Affordable housing: Challenges and solutions

A recent WBEF webinar looked at the perennial problem of affordable housing, considering some of the main challenges and possible solutions. Here are five things we learned.

Defining housing affordability

The most common method of defining housing affordability is comparing expenditure to household income, explains Alice Pittini, Research Director at Housing Europe, a European Federation of Public Co-operative and Social Housing Providers in Europe. Eurostat defines housing overburden to be when the cost of housing, including related expenditure such as utility bills, exceeds 40% of household income. However, this definition does not take account of the quality or the suitability of the homes, nor the fact that 40% is not necessarily unfordable for some. Alice Pittini favours the definition by Professor Mark Stephens of Glasgow University. According to Professor Stephens, ‘housing is affordable when it meets a minimum acceptable standard and can be obtained and retained leaving sufficient income to meet essential non-housing expenditure’.

The situation in England

In England, the two most dominant forms of affordable housing are affordable rent (capped up to 80% of local market rent) and shared ownership (a mix of ownership and subsidised rent). Historically, social rent, which was cheaper than affordable rent, was the chief form of affordable housing. Social rent comprised 76% of new affordable housing supply in 1995-96, says Professor Stanimira Milcheva, Professor in Real Estate Finance at University College London and Director of the Affordable Housing Group at the university’s Bartlett School of Sustainable Construction.

The Right to Buy scheme was introduced in 1980 and allows people renting social accommodation to purchase the property at a discount. However, as the transfer of the social housing stock into private ownership has not been replaced on a one-to-one basis, the overall supply of social housing has reduced. Between 1991 and 2022, the new supply of affordable housing in England was on average 50,000 homes. In 2021-22, there were 210,000 homes built in England with about 29% of those being classified as affordable. To put this in perspective, 1.2 million households in England are currently on the waiting list for social homes according to Shelter, the housing and homelessness charity.

In the 2021-22 cycle, roughly half of the new supply of affordable housing was funded through the Affordable Homes Programme (AHP). The other half was funded by Section 106 agreements, whereby a developer undertakes to mitigate the impact of a development, for example, by building affordable housing. According to Milcheva (2020), the supply of new affordable housing has been volatile over the last decade as a result of the funding cycles of the AHPs.

‘If we can deal with housing provision generally, then almost by definition planning policy will help deliver additional affordable housing on top of that’, believes David Perry, a solicitor and Partner in the Real Estate team at Shoosmiths and National Head of Affordable Housing at the law firm. Developers and investors need support to drive delivery, because while the demand is there, it is the supply that’s the problem. High land prices and material costs are likely to put a downward pressure on supply, he says. Rather than an overload of new policies, we need stability around affordable housing specifically, says David Perry. ‘There is a sense in the sector that we are constantly playing catch-up with the next initiative, and we need to shift towards delivery,’ he says. He also feels that there has been a little too much focus on home ownership rather than rental, despite the growth of the private rented sector (PRS) as a major market segment.

A successful government scheme in the US is Low-Income Housing Tax Credits (LIHTC), says Stanimira Milcheva. Under this initiative, developers receive tax credits for building affording housing with income-linked affordable rent capped for a specific period of time. These tax credits are provided over a period of 10 years and are claimed annually. The programme requires that the affordable housing units be rented to low-income households for a minimum of 15 years.

Alice Pittini highlights that community land trusts are gaining popularity in Belgium, offering a potential solution to affordable housing stock leaving public ownership. In cases where public funding is used, homes must remain permanently affordable due to an ownership structure that divides ownership between the land and the building. The land is held in a local trust and ownership is shared between local authorities and housing associations.

Researching what works

Housing Europe, along with two UN agencies, spearheaded Housing 2030, a research project which focused on the transferability of successful housing solutions. According to Alice Pittini, it is common to hear about effective policies, but not the extent to which they can be adapted to different countries and timeframes, she says. The study examined policies in an integrated manner, looking at governance, land policy, finance, and sustainability. Housing policies are often siloed and there should be much more coordination among stakeholders, she adds.

The role of institutional investors

Affordability is an international problem, not just in the UK, but around the world. It is driven by political ideology and push for home ownership says Stanimira Milcheva, who believes the UK needs more affordable rental tenure. The past few years has seen large institutional investors enter the UK private rented sector. This trend that has been pioneered in the US, where institutional investors’ real estate portfolios consist of about one third of multifamily housing, she says. However, recent academic research shows that Impact investing funds are usually willing to accept a lower rate of return in exchange for achieving impact. So, it’s about creating a narrative for savers: while the returns from investment in social housing might not be as attractive as other types of real estate assets, their investments might contribute to achieving positive social impact, she explains. Shoosmiths has spoken to several funds who are interested in impact investment, says David Perry. He thinks there is a general understanding among institutional investors that while returns on affordable housing will never be stratospheric, they will be consistent, long term, and have a place on investment portfolios as part of a balanced scorecard. Affordable housing offers greater protection against eviction for unpaid rent than the private market. However, housing associations have not historically defaulted on their financial obligations, making social housing a low-risk investment for lenders and institutional investors, points out Stanimira Milcheva.

‘Institutional investors can have a huge impact on the delivery of affordable housing. They can structure the financing to allow cash flows to be spread over a longer period. This is especially suitable for rental tenures’, says Stanimira Milcheva. This contrasts with the prevailing model of large housebuilders in the UK, who would use residual rent valuation. This exposes them to sales risk, making housing supply highly pro-cyclical and more volatile, she says.

Priced out of the market

The affordability problem is being increasingly concentrated in urban areas, says Alice Pittini. For example, Portugal generally has a low rate of housing overburden, but the situation is different in the capital, Lisbon. Many individuals, particularly young adults, or households with only a single source of income, can no longer afford to live in the city where they were born because of rising rents. A major factor is the proliferation of short-term lettings, which is a common problem in cities that are tourist destinations, she says.

There is no one size fits all solution for affordable housing for key workers, says David Perry. We need to ensure everybody can afford somewhere to live at their price point. Somewhere that is decent, liveable, and sustainable, he says. What we require, he advocates, is a balanced scorecard for the provision of housing, which includes high-end properties, mid-range options, and social rented housing. ‘It’s not just about building housing, you also have to think about mobility and transport infrastructure, because if people are travelling a distance to work, they need to able to do that affordably as well,’ he says.

Affordable housing: Challenges and solutions

The cost of living crisis has made addressing the affordable housing challenge even more pressing. The pandemic shone a spotlight on the importance of keyworkers to towns and cities, yet many are being priced out of living locally. Students and other low-income groups are also finding the housing situation problematic. Affordable housing is a core component of sustainable placemaking and vibrant local communities. Hear from a panel of experts as we discuss how affordable housing can best be achieved and the public policy and market-based levers most likely to bring about early results.