CIH Scotland l Keeping our Rents Affordable 2 nd October 2013 Donna Milton, Managing Director, Arneil Johnston
Why is Affordability Analysis on the Agenda? Housing system analysis Development funding model assembly PRS research MMR feasibility Arneil Johnston work programme 2013 Key issues & questions Consumer ability to meet costs, preferences & choice Economics of development Effectiveness of housing system operation Sustainability of social housing business model
Components of Housing Affordability Assessment What evidence do you need & what factors should be considered Housing costs Household incomes Consumer factors Housing economics Rental values House prices Equity assumptions Lending costs Area profiles Target consumers Access to subsidy Ability to pay Preference: willingness to pay Viability of investment Sustainability of management/ maintenance
Housing Affordability Model Model Inputs Model Assumptions Income profile Customer intelligence CACI Paycheck Salary benchmark Benchmark: ability to meet Housing costs & rent levels Affordable rents MMR rents Market rents Shared equity Shared ownership Market entry % income devoted to housing costs Rent to income ratio % +/- market rents/lha levels Rent to income ratio % equity stake Equity/rent ratio Mortgage multiplier % who can/cannot afford each housing tenure
Local Authority Tenure Affordability Profiling Council A Council B Council C Council D Rural Urban-rural A Urban-rural B City Median income: 22K Median income: 28K Median income: 25k Median income: 30k RSL rent: 296.00 RSL rent: 308.10 RSL rent: 306.16 RSL rent: 282.94 PRS rent: 436 PRS rent: 611.32 PRS rent: 471.00 PRS rent: 1,122 Market entry: 65,805 Market entry: 86,613 Market entry: 58,465 Market entry: 118,000 % social housing: 15% % social housing: 16% % social housing: 29% % social housing: 23%
Rental Benchmarks Property Size Market Rents LHA Rates LHA/Market variance Social Rents Market/ Social variance LHA/Social variance Council A 436.00 464.60 6% 296.00-32% -36% Council B 611.32 547.61-10% 308.10-50% -44% Council C 471.00 447.00-0.5% 306.16-35% -32% Council D 1,122.23 632.98-44% 282.94-75% -55% LHA rates up to 44% below commercial values RSL rents up to 75% below commercial values RSL rents up to 55% below LHA rates
Tenure Affordability Assumptions Social housing Average RSL rents per area 30% income devoted to rent Market rent Average Market rents per area 30% income devoted to rent Mid market rent 80% LHA rate per area 30% income devoted to rent Lower Quartile Market LQ price per area 15% deposit 3 X s mortgage multiplier New Supply Shared Equity 120,000 per unit 80% equity share 7.5% deposit 3 X s mortgage multiplier Low Cost Home Ownership 120,000 15% deposit 3 X s mortgage multiplier
Income to Rent Ratios Rents are considered to be affordable if the household pays no more than 25% of their income on housing costs In reality, most households will spend between 25% to 35% of their income on housing costs Model assumption: income to rent ratio tested at 30%
Customer Sounding Board Validating income to rent ratio assumption Research June 2013 Willing to spend Actually spend 1% 10% 20% 30% 40% 50% 60% 90% willing to pay between 20%-40% of income on rent but spending significantly more 50% are spending between 40%-50% of their income on rental costs alone
% that CANNOT Afford by Tenure Rural Urban-rural A Urban-rural B City area On average 22% can t afford social housing On average 65% could afford MMR product On average 47% could afford market sale Average size of social rented sector: 21% Average size of intermediate sector:??? Average size of owner occupied sector: 70%
% that CANNOT Afford by Tenure 19%-25% can t afford RSL rents 31%-40% can t afford MMR 35%-69% can t afford PRS 47%-56% can t afford market entry 49%-57% can t afford shared equity 56%-64% can t afford LCHO
Rental Affordability MMR improves affordability for 2% MMR improves affordability for 29% Structure of local economy & local income profile are key drivers in PRS affordability
Knowing the Customer Rural area: PRS tenant base income profile 35% of all local households can t afford market rents 49% of PRS tenants can t afford market rents 25% income to PRS rents 30% income to PRS rents 40% income to PRS rents 39% PRS tenants pay less than this 61% tenants need to pay more than this 51% PRS tenants pay less than this 49% tenants need to pay more than this 65% PRS tenants pay less than this 35% PRS tenants need to pay more than this 27% not receiving LHA 18% not receiving LHA 10% not receiving LHA
Affordability Analysis Assessing housing affordability depends on relationship between 3 factors Housing cost Ensure baseline evidence is robust Use housing market analysis to inform assumptions Know your customer base: consumer ability & preferences Household incomes Consumer There is a forth factor however.
Rent Affordability & Business Management The biggest individual risk to a housing business plan cash position is not to increase rents in line with costs If rents are frozen and don t increase with costs Positive cash positions can drop substantially Finances threatened more by other risks Lenders may be less confident in the Plan Tenants cannot make same investment choices
Business Plan Risk Analysis What risk factor has the worst impact on a positive financial position? Cash reduces by 7% Arrears triple due to HB changes Rents fixed at inflation only Cash reduces by 49% Cash reduces by 13% SHQS costs increase by 15% Pension costs increase by 15% Cash reduces by 5%
How do you Balance Affordability & Limit Risk? Know your business & your customers Analyse expenditure Which costs are controllable? Which costs are linked to inflation? Do we need to cut costs to maintain affordability? Business plan development Tenant engagement Test inflationary assumptions Share the evidence Based on cost Encourage informed structure what decision making increase is needed to stabilise plan? Dialogue on rental policy
Housing Affordability Policy Investment & rental strategy should be informed by evidence of Housing costs Income profile Consumer choice Housing economics Rental values House prices Tenure model assumptions Local households Target consumers Access to subsidy or lending Ability to pay Preference: willingness to pay Viability of investment Sustainability management/ maintenance model Customer engagement & informed dialogue on priorities is essential