Building Sustainable Tenancies: Living Rent Methodology
Globally, the continued increase in living costs alongside largely frozen wages has seen individuals and families stretch further to make ends meet month-to-month. In the UK, 4.8million people are experiencing trouble with housing affordability, equating to around a fifth of all households. 1.3million of those people live in social housing on lower social rents. Decent employers are increasingly embracing The Living Wage to ensure their work pays, while the ‘Living Rent’ is starting to gain traction with housing providers to create tenancies that prevent arears and unrecoverable debt.
The housing crisis means that housing affordability is an issue, rippling across most stratas of society. According to The Affordable Housing Commission, there are four groups in particular that are at risk from acute housing stress: struggling renters, low income older households, struggling homeowners and first-time buyers. In the UK one of the tactics deployed to tackle this stress for renters has been the introduction of ‘Affordable Rents’ which are set at 80% of the market rents.
Affordability of housing has often been measured by a traditional ratio of 30% of a person’s income contributing to housing costs. Although this is a good starting point for measurement, there are plenty of other factors which need to be considered; those such as, make up of household, quality of that household and location. Location, for example is a prime factor when considering setting a living wage methodology in an organisation. This is because even if a rent is set at a nominal, but, fair percentage of income, this can mean very different things for those living in inner London, or a rural community in Wales.
One way of considering these factors together to judge affordability is the Joseph Rowntree Foundation’s Minimum Income Standard (MIS). Created in July 2018, it takes into account all household and family expenses. Unsurprisingly, working the minimum wage for 35 hours per week would be too low for households to reach MIS. It estimates a single person needs to earn £18,400 p/a and that a working couple with two children should be earning at least £20,000 p/a.
“For a rent (including service charges) to be affordable, a household with one person working 35 hours or more should only exceptionally be dependent on Housing Benefit in order to pay for it.”
What a Living Wage Methodology proposes is that rents be divorced from market rates and instead set on a basis of people’s personal incomes. Tailoring rental rates to individual affordability that grows and morphs with a customer’s circumstances could ensure rents are always paid and arrears do not build up. Housing associations in Scotland for example, have been setting their own rents within an outcome-based regulatory framework for many years. Even though this idea is being applied by some housing providers in the rest of the UK and showing to be popular with customers, there are potential downsides too. For some tenants it may mean accepting that they will pay more; there is always the possibility with ‘greater good’ policies that a few will not benefit. Some providers have tackled this with a choice of tailored or standard rents.
What introducing Living Wage Methodology can encourage is the building of flexible business models that avoid unrecoverable debt by setting up tenancies that grow with the customers. Rather than gambling on a higher figure of unattainable income, growth and success metrics change under models such as these. In introducing such a strategy, an organisation needs to be in close collaboration with them, while also having access to a rich source of tenant data in order to build a plan that works for both the individual and the housing provider. When done in this way, in close consultation with communities it can transform lives, as well as the balance book of a housing provider.
“Inevitably we found that one size doesn’t fit all. Many associations are considering the Living Rent methodology alongside other wider affordability metrics and are mining available data to support meaningful conversations with tenants. Our next step is to work with housing associations to make this ambition a reality. Deciding how much rent to charge, where to charge it, and the impact of doing so is one of the biggest decisions a housing association makes. It goes to the heart of our values as social businesses. In Wales, we think that the best and most effective way of doing this is to make those decisions transparently, based on data and in partnership with tenants at a local level.”
MVH in Wales, is a mutual owned housing provider that is controlled by employees and residents. Following extensive consultation, the organisation established a ‘Living Rent’ structure which now sets 1,300 different rents for 4,100 properties. To achieve this, MVH set similar rents for similar sized and quality housing. Individual and average incomes are paired with stringent pre-tenancy checks alongside Universal Credit triaging and offering financial education. For three-bedroom properties this produced a rental rate including all service charges set at 25% of average incomes in 2018-19, which was further reduced to 24.5% in 2019-20. As of the end of March 2019 the organisation reduced their current rent arrears by £50,000.
This housing project, based in Hackney, London is not a regulated housing provider but still offers inspiration for underpinning a Living Rent methodology into an organisation. They assess affordability of their one to three-bedroom properties in line with the Joseph Rowntree MIS and adjust it according to local costs, such as council tax, which in inner city London is high. Since 2016, customers have been able to opt-in to personalised rents for a one or three-year tenancy. Letting in the New Era Estate is committed to giving Londoners the lowest rents they can whilst making the organisation financially viable.
“Following extensive research and by working closely with the residents of the New Era Estate, we are pleased to offer a choice for our residents designed to best suit their financial needs. By offering an ‘opt-in’ rental scheme, our calculations show that two thirds of residents, who responded to our initial questions about earnings, will be better off however, we will also introduce a standard rental option should they prefer.”
As the gap between earnings and housing affordability continues to widen, Living Rent schemes will be an important trend to track for social housing providers wanting to secure income and build sustainable tenancies. Legislation will also need to adapt to allow housing providers more autonomy in setting rents. What will also be a likely outcome, is organisations embarking on private/public partnerships and diversifying their output, introducing fairer rent properties that are invested in the community’s and company’s long-term health.