Research article

Rents and income: the missing link

Time for a closer association between rents and affordability

Affordable rents, which constitute the bulk of new supply, are set in relation to the market. But, in many areas, rents are growing faster than both incomes and housing benefit allowances.

Indeed, our focus groups felt that the housing crisis is closely linked to a wage crisis. That can mean new homes are unaffordable to the types of vulnerable or low income households most in need.

North-South divide

This is generally less of an issue for northern landlords, where a single block of properties could comprise social, affordable and market rental tenancies all at similar levels. Elsewhere, differentials in rents within the sector can result in a range of distortions and inefficiencies in matching demand and supply.

One focus group participant explained that their organisation is looking to limit delivery of larger, family-sized homes at affordable rent despite local need, as few households could afford them.

In London, a landlord might be charging a low social rent to a long-time (secure) tenant now on a good income, while their less well-off neighbour is charged an affordable rent that is significantly higher.

Changing approach

In some circumstances this is already changing the approach taken by providers. For example, Peabody announced it will stop charging affordable rents, focusing more on delivering social rented homes and treating existing tenants of similar properties more fairly. For now, that is the exception rather than the norm.

Efforts to remove these inefficiencies have had mixed success. The Pay to Stay policy proposed in 2015 (essentially means-testing ongoing sub-market rents) was dropped after many in the sector criticised it as unworkable.

While our focus groups agree this policy was flawed for a variety of reasons, they feel the general concept of more closely linking rents to actual incomes was laudable.

Peabody announced it will stop charging affordable rents, focusing more on social rented homes

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Lessons learned

Initiatives such as the London Living Rent and Dolphin Living’s Personalised Rent are aiming to restore the link between housing costs and income. The former sets two-bed rents at 33% of local median household incomes, but is explicitly aimed at ‘middle-income Londoners’ and has an upper income threshold of £60,000; in practice, rents are around 65% of market levels.

Our focus groups are broadly in favour of the principle but have concerns with the implementation, noting that it was difficult to deliver viability in higher-value areas of the capital without higher levels of grant aid.

Personalised Rent is much closer to Pay to Stay, setting a minimum rent based on property type and then charging a variable, additional element based on tenant income and household type. Although a fairer way of setting rents, there are clearly administrative and viability challenges to delivering large volumes of such a product.

Flexibility needed

Despite these issues, our focus groups are clear on the need for much greater flexibility and a grant aid system which supports that. In the meantime, the need to build market housing (to help cross-subsidise other development aspirations) remains. It is an important source of capital receipts. By contrast, the market build to rent sector is increasingly seen as the domain of the private sector or large housing associations with access to private capital.

Other articles within this publication

6 other article(s) in this publication

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Simon Smith

Simon Smith

Senior Director
Research & Consultancy

Two Exchange Square

+852 2842 4573

 

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