Housing affordability study: Findings report

5. Views on measures of affordability

This chapter explores participants' views on how best to measure or define housing affordability. First, views on different affordability measures are discussed, followed by findings from an activity based on a set of housing affordability vignettes.

Cost-to-income ratio

Study participants were presented with three existing measures of affordability and asked for their views on each. The cost-to-income ratio was explored first; this considers the proportion of a household’s income that is spent on housing costs. This measure requires an agreed percentage threshold to be set, and if exceeded, housing costs are deemed unaffordable.

There were mixed views on the cost-to-income ratio. Some participants appreciated its simplicity; it was seen as a straightforward measure to assess affordability and set a standardised precedent of housing affordability that could be applied widely.

“I think looking at income to rent is a good way of looking at it because it gives you a good perspective and you could use it on an international basis too.” (Private tenant)

However, there were some criticisms of this approach; the most common was that the ratio does not reflect the complexities of individual circumstances, like family composition, income and non-housing related expenses. Participants highlighted differences in the needs and essential costs of single people versus families with children, and pointed out that residual income from a larger salary goes a lot further than that of a lower salary.

“It’s not good enough – it doesn’t capture the nuance of different people’s situations. It doesn’t consider that some people are on benefits, some people are disabled and that people are often made jobless.” (Private tenant)

“25% of £100,000 a year is different from 25% of £20,000 a year. So although it’s a set figure, it's different for different people.” (Social tenant)

Others expressed uncertainty about whether the measure should include only rent or other housing costs, and a few tenants struggled to understand the concept or estimate how much of their income is spent on housing costs.

There was also no clear consensus on what was considered a fair or reasonable housing cost-to-income ratio; most identified between 25-30% as a fair benchmark, however suggestions ranged from 20-50%. Those spending a higher proportion of their income on housing costs tended to suggest a higher threshold.

Residual income

The second affordability measure presented to tenants was residual income, which looks at how much a household can afford to spend on housing costs without sacrificing other necessities or a decent standard of living. A ‘residual income measure’ considers what remains of a household’s income once non-housing expenses (e.g. food, childcare, travel, savings etc.) have been deducted.

Overall, participants preferred this approach to the cost-to-income ratio. It was described as fairer and more equitable, in that it recognises different personal circumstances and considers a wider range of costs.

“I would agree with that one because everybody's circumstances are taken into account… if you're disabled and heat is a necessity or more petrol because you have to drive more because you can't walk, things like that. That's taken into consideration then and it's what's left over afterwards.” (Social tenant)

A few tenants also felt that this measure aligns well with their approach to budgeting, in that they think about the essentials they have to pay for, and then plan their budget for other costs depending on what they have left.

However, there were some reservations about the residual income measure’s effectiveness and suitability. A few raised concerns that it does not account for emergency or one-off expenses, like an unexpected car repair or vet bill.

“It’s quite precarious because I’ve definitely been in a situation where I’ve known how much money I’m going to have leftover and then something will come up and it just completely wipes me out.” (Private tenant)

It can also be difficult to explain or apply widely; participants highlighted that there could be difficulties in determining which costs are ‘essential’ and defining what constitutes a decent standard of living.

A few felt it could be open to exploitation; either in terms of people exaggerating their other essential costs to minimise what they have leftover for housing; or landlords taking advantage of residual income to charge higher rents.

“Is a landlord gonna swoop in and take absolutely everything they can get? I think it would be exploited.” (Private tenant)

Minimum income standards

The third measure explored was the Joseph Rowntree Foundation minimum income standard^[8]. Joseph Rowntree Foundation estimated that in April 2022, a single person needed to earn £25,500 a year to reach a minimum acceptable standard of living; a couple with two children needed to earn £43,400 between them.^[9]

There were mixed views about this measure. Participants agreed it was easy to understand and explain, and appreciated that it focuses on people maintaining an acceptable standard of living.

However, critics felt that the income required to achieve an acceptable standard of living is highly personalised and dependent on individual circumstances. It was noted that, for example, one couple with two children might have completely different needs and costs than another couple who also have two children. Geographic variations that affect affordability were also discussed, with participants reflecting on the higher cost of living in big cities or island communities. They concluded that minimum income standards may be too generic with so many potential household compositions and circumstances to consider.

A few noted that this measure also relies on effective and accessible public services to achieve an acceptable standard of living. There was also debate over whether the set amounts are realistic and sufficient for living comfortably, particularly in the private rental market.

“I would feel happier with this approach if we had more robust public services that people could rely on, but… unfortunately I don’t think the safety net in the UK is good enough for this to be an acceptable minimum salary.” (Private tenant)

“That leaves you with so little.” (Private tenant)

Summary of views on existing measures of affordability

Figure 2 summarises participants’ views on each of the affordability measures discussed.

Figure 2: Views on measures of affordability

1) Cost-to-income ratio - The percentage of a household income spent on rent; requires an agreed ‘affordable’ benchmark to be set.

• Overall: Mixed views. Views on a fair or reasonable housing cost-to-income ratio were mixed. 25-30% was the most common suggestion; other ratios between 20%-50% proposed.
• Positives:
  • Standardised; could be used on an international scale.
  • Gives a good sense of perspective.
  • Easier to explain and understand than residual income.
• Negatives:
  • Does not take into account individual circumstances, varying incomes or other essential expenses that people have.
  • Need to establish whether to include just rent or all core housing costs.
  • Some struggled to understand the concept or to estimate how much of their income goes on rent.

2) Residual Income - How much a household can afford to spend on housing costs without sacrificing other necessities or a decent standard of living, i.e. what remains of a household’s income once non-housing expenses (food, childcare, travel, savings) have been deducted.

• Overall: Generally preferred to the cost-to-income ratio, but reservations were expressed about its effectiveness and suitability.
• Positives:
  • Fairer/more equitable approach than cost-to-income ratio.
  • Takes into account a wider range of circumstances.
  • Aligns with people’s approach to budgeting.
• Negatives:
  • Does not account for emergencies/unexpected one-off expenses.
  • Difficult to explain/apply widely.
  • Difficult to determine essential costs and a ‘decent’ standard of living.
  • Potentially open to exploitation, either by renters ‘exaggerating’ costs or by landlords ‘taking all they can get’.

3) Minimum Income Standard - The annual income needed to reach a minimum acceptable standard of living. In April 2022, Joseph Rowntree Foundation concluded that a single person needs to earn £25,500 and a couple with two children needs to earn £43,400 between them.

• Overall: Mixed views - some felt this was a fair approach; others felt it was too generic.
• Positives:
  • Easy to explain and understand.
  • Support for this if a more personalised approach is used (i.e. individual calculator).
  • Some felt this would be enough to live on comfortably.
• Negatives:
  • Does not take into account individual circumstances (such as where you live, stage of life, savings, other needs).
  • Questions over how to define a minimum acceptable standard of living.
  • Relies on effective and accessible public services to achieve an acceptable standard of living.
  • Some felt this was not enough to live on.

Other measures

Tenants were also asked to share what they felt was the best way to define or measure housing affordability. The most common suggestion was to link the definition of housing affordability to minimum wage or a living wage; i.e. setting a standard that a person earning minimum wage should be able to afford to meet their housing costs without sacrificing other basic needs.

“If I were to come up with a policy, I would say if you're looking at someone who's on minimum wage, they should be able to afford their housing. Have that covered, and then also be able to save, able to enjoy their life, able to have a full life rather than just being a slave to their labour.” (Private tenant)

“You can't base it on every individual circumstance… But you have to have a starting point, a base level that we think is reasonable based on all the data that they collect for the minimum wage and living wages.” (Social tenant)

A few private tenants suggested an approach which links housing costs to profits; for example introducing a definition which states that rent is deemed fair and affordable if it is no more than 10% over the cost of owning and maintaining the property. As an example of this definition, if the mortgage payment and upkeep expenses of a property cost a landlord £500 per month, fair rent would be up to £550.

“That the maximum profit you can make on your rental property is 10 or 12% a month.” (Private tenant)

“The concern is that landlords are increasing the cost of rent to make a profit more than just covering their standard costs. Obviously they’re entitled to make a profit, but should there be a cut off as to how much they can make? Yes, I definitely think that should be implemented.” (Private tenant)

“My ideal mathematical equation for housing affordability is the costs of maintenance are covered but no one's making a profit off anyone.” (Private tenant)

One participant suggested applying a cost-to-income ratio based on a means-tested or tiered system, which would mean that a household’s housing affordability threshold or ratio would depend on income, savings, location, age and household composition.

“Maybe a tiered system... Should it be linked to income levels like you have for a tax bracket? Yeah, I think it needs to be more categorized like that, so that housing affordability for a single person is different from that of a single parent… So:

A single parent with two children - their affordability is 15% of income.

A single parent with one child - it's 20%, so increased by 5%.

And then a two parent family, both working, two kids, then it's 35%. I think that's a fair way of doing it.” (Private tenant)

Some participants discussed the idea of residual income being broken down into a daily amount per person, and considering whether or not this would be sufficient for someone to live on based on their circumstances.

Participants in Phase 2 also discussed the UN Committee on Economic, Social and Cultural Rights affordability criteria for adequate housing, which states: “Housing is not adequate if its cost threatens or compromises the occupants' enjoyment of other human rights.”^[10] Tenants welcomed this definition as ‘reasonable’ and ‘logical’. One felt it aligned well with the principles of the housing as a human right campaign which they endorsed. Another agreed with the definition in principle, but thought it could be strengthened or supported by including a list of relevant or affected human rights.

Vignette activity

Discussions in Phase 2 of the study included an activity based on a set of vignettes, which described four scenarios of tenants living in different housing situations. The vignette activity was used to facilitate more in-depth exploration of the nature of housing affordability and to help determine at which point housing becomes unaffordable.

The situations described in the vignettes are entirely fictional and therefore, the income, rent and bills described may not accurately reflect real-life finances (i.e. realities of the rental market and entitlement to benefits).

A summary of tenant’s views on the four vignette scenarios is provided in Figure 3.

Figure 3: Summary of vignette activity

1) Nathan & Priya - A young couple renting a 2-bedroom flat from a private landlord in Edinburgh. Both work full-time.

• Combined monthly take-home (after tax) income = £3,000
• Total housing costs (including rent, council tax & utilities) = £1,500

Views on this vignette:

• Mixed views; a few felt this was sufficient to live on comfortably and facilitate a decent standard of living.
• Others described it as ‘totally unaffordable’; essential costs can be met but it doesn't give them the opportunity to save or invest in the future if they wish to buy a home or start a family.
• Most felt 50% is not an acceptable cost-to-income ratio.

2) Josh - A student at the University of Glasgow. Lives alone in a one-bedroom flat that he rents from a private landlord. Gets a student loan payment and has a part-time job.

• Monthly take-home (after tax) income = £1,400
• Total housing costs (including rent & utilities) = £700

Views on this vignette:

• Mixed views; some viewed this as ‘reasonable’ for a student living alone.
• Discussion of some financial benefits to student life e.g. access to casual part-time work/overtime, tax breaks, council tax relief, student discounts.
• Others reiterated the view that 50% is not an acceptable cost-to-income ratio.

3) Sarah - A single mum with two children (aged 5 and 10). Rents a three-bedroom home from a housing association in Edinburgh. In receipt of state benefits.

• Monthly take-home (after tax) income = £1,200
• Total housing costs (including rent, council tax & utilities) = £900

Views on this vignette:

• Unanimous agreement that this housing cost is completely unaffordable.
• Described as living in abject poverty, with significant detriment to family’s emotional state, quality of life and future.
• In this scenario, children’s expenses (activities, clothes, etc.) were considered completely unaffordable.

4) John & Ruth - A retired couple in their late 60s. John has a disability which affects his mobility, and Ruth is his carer. Renting a 2-bedroom house from Scottish Borders Council.

• Combined monthly take-home (after tax) income = £1,800
• Total housing costs (including rent, council tax & utilities) = £600

Views on this vignette:

• Some debate; affordability dependent on other factors: savings; extent of John’s needs, and access to benefits like attendance allowance.
• While 33% was generally considered a more reasonable cost-to-income ratio, it was not seen as affordable in this particular circumstance given John’s disability and potential extra costs attached to this, e.g. travel to hospital appointments and higher energy bills.
• Questions over future; if one were to pass away, the household’s income would decrease, but outgoings would remain high.

The vignette activity prompted reflections on the fluid nature of housing affordability; what is ‘affordable’ can change based on need and life stage. For example, some participants felt that Josh’s situation was acceptable while he was a student (and with the ability to pick up extra work during summer holidays) but would not be so affordable for older people with more commitments and responsibilities.

“You cannot put a figure, a percentage or a statistic on it because it isn't one size fits all.” (Social tenant)

“My perspective of what I find a stable, secure home is different now than it was when I was maybe 18, 19, 20. My needs have changed.” (Social tenant)

The vignettes also provoked further emphasis on the need for a ‘future-proof’ definition of housing affordability; the notion that rent should not prevent people from saving for the future.

“So I wonder in this affordable housing definition should it also come into that, that rents should not be so cost prohibitive that it makes it virtually impossible to save for a mortgage.” (Private tenant)

Importance of housing action and regulation

While participants engaged well in discussions about the merits and drawbacks of the different affordability measures, some expressed concern that the measures do not reflect the realities of the rental market. A few questioned the value of establishing a shared understanding of housing affordability, emphasising that this alone will not improve tenants’ experiences of the rental market; it does not affect how much landlords charge in rent or address housing shortages. They argued that more focus should be placed on action to better regulate the housing market, increase affordable housing stock and improve protections and conditions for tenants through measures like rent caps and eviction bans.

“Landlords have a lot of power and it comes down to them as individuals and what they’re willing to do. And a lot take advantage of people unfortunately.” (Private tenant)

“The problem is there’s not enough in the private market at a certain rate.” (Private tenant)

“I don’t think when it comes to housing we should be focussing so much on affordability; we should be focussing on building people power and looking at measures like rent freezes, rent caps, rent pressure zones, eviction bans, stopping no-fault evictions, stopping ridiculous fees in the private rented sector, putting some regulations on deposits, ending Air BnBs and short term lets. All of these things are just insanely exploitative. We need more regulation.” (Private tenant)