Rent affordability in the affordable housing sector: literature review

Executive summary

This literature and evidence review, the first stage of a larger project, studies rent affordability in the social and mid-market rented housing sectors. We have conducted a search and evaluation of the available and most recent (at the time of writing) literature on definitions, measurements, data and policies related to social rent affordability which have been used to identify knowledge gaps. Rent affordability is increasingly an issue in housing, and is at the centre of several Scottish Government’s strategies, such as the Tackling Child Poverty Delivery Plan and Housing Beyond 2021.

Definitions and measures of rent affordability in the affordable sector

There is no one universally accepted definition of rent affordability in the literature. Different definitions depend on the purpose of each study, the person (household type and income) and the property (type, size and location of dwelling). However, all definitions agree that affordable housing should secure affordable rents for a given standard of housing in terms of quality. Similarly, there are several measures of rent affordability described in the literature. The most commonly used method is the rent-to-income ratio, because of its simple and easy-to-compare formula. In the calculations of income, some analysts (including the Scottish Government) take into account net income, the household income after tax and benefits, including housing benefits, while others consider gross household income. This ratio has been criticised as simplistic and other methods have been suggested, such as the housing expenditure-to-income ratio, which reflects better the differences across household type, and the residual income approach, which measures the difference between income and housing costs. A combination of objective ratios with more subjective indicators of economic hardship could lead to better understanding of the affordability issues experienced by tenants in the affordable housing sector.

Housing and poverty

Rent affordability plays a crucial role in tackling poverty. Research suggests that high housing costs are one of the biggest drivers of poverty in the UK, especially affecting single adults and families with children. Poverty rates are different before and after housing costs have been taken into account. The housing-cost-induced poverty phenomenon, i.e. poverty after considering the housing costs, means more households live in relative and absolute poverty in Scotland every year. The level of poverty appears to be acute among children, especially after housing costs are taken into account. The relationship between housing costs and poverty is also influenced by tenure, with social tenants more likely to live in poverty after housing costs have been considered. Poor housing conditions may have a negative impact on people’s health, wellbeing and life chances, especially for children increasing the risk for health problems during development and early childhood, as well as the risk for mental health and behavioural issues and the risk for low educational attainment, unemployment and poverty.

Social rents

Recent evidence highlights a cumulative increase of 12.2 percentage points in social rents in Scotland over the five financial years from 2013/14 to 2017/18, which equates to an increase of 6.9% in real terms, i.e. over and above the level of CPI inflation over these years. Scotland has the largest social housing sector in the UK and lower social rents compared to England and Wales, but higher compared to Northern Ireland (only in the case of local authority social housing). In 2017/18 the average social rent in Scotland was £76.23 per week and varied based on household size, provider (local authorities offer lower rents) and location (Edinburgh registers the highest rents). Mandatory services, such as lighting maintenance, are included in the rent, while optional services, such as heating, are not. Service charges may impact on future affordability as they are expected to increase along with increasing domestic fuel costs, and also charges for new builds appear to be higher than for the existing stock.

Mid-market rent

Mid-market rent (MMR) is part of the affordable rented sector and is an affordable alternative to the private rented sector. MMR is not covered in as much detail as social rent in the literature. MMR rent levels can be set by providers in a variety of ways, including 80% of the Local Housing Allowance, 80% of the local median private rent, 33% higher than a comparable social rented property or a rent-to-income ratio of 30%. Based on the evidence from one research project, MMR could attract more families if there were enough affordable family-size homes (there is a mismatch in supply and demand) and young people did not always consider MMR as an affordable housing option.

Rent setting mechanisms

As there is no national rent policy in Scotland, landlords use other mechanisms to set their rents, such as comparing their rents to local/national averages and rents from other social landlords. Landlords are allowed to increase their rent, but they first need to consult with their tenants and offer them viable alternatives. However, evidence suggests that just half of the tenants were informed by their landlords about annual rent increases, and the majority were not presented with alternative options to these increases. Finally, social rents should satisfy national social rent benchmarks.

Policies with an impact of rent affordability

Scotland. In Scotland, a series of policies and benefits (most of which are reserved to the UK government) aim at supporting low-income households with rent payments. However, there are also some policies beyond the control of the Scottish Government, namely the Benefit Cap and Bedroom Tax, that might negatively affect rent affordability. The Scottish Government is currently mitigating these reforms, for example through Discretionary Housing Payments and Universal Credit Scottish Choices. The Child Poverty (Scotland) Act 2017 acknowledges housing as a significant element of households’ income and aims at reducing family housing costs in order to eradicate child poverty. The Fuel Poverty (Scotland) Bill 2018 aims to reduce fuel costs.

England. In England, according to recent studies, social housing is now tending towards a safety net role and there is a shift from social to affordable housing. Social landlords in England have been constrained by the Housing Revenue Account subsidy rule over the last two decades, which gave little incentive to consider affordability. In an England-based study, the Chartered Institute of Housing recommended the adoption of a common definition for social housing, the increase in the supply of affordable housing and to link rents to local incomes using rent setting mechanisms.

Wales. In Wales, there is a need for public investment to tackle shortage of supply in social housing and meet housing quality standards. Following Scotland’s example of the Housing (Scotland) Act 2014, Wales abolished the Right to Buy in 2017. Suggestions to improve social rent affordability include a re-emergence of local authorities as social housing providers and a need for a re-think of the existing housing stock, as there is a shortage in required housing types and an excess supply in dwellings with reduced demand.

Northern Ireland. In Northern Ireland, the Bedroom Tax is mitigated, and the housing element of Universal Credit is paid directly to landlords, unless otherwise requested by social tenants. Suggestions to improve affordable housing include a developer contribution to boost supply in affordable housing and local authorities to undertake small scale development on public estates as a solution to lengthy planning approvals.

Gaps in Knowledge

A few gaps in knowledge have been identified through this literature review:

• The literature examines the meaning of rent affordability for social tenants but suggests that further research is needed to investigate this topic. An identified gap in the literature is that there is not enough evidence of what rent affordability means for tenants and whether housing benefits and lower housing costs can fully mitigate rent affordability issues. The impact of rent increases on households has not been studied enough from the tenants’ subjective perspective.
• There is a gap in knowledge around how social landlords set and increase their rents and service charges and what factors lead to such changes. There is also not enough evidence on whether service charges will make newly built social rented sector housing less affordable and whether standard requirements for social housing might lead to rent and service charges increases. To contribute to the tackling of child poverty and housing-costs-induced poverty overall, we need to explore the reasons for social rent increases and the ways to reduce them and ensure affordable rents, especially for families with children.
• The lack of literature regarding the mid-market renting sector suggests a knowledge gap. The review identified a gap in evidence on MMR rents, mechanisms of MMR rent setting, accessibility and type of supply, as well as to how affordable MMR is.