Affordable Housing - What does affordable actually mean?

For the Government to set targets for ‘affordable housing’ is actually misleading because affordability is relative to the state of the housing market (both sale and rental sectors) at any particular moment in time. 

Source: http://www.myfinancialtips.com/

As my children were growing up I was carefully watching the housing market with dismay as house prices through the mid-nineties and into the early part of the millennium continued to soar.  I am sure many parents have the same concerns and now wonder how on earth their offspring will manage to get their feet onto the property ladder.  In 1986 my wife and I purchased our first house.  A three bedroomed mid-terraced property (a previous right to buy property on a council estate) with a small front garden and a good size rear garden, perfect for raising a young family.  The house cost us £19,000 for which we obtained a mortgage very easily at the time.  Prior to putting in our offer, I remember having a number of sleepless nights wondering whether we could afford the property as it was actually £1000 above our maximum budget. 

Nowadays with the accelerated rise in house prices since then, things have changed and the decisions facing those who want to enter the property market for the first time have multiplied significantly.  Decisions whether to save for a larger deposit will often result in either ‘living with the parents’ longer, or possibly renting.  The problem with renting of course is that rental values have also risen quickly, which results in money which could be saved for a deposit being used for monthly rent payments instead.  It’s a vicious circle and one that is not likely to change as property prices will never return to the levels I discuss above, when I purchased my first home in 1986.  My son who is now 23 years old keeps telling me (tongue in cheek I hope!) that he is patient and is more than prepared to wait for my wife and I to fall off our perch and take the inheritance! I tell him that even in this circumstance the Government will swoop down and take a large chunk through inheritance tax, which he is not best impressed with at all!  The above demonstrates the difference with how I perceived ‘affordability’ less than 30 years ago and how the new generation of first time buyers will perceive what is affordable for them.

  

Property Rented Sector

The UK Government definition of affordable housing is:  ‘Affordable housing includes social rented and intermediate housing, provided to specified eligible households whose needs are not met by the market. It can be a new-build property or a private sector property that has been purchased for use as an affordable home’.  (Intermediate housing is housing which is often provided on a fixed term basis by a Registered Social Landlord where rents are set in-between the Social Housing Rent and Open Market Rent)  On 14 July 2011, the Minister for Housing made a written ministerial statement announcing the outcome of the affordable homes programme 2011 to 2015, managed by the Homes and Communities Agency. ‘As part of the programme, we introduced the affordable rent product. This allows registered housing providers to charge no more than 80% of local market rent (including service charges where applicable) for new affordable homes’. Source: www.gov.uk.

Source: http://blog.windhillrealty.com/

It appears therefore that ‘affordable’ rent is deemed to be 80% of the local market rent? If this is the case then affordable rent will continue to increase parallel to any increase in local market rent.  This again demonstrates the confused perception of what ‘affordable’ actually means.  The Government can regulate the Social Housing Sector, but what about those in private rented accommodation. In a recent article in the Guardian (Link), Hannah Fearn discussed the UK private rented sector and concluded that large parts of the UK are now unaffordable for low and middle income households:

‘Unlike the previous two generations, a large proportion of our population is facing life in unstable, often unfit and largely unaffordable housing with no prospect of either transitioning to secure social rent or stepping into home ownership in sight.

Home Truths, a report from the Resolution Foundation published on Monday, revealed that for low- and middle-income households in the private rented sector whole swathes of the country have become unaffordable. Using data supplied by Hometrack, the thinktank calculated that a third of the country was now off limits to poorer private renters at a time when half of young low- and middle-income households are living in this tenure.

For a renting family with a combined income of £19,000 a year, half of the country is now unaffordable because the cost of accommodation takes up more than 35% of monthly take home pay’

Until we address the problem of housing supply in the UK then it will be impossible to avoid natural economic market conditions driving the market in an upward direction.  Where we have high demand and limited supply then the only outcome will be a continuing increase in rental values. 

Property Purchase Sector

When the Government emphasise the need to build affordable housing what do they actually mean for those who want to purchase a house for the first time?  Well again, this is not clearly defined and there is no threshold of ‘affordable’ in terms of property value.  The main way in which the Government attempt to make houses affordable is to offer numerous support schemes, initiatives, incentives, etc. These include the recently introduced help to buy scheme, shared ownership, shared equity (such as first buy), and so on.  Most of these schemes offer a percentage incentive, whether that is in shared equity or a low interest, government guaranteed loan, based upon the value of the property.  While these schemes may help first time buyer onto the property ladder what is really needed, as with the rented sector discussed above, is an increase in supply of new build houses and quickly!  

A recent article in the Guardian (Link) emphasises the impact of the lack of new housing in the UK: ‘Two numbers sum up one of the biggest problems in Britain today. They are: 240,000 and 108,190. The first – 240,000 – is the rough forecast for how many new homes are needed each year to meet demand; while108,190 is the actual number of new homes added in England in the last financial year. That shortfall swells and falls, but is always there – and it accounts for the country's housing crisis’. At the risk of repeating myself, until we address the problem of housing supply in the UK then it will be impossible to avoid natural economic market conditions driving the market up.  Where we have high demand and limited supply then the only outcome will be a continuing increase in house prices. 

So to answer the question of how to define ‘affordable’ is actually missing the point.  For the Government to set targets for ‘affordable housing’ is actually misleading because affordability is relative to the state of the housing market (both sale and rental sectors) at any particular moment in time.  Affordability is a moving feast and will never be a fixed entity due to the complex nature of the World we live in.  One thing that is for sure is that over the last thirty years due to the significant increase in house prices as well as the increasing demand for a limited housing supply in the UK, is that the threshold of affordability has changed.  The current generation of first time buyers face much higher house prices and rents which will continue until something is done to significantly increase the supply of new houses.

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