Money, REalyse

Finding affordable housing is no longer just a London problem, and has spread across the UK. Yet the root of this issue is that these properties are never as ‘affordable’ as they seem. To find out why, our CEO Gavriel Merkado delves into the systemic issues that surround the current definition of affordable housing, and why it’s making it even harder for ‘Generation Rent’ to get a step up the property ladder.

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Reassuringly Expensive: The Moving Target of ‘Affordability’

Do you remember the old Stella Artois advert? The phrase ‘Reassuringly Expensive’ was the beer’s iconic tagline between 1982 and 2007. I can only assume the slogan was intended to explain why a pint of it tended to cost more than others, despite it being made from the same ingredients!

It’s one of the most obvious examples of ‘premium’ brand equity: the ability of marketeers to convince buyers that an identical product has inherently better quality thanks to its higher price. It is on this premise that I start this article.

So, what is the problem?

Well, there are several issues with ‘affordability’ in the real estate industry. Let us begin with what the current definition of ‘affordable’ is in relation to housing in the UK. Then, what the problems with the current definition are and how it works in practice. Finally, why should anyone care about affordability anyway? And what should a new definition look like?

The Current Definition of ‘Affordable’ in the UK Real Estate Industry

Firstly, what is the current accepted definition of ‘affordable’ when it comes to UK real estate?

Well, according to the UK government, in the case of rental property it means the following: “Affordable rented housing is let by local authorities or private registered providers of social housing to households who are eligible for social rented housing. Affordable Rent is subject to rent controls that require a rent of no more than 80% of the local market rent (including service charges, where applicable).”

However, in the case of the ‘for sale’ property market, questions of affordability are a little less clear. This is because it involves calculations of the differences in prices to the recipient across the portfolio of social housing, mortgage payments on the private market and mortgage payments on affordable housing. This spread brings with it a mind-boggling array of possible variables. For the sake of simplicity in our argument at this stage, I will stick to the same definition as for rental properties.

What proportion of new properties are supposed to be affordable? Well, that comes down to negotiation of S106 agreements between developers and the local authorities. However, in aggregate, between the period of April 2017 and March 2018 there were 47,355 ‘affordable’ homes built in England. This is out of a total of 160,470 new build completions over the same period. So, 29.5% of all new build properties completed in that time are sold or rented as ‘affordable’.

According to those recent statistics, a third of properties are being provided at roughly a 20% discount to the local market rate. That all sounds quite generous and socially minded! The catch is, however, that the ‘affordable’ units are often different to the main market units: perhaps they face the ‘wrong side of the tracks’, or even have less facilities, amenities and features than the others. This means that a large part of that discount is already priced in by virtue of the ‘affordable’ properties being of lower quality than the other ‘main market’ properties in the same development. If those same properties had been sold on the open market instead, it is quite likely that they would fetch lower prices anyway.

Secondly, and most importantly, the definition of affordability being set relative to the prices or rents being charged in the local market creates a constantly moving target. Such a definition has no direct relevance to the purchasing power of prospective tenants and owners at the end of the process. So, were the price of a development or comparable property in the area to suddenly increase, then so does the price of the ‘affordable’ units, in what can often be a truly bizarre sequence of events.

But, if I want to read on and analyse the nitty-gritty of the pitfalls in our current definition of affordable housing, you’ll have to download our report by clicking here. We’ll suggest how to find a solution to the ‘affordable’ housing problem there, too.

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