Rent affordability in the affordable housing sector: literature review

9. Key Findings and Gaps in knowledge

Definition of rent affordability in the affordable housing sector

There is no one standard and universally accepted definition of rent affordability, but many alternatives (although many do not differ widely). The different definitions are based on the purpose of each study, the person (household type and size, household income and benefits) and the property (type, size and location of dwelling). All definitions agree that affordable housing should secure affordable rents for some given standard of housing in terms of quality.

Gaps in knowledge: One of the main gaps identified from the report is that there is not enough evidence of what rent affordability means from the tenants’ perspective, a more subjective perspective. It is also unclear from the literature whether a home should be considered affordable when tenants can pay their rent without claiming any housing benefits or when tenants pay their rent even if they are in receipt of housing benefits.

Measuring rent affordability

There are various ways to measure rent affordability. Most of these methods are suggested by economists and include easy-to-measure and compare ratios, such as the rent-to-income and the housing costs-to-income ratios (the latter often used by the Scottish Government) or the amount of income left to a household after paying for housing (residual income approach). However, the measure of affordability strongly depends on the household type (single adults, working age or pensioners, couples with children or without). Other measures, from the tenants’ perspective, focus on the relationship between financial stress and household wellbeing with affordability, tenants’ perceptions of rent affordability and self-reported financial difficulties. A combination of traditional objective ratios with more subjective indicators of economic hardship is believed to lead to a better understanding of the affordability issues experienced by tenants in the affordable housing sector.

Gaps in knowledge: The most common measure is the rent-to-income ratio, in which case the choice of how to measure income by including or excluding housing benefits can be arbitrary and based on the researcher’s decision. A clearer definition of affordability (even if different for different sub-groups) would lead to a more clear decision on how to measure income in the affordability ratio and how to factor in housing benefits.

An interesting question that could not be answered from this review is whether and why households in receipt of housing benefits (usually low-income households) face rent affordability issues (in an objective and subjective way) and whether benefits can fully mitigate rent unaffordability. There is also a lack of data on the housing and non-housing costs (and their definition) of a household and the percentage of housing expenses covered by housing benefits.

The relationship between housing and poverty

Poverty rates tell a different story before and after housing costs are being considered. High housing costs have a direct impact on poverty and material deprivation. More people live in (relative and absolute) poverty after housing costs in Scotland. The phenomenon known as housing-cost-induced poverty (poverty after considering housing costs) is more pronounced among children. The relationship between housing costs and poverty is also linked with housing tenure. Social tenants are more likely to be affected by poverty after housing costs, as well as by persistent poverty.

Finally, there is evidence that poverty affects housing. Poor housing conditions may have a negative impact on people’s health, well-being and life chances, especially for children, and might lead to poverty. Children and other people who spend a high proportion of their time at home are disproportionately affected by low-quality housing conditions.

Gaps in knowledge: Housing costs, including rents and bills, lead to housing-induced poverty. In order to be able to reduce this type of poverty, we need to explore what is driving social rent increases and examine ways to reduce them and ensure affordable rents, especially for families with children.

Mid-market rents and affordability

MMR is a type of affordable housing, mostly funded by the private sector and aims to be an affordable alternative to the private rented market. The Scottish Government will continue to seek to support viable proposals to deliver MMR at scale throughout Scotland. An interesting point raised in this review is that supply of MMR should match demand, especially in terms of dwelling size. Based on evidence from one research project, MMR properties could attract more families if the supply of bigger affordable properties in this sector increased. This issue of a mismatch between supply/stock and demand has often emerged in the review regarding overall affordable housing across the UK.

Gaps in knowledge: The initial research question asked whether MMR was considered an affordable source of housing by tenants and whether MMR was set up as affordable by housing associations. This review could not answer this question with precision due to a lack of data. There is a lack of data on MMR rents, mechanisms of rent setting, accessibility and type of supply, mainly in terms of size of dwelling measured in number of bedrooms.

Data on affordable rents

Social rents in Scotland vary greatly by housing provider (lower when social housing is provided by local authorities rather than by housing associations), property size and location, as well as by UK region. Social housing in Scotland is more affordable compared to England and Wales. Chapters 6 and 7 demonstrated that there has been an increase in social rents over time. The increase is gradual, without extreme peaks and is spread evenly across housing tenures. We can only speculate on the potential reasons for social rent increases that go beyond the annual inflation rates. Among these reasons are an increase in construction costs, lengthy planning permission approval for housing associations (which can be translated in money loss), an increase in fuel consumption and costs of living, a need for more investment and improvements in social housing stock and new builds to meet standard requirements (energy efficiency, etc.), an increase in service charges for new builds, a shortage in supply of required social housing, and the growth in the private rented sector. It has emerged from this report that there might be an under-supply of the most required types of dwellings (in terms of size) across the UK.

Gaps in knowledge: Further research on the reasons for social rent increases would be necessary in order to confirm or not the above speculations. More information is needed on service charges (costs of mandatory and optional services) and whether they are more expensive (and by how much) for new builds. We also need more information on the relationship between Universal Credit payments and rent arrears, and on whether policies, such as EESSH, lead to rent increases.

Rent setting mechanisms and rent increases

In Scotland there is no national rent policy or specific rent regulations, and social landlords use other mechanisms to set their rents, such as comparing their rents to other local/average rents. Social landlords are allowed to increase their rents after having consulted with their tenants and provided them with alternative solutions, such as a decrease in service charges, and they need to give them a month’s notice before applying any rent changes. However, recent research from the Scottish Housing Regulator suggested that only half of the tenants were informed by their landlords about annual rent increases, and the majority were not presented with alternative options.

Gaps in knowledge: Even though each housing association publishes annually a report on their rent and service charge setting policy, there is no summary information of how the sector as a whole sets and raises their rents or on whether and how they consult with their tenants. There is also a lack of literature on the specific tools/methods social landlords use to define their rents and ensure affordability. Finally, there is a lack of recent evidence on the impact of rent increases on social and MMR tenants, not only financially speaking, but also on their wellbeing.

Policies in Scotland with an impact on rent affordability

A combination of housing policies with other policies is needed to tackle the problem of unaffordable housing. Policies and benefits that support directly or indirectly low-income households with rent payments in Scotland include Housing Benefit/Universal Credit, Discretionary Housing Payments, the Tackling Child Poverty Delivery Plan, the end of the Right-to-Buy policy, the new Beyond 2021 Housing Policy, etc. Policies that might negatively affect rent affordability, and are reserved to the UK Government, include the Benefit Cap and the Bedroom Tax. Scottish funds aim at mitigating the negative effect on rent affordability caused by these UK reforms.

The most common policy challenges appear to be related to the combination of low incomes and high rents, shortage in supply of affordable housing, and over-supply of dwellings that do not cover tenants’ needs in terms of type, size and location.