The impact of cost rental: affordability (Part II)

The Week in Housing 20/09/24

This is the second installment of a series presenting the findings from my recently published report on The Impact of Cost Rental Housing (see Part I here). This week I focus on affordability. More detailed data/analysis is presented in the report itself. Also, I had a piece in the Irish Examiner earlier in the week looking at the affordability issue in the sector and the potential role of rent subsidies.

The affordability of cost rents has been the key issue of political debate around the tenure. A couple of week’s back, I was at Threshold’s conference which included a ‘political panel’ composed of elected representatives from all the parties, except FG. What was obvious was that all parties support the sector and view it as central to reforming the housing system and addressing the housing crisis. The only real bone of contention related to the affordability of rents, with Eoin O’Broin saying the sector is at a ‘crisis point’. But until now little was known about the affordability of the sector, except for the advertised rents.

As noted last week, cost rental tenants are generally concentrated in the middle of the income distribution. Median household disposable income is €42,384. The distribution of rents, as a proportion of disposable income, can be seen below. On average, households spend 34.5% of their disposable income on rent.

Rents at the time of data collection (summer 2023) were between €1,200 and €1,500 for a two-bed. Some more recent units are coming on stream closer to €1,600 for a two bed. One of the most remarkable finding from our research is that there are as many cost rental households paying more in cost rental than in their previous accommodation as there are households paying less. This is partially explained by the fact that many cost rental tenants were coming from private tenancies within RPZs and had rents significantly below average. Nevertheless, it is a concerning finding.

Our research used a number of rent-to-income ratio measures. First we look at the proportion of households that pay more than 30% of their net income on rent, the threshold of affordability most often used in academic research. To present a more nuanced picture, we also employed the so-called 40/30 rule, which captures the proportion of households who pay more than 30% of their disposable income on rent and fall within the bottom 40% of the income distribution.

Second, we use the same approaches with a threshold of 35% of household net income, as this figure is used in determining eligibility for Cost Rental households.

Only 25.2% of households pay rent less than or equal to 30% of income, i.e. almost three quarters of households exceed the affordability threshold of 30%. A much smaller figure of 33.1% of households pay more than 30% and are in one of the bottom four deciles of the income distribution.

55.8% of households pay rent which is less than or equal to 35% of their income, i.e. a little under half of households exceed the affordability threshold of 35%. In terms of the 40/35 affordability rate, a much smaller 24.5% of households pay more than 35% and are in one of the bottom four deciles of the income distribution.

The key take away is that, according to the more sophisticated ‘30/40’ measure, between one third and one quarter of households can be said to have an affordability issue.

We also used some subjective measures of affordability. The below figure shows that the vast majority of cost rental households consider their rent is ‘very’ or ‘fairly’ affordable.

Somewhat worryingly, quite a high proportion have had to reduce spending on food and other essentials. However, it should be noted that the data collection coincided with a period of significant inflation.

As noted above, despite the fact that quite a high number of households pay more than 30% of their income on rent, the majority viewed their rent as affordable. Our research found that most tenants view their cost rents as ‘fair’ as well. The reasons for residents’ positive assessment of their housing costs were identified in our in depth interviews, and include:

•  Cost rental units are typically larger, newer and better quality than previous accommodation. Tenants feel they are getting a lot of ‘bang for their book’ as their homes are brand new, generally A rated, and of a very high standard. Most tenants also moved into larger units when transferring to cost rental

•  Cost rental provides secure, professionally managed housing. As will be discussed next week, residents hugely valued the security of cost rental homes and the professionalism of their AHB landlords, and this contributed their positive assessment of rent costs

•  Cost rents are typically lower than comparable current asking rents. When assessing their rents tenants often make comparisons to comparable properties which are currently on the market, and asking rents for such properties are often far in excess of cost rents. Some residents, upon initially applying for cost rental, thought it must be some kind of scam as the rents were so low.

Finally, in interpreting the affordability findings shared here, there are three crucial caveats that must be part of the picture:

•  Cost rental is designed to achieve affordability over the medium and long term. Our data reflects the very first year or two of a tenancy, and we can expect affordability to improve substantially even within a few years. Recall that the typical cost rental household consists of two adults in their thirties, both in employment. We can thus expect incomes will grow much faster than rents.

• Cost rental residents are eligible for HAP if they experience a loss of income and their income falls within HAP eligibility

•  Cost rental, when it reaches scale, will exercise a price dampening effect on the wider market, and this dimension is not captured in our research.

• Our research does not capture the experience of households who were deemed ineligible on affordability grounds, i.e. it does not capture the experience of households who can’t get into the sector in the first place.

Events & News

I’ll be speaking at this Housing Agency research event next Tuesday, along with plenty of other housing scholars. Focus Ireland’s conference on ending homelessness is taking place next week. Simon week is next week - see some of the events here.

What I’m reading

Along with the Q1 2024 rent index, the ever busy RTB have published a new individual-property level analysis of rent increases, in conjunction with ESRI. NESC have an important new piece of research on the potential of Modern Methods of Construction. Progress Ireland is a new policy think tank, you can check them out here and read one of their first housing-related proposals here.