical group of low to moderate income households of working age; is it adjusted for household composition; or are we dealing with the income of real applicants starting a tenancy? In Australia, they focus on households in stress defined as households in the bottom two income quintiles paying more than 30% of their income in rent/housing costs. Many may well feel that the bottom 40% of the income distribution is no longer sufficient to capture affordability risks sufficiently, to account for who is most impacted by increased housing costs or reflect income stagnation over long periods of time^[6].
• Residual Income approaches are concerned with how much income one had to pay on non-housing necessities after meeting housing costs. This is at the heart of the welfare state’s original conception of housing benefits i.e. that no-one should fall below a minimum level of income after housing costs (taking account of household composition and need), and in the use of poverty standards after housing costs are taken into consideration. What should that list of necessities, or requirements to live a minimum acceptable standard, consist of and who determines it? Who shapes the income equivalization approach^[7] – it can have a big effect on specific household capacity to meet or exceed the threshold. Good practice approaches to equivalence scales are discussed later an in an appendix to this report.
• Application of the ratio or residual methods to some form of income standard (associated with Joseph Rowntree Foundation (JRF), among others). The income standard idea asks the question: what are the necessities or requirements of a decent life? It is an empirical question and one that is regularly constructed and, like the basket of goods and services that create our inflation indices, periodically changes or is updated as tastes and activity popularity wax and wane. There is considerable expertise in how these surveys are designed and conducted but they can be controversial and their application to thinking about residual incomes or the residual implied by a cost to income ratio – is not straightforward. Other relevant income benchmarks that might be used here would include minimum or living wage measures or the principle of a minimum income guarantee, as well as empirically distinguishing income levels before and after housing costs, suitably defined, compared to the Scottish/UK relative and absolute poverty standard.
• Incomes beyond housing benefit thresholds can also contribute to understanding affordability (as discussed by Wilcox et al, 2007; and Wilcox, 2009). The idea here is that if incomes have risen sufficiently to end Housing Benefit (HB) eligibility, then this may be a signal that a given household is more likely to be able to meet housing costs (often termed, a stopping rule). One effect of gross incomes exceeding the benefit threshold is that net income will start to increase more rapidly as a consequence of moving beyond tapers of withdrawal. This of course depends on the generosity and effectiveness or otherwise of the benefit system, its uprating and other caps that may apply. Rules operating within Universal Credit and predecessors generate very different affordability ratios for different households e.g. lower for families with children but higher for single persons impacting also on labour incentives and poverty traps which can stretch to higher incomes at the upper end of Universal Credit eligibility. This is a key reason why we may wish to provide disaggregated measures of a shared understanding (concentrating on key groups of interest) as well as a global figure. To be fair to its proponents, the escape from benefit focus was seen as one of a cluster of measures that would provide a more rounded sense of whether or not rents were tolerable, and it does helpfully point to the importance of continuing HB support while in low wage work, but also that the interaction between benefits and rents is a critical part not just of affordability but also child poverty.
• Combinations of the above are possible though they present data complications and a higher minimum data need for each case involved. In principle, however, you could combine rent to income ratios with residual income (which may or may not be based on an extraneous or affordability-purposed income standard) and the HB stopping rule (Wilcox, 2007, 2009; Littlewood, 2012). However, not only does this multiply up data and analytical complexity, it also expands the number of assumptions required.

A House of Commons research paper by Wilson and Barton (2022) gives a sense of the extent to which different affordability thresholds are now widely used in housing but also the careless language (i.e. where the same word is used to mean different things) which abounds across Scottish and UK housing practice. These include:

• ‘[affordable housing is] subsidised housing that meets the needs of those who cannot afford secure decent housing on the open market either to rent or buy’, ODPM Select committee Affordable Housing Inquiry, 2005-06.
• The 2010 English Affordable rents scheme, with rents up to, depending on local market contexts, 80% of local market rents (this also incorporated charging these higher rents on formerly social rented properties when they fall vacant to help cross subsidise the affordable rent properties).
• London Living rents based on 30% of estimated median gross household income for a given London Borough, varied by bedrooms, and by up to 20% to take account of local house prices and caps to set an absolute ceiling. These are lower than 80% of local market rents.
• Within the planning system, affordable housing quotas through S75 agreements (S106 in England) are germane. In England, the NPF suggests the definition of affordable rents and LCHO products as: ‘housing for sale or rent, for those whose needs are not met by the market’. It goes on to define affordable rent in terms of either the government’s 2010 affordable rent policy or at least 20% below local market rents, also that the landlord is a social registered provider and includes provisions to remain at an affordable price for future eligible households. Where build to rent is termed ‘affordable private rent’, it is expected to be the normal affordable rent provision found elsewhere in England.

In England, this has been further complicated by the recent First Homes policy which planned to use part of or all the affordable housing quota from S106 agreements for use as discounted first homes (in perpetuity) at a minimum level of 30%.

Arguably, the levels and rules around housing benefit, with different basic eligibility levels by housing tenure (e.g. it covers rent but not mortgage interest) also creates further inconsistencies in the underlying affordability thresholds.

In addition, a further benchmark widely used is to set rents in the affordable rent sector (e.g. mid-market rent in Scotland) in relation to the maximum local housing allowance for that broad rental market area by property size – which has inconsistently been linked to the 30^th percentile of the distribution of local market rents.^[8]

The list from Wilson and Barton suggests wide but inconsistent use of the term, different definitions and quite separate meanings. In Scotland, this definitional inconsistency arises in still further ways:

• The affordability dimension of the introduction of a human right for all to adequate housing.
• The assumed starting rent in social housing grant allocations.
• The assumed rent with mid-market rent^[9] grant allocations.
• The continuing affordability of rent increases in the social and mid-market sectors (and whether such questions are or are not adequately monitored).
• The levels of equity loans implied by Help to Buy products for first time buyers and the wider rules governing these policies in terms of price ceilings, etc.
• Planning assumptions for S75 planning agreements regarding what is affordable housing.
• Technical assumptions in the housing needs and demand analysis toolkit as to what constitutes affordable renting and owning.
• Assumptions about affordability that might play a role in helping to determine the format and content of any new national rent control policy included in the new Housing Bill.

There is little point in developing a sector wide shared understanding of what we mean by housing affordability, unless it operates systemwide on a consistent basis. There is a reasonable requirement therefore to expect a form of economic impact assessment and equalities impact assessment regarding the consequences of a common change rolled out presumably over time across these different dimensions of affordability.

Much of the critique has been about the fact that a lot of new affordable housing simply is not affordable – in other words, being tied to a relatively fixed proportion of market rents may over-emphasise the discount to market but say little about stagnant or falling incomes and the freezing or cutting of welfare benefits. So, if market rents are rising strongly relative to incomes, an affordable rent can be beyond the means of target households, and this undermines the notion of what a subsidised affordable model is supposed to do.

Affordable housing policies in the sense of products that generate sub-market rents or cheaper mortgage costs ought to be directly related to the same underlying meaning or definition of affordability. To repeat, we are not suggesting that the purpose of the shared understanding is to make a series of providers unaffordable overnight in parts of their housing stock; rather the aim is to provide an assumption for affordability for new interventions but also over time to seek the progressive realisation of a generally more affordable housing system.

We are also concerned with the affordability or otherwise of market rented housing. Some would argue that private rents are simply the product of demand and supply, or that they are affordable to those who can bear them. While the latter argument does not really advance the debate practically, we consider that the actual outcomes of what people pay in the PRS is highly relevant to our shared understanding, as would be low residual income (after housing costs) for such households. Moreover, vulnerable private tenants on low incomes will interact with Local Housing Allowance (LHA) and Universal Credit. This means that private renting affordability levels have active public policy dimensions which in turn need to engage with how a shared understanding would help guide the extent to which social security benefit levels are contributing effectively or otherwise to meeting affordability and adequate housing goals.

Moreover, not all affordability dimensions are in the gift of Scottish Ministers e.g. welfare benefits, or affordability stress tests for mortgages. But the prize of eliminating variation in what we mean by affordability for all devolved matters is surely a sensible end of reform. This would require, as is suggested above, economic and equality impact assessments and a more measured assessment of consequences on policy design and outcomes.