27 September 2017

Affordable housing? What does 'affordable' mean?

  • House prices have risen by 2.9% over the last 12 months
  • Increases are significantly higher than wages
  • On average, people can today expect to pay 7.6 times their annual salary to purchase a home.

It's no secret that we're in the middle of a housing crisis. As a nation, we do not have enough homes to meet demand, the result of decades of failing to improve levels of house-building across the UK.

That shortage has continued to push house prices up. According to the latest Nationwide house price index, house prices have risen by 2.9% over the last 12 months, to an average price of more than £211,000. Just five years ago the average price was £164,000. That's an enormous jump.

The government knows only too well that we need more homes that people can actually afford to buy. But the problem is there is very little clarity about exactly what 'affordable' means.

Affordability is getting worse

Figures from the Office for National Statistics (ONS) make clear the fact that housing affordability is getting worse.

The ONS calculates affordability by dividing house prices by average earnings. With house prices increasing at a significantly higher rate than our wages, purchasing a property is becoming more expensive.

On average, working people can today expect to pay 7.6 times their annual salary on purchasing a home in England and Wales. In 1997, just two decades ago, that figure stood at 3.6 times earnings. Clearly, the nation needs to build more homes that people can actually afford. But what does that mean in practice?

How does the government define affordable housing?

One problem is that the way the government defines affordable housing is somewhat loose. The 2012 National Planning Policy Framework says that whether a property is classed as affordable is 'determined with regard to local incomes and local house prices', which isn't enormously helpful.

The Housing white paper issued this year isn't much better. There are 40 separate mentions of the phrase 'affordable housing' within the 106-page document, but the definition isn't that clear: 'housing that is provided for sale or rent to those whose needs are not met by the market'.

There are then sub-categories, things like starter homes or homes sold at a discount, and then the added category of intermediate housing.

Learning from Shelter

Housing charity Shelter has gone a step further, with a rough guide for what affordable means in practice. They believe that mortgage payments costing around 35% of a person's net annual income – so their money after tax and benefits – counts as affordable.

Shelter accepts that this is only a ballpark figure, as 35% of a low income is obviously less than a high income, and those with children may still find such a figure difficult to meet. Nonetheless, the charity says that having a figure like this makes it much easier to judge how easy it really is for different groups to meet their housing costs.

Part of the problem is that housing costs vary so significantly across the country. What's affordable in Maidenhead may not be affordable in Macclesfield, and vice versa. Building more affordable homes is a national challenge, but one which requires more localised answers.

That said, if we don't have a proper definition for exactly what is meant by affordable housing, then it is much harder for councils to create a comprehensive house-building plan for their regions and meet the needs of local people. That needs to change.

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About the author

John Fitzsimons

John Fitzsimons is an award-winning financial journalist who has written for publications including the Sunday Times, The Mirror, Forbes, Moneywise and loveMONEY.

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