7. Calculation of affordable housing need

Initially, we set out the key findings of chapter 7. Note that referencing, data source and context is provided in the body of the chapter.   

Key findings

• Calculations indicate that a gross household income of £36,000 is required to access lower quartile market housing in Torbay.
• A gross household income of just over £18,500 is required to access lower quartile market rent.
• Gross household incomes of £25,334 and £26,600 will enable access to shared ownership and First Homes properties at 50% and 30% discounts respectively.
• The gross annual number of households in need of Affordable Housing for Rent is 644. This breaks down as 326 households in existing housing need, 286 new forming households in need and 32 existing households falling into need.
• The gross need will in part be met by an annual projected supply of 257 providing for a net annual unmet need of 387 Affordable Housing for Rent dwellings.
• The net annual unmet need for Affordable Housing for Sale is 334 dwellings per annum. This figure has been boosted by the new housing need category of household of households who aspire to rent or own whatever their current housing situation.
• The annual unmet need for affordable housing for rent and affordable for sale is on a par.

However, in policy terms the Council needs to consider the relative impact of a households’ housing situation. It is clear that homeless households are impacted by their housing situation to a greater extent than a household living in the private rental sector who aspire to ownership.   

• In order to facilitate access to the Affordable Housing for Sale market for households able to access the private rented sector at the entry level (£18,500), a discount of just over 50% is required on a First Homes product and the minimum share sale on a shared ownership property would be 36.5%.

Introduction

This chapter assesses the need for affordable housing in the Torbay local authority area over the ten year period from 2021 to 2031. The PPG sets out guidance for the assessment of affordable housing need within paragraphs 18 to 24 of the HENA guidance. 

PPG states “all households whose needs are not met by the market can be considered in affordable housing need” (Paragraph 018 Reference ID: 2a-018-20190220). Plan-making authorities will need to estimate the current and future affordable housing need within their local area. It goes on to state “strategic policy-making authorities will need to estimate the current number of households and projected number of households who lack their own housing or who cannot afford to meet their housing needs in the market” (Paragraph 019 Reference ID: 2a-01920190220).

The PPG method for assessing the need for affordable housing is set out as follows: 

The NPPF 2019 has expanded the definition of those in affordable housing need to include households who may be able to afford to rent privately but whose preference is to buy a home but cannot do so without some form of subsidy. The PPG on Housing and Economic Needs Assessments supports the NPPF expanded definition by also including households that “cannot afford their own homes, either to rent, or to own, where that is their aspiration” (Paragraph 020 Reference ID: 2a-020-20190220). The inference from this is that those who can afford to rent but who aspire to buy and are unable to do so, should be considered in housing need. PPG does not provide specific guidance as to how to assess the needs of such households who can rent but not buy and who are referenced at bullet 6 below. We will refer to methodology to calculate the extent of this group on pages 64 to 65. 

Prior to this the ability of households to afford housing in the private rental sector determined whether or not they were considered in need of affordable housing.

This data to support this assessment should include trends and current estimates of the following as set out in paragraph 20 of the PPG:

• The number of homeless households;
• The number of those in priority need who are currently housed in temporary accommodation;
• The number of households in over-crowded housing;
• The number of concealed households;
• The number of existing affordable housing tenants in need (i.e., in unsuitable dwellings); and
• The number of households from other tenures in need and those that cannot afford their own homes, either to rent, or to own, where that is their aspiration.

• This includes:
• Lettings from the existing social/affordable housing stock;
• Suitable vacant dwellings; and
• The committed net new supply of affordable dwellings.

The estimates derived by way of steps A to B above are added together to identify a gross need. The supply of affordable housing (step C) is then subtracted to identify a net annual need for additional affordable housing. 

Entry levels

Prior to the calculation itself, entry-level costs of housing to buy and rent are assessed. This is to establish the proportion of households that can meet their needs in both the purchase and rental market, and consequently the proportion that require subsidy to do so. Steps A and B above are calculated at a gross level and then those that are estimated to be able to afford to meet their housing needs are discounted from the final assessment. As we are assessing household income as opposed to individual earnings, we use CACI Paycheck (gross household income) data for this purpose. 

The analysis below considers the entry-level costs of housing both to buy and to rent in Torbay. An analysis of Land Registry and Valuation Agency Office data has been carried out to establish lower quartile house prices and rents. Using a lower quartile figure as the entry-level point is consistent with the PPG on Housing and Economic Needs Assessments. We have also reported both the mean and median figures for comparison with lower quartile house prices as set out in Table 7.1 below.  

Table 7.1 uses price paid data from Land Registry for Torbay over the period April 2020 to March 2021. The lower quartile (LQ) price paid across all dwellings is £160,000. The LQ price for terraced housing is closest to the overall LQ price at £163,000. The LQ price for flats is £95,000 which is considerably lower than the LQ price overall. In fact, the median price for flats is also lower than the LQ price for all dwellings.

Source: Land Registry 2021 

A similar analysis has been carried out for private rents using Valuation Office Agency data for lettings over the 12-month period to March 2021. The analysis shows a lower quartile (LQ) cost (across all dwelling sizes) of £495 per month and a median cost of £600. LQ rates for studios and for rooms are cheapest at £325 and £347 respectively. The LQ rental price of accommodation for households of more than 2 people, traditionally family accommodation, is higher than the average LQ price across all dwellings. This table is also referred to in the previous chapter in which the report considers the private rental sector.

Source: ONS 2021

Local incomes

Household income impacts the ability of households to make choices in the housing market. The second part of the affordability equation indicates the ability of a household to afford to buy or rent housing in the market without the need for any kind of subsidy. Data on household income has been modelled using CACI Paycheck data which provides both average gross household income and distribution of income. Table 7.3 sets out average household income for Torbay. 

Source: CACI Ltd 2021

The graph below shows gross household income distribution by 5 thousand (k) income bands by proportion of overall households. The overall number of households identified is 62,913. The salary band with the highest proportion of residents is the 15k to 20k cohort at 11.3% of all households (7,114 households), followed by the 10k to 15k cohort at 10.3% of all households (6,456 households). Nearly 50% of Torbay households earn 30k or less. 

Figure 7.1: Estimated Household Income Torbay 2020-2021

Source: CACI 2021 

Affordability thresholds

Market purchase

Affordability thresholds are assessed in relation to accessing both the rental and sales market, and the income gap between the two. We have reviewed typical gross household income multiples accepted for lending purposes with the presumption of a 10% deposit. For the purposes of this we have assumed that a household will be able to borrow four times their household income with a 10% deposit.

Market rent

Assessing if a household can afford market rented housing is slightly more complex as we need to establish what percentage of gross income is considered affordable for a household to be spending on housing rent. Strategic Housing Market Assessment guidance from 2007 suggests that 25% of gross income spent on housing rent costs should be considered affordable, although the guidance notes that this threshold should be determined locally. This 25% figure was used within the Exeter and Torbay SHMA 2007 (update 2011).

Other studies looking at the rental housing market indicate that households are committing a far greater proportion of their income to rent without attracting housing subsidy. The latest English Housing Survey report 2019-2020 (Private rented sector) indicates that on average households commit 32% of their household income, including Housing Benefit, on rent. This accords with our understanding of the private rental market in Torbay.

Affordable Housing for Sale (AHS) 

First Homes is a discount to market housing tenure. Discounted market housing has been previously delivered in Torbay as an AHS tenure. Shared ownership is the historically predominant form of AHS in Torbay and the product that is most familiar to the housing sector in general. As such we will focus upon First Homes and shared ownership as the only AHS relevant to Torbay. 

As covered in Chapter 2, First Homes is a new discounted market product that the Government has introduced through PPG. It is to be sold at a minimum discount of 30% of market value of the property. First Homes will be provided as new build, although as with other Affordable Housing for Sale (AHS) dwellings, a resale market will develop over time. Resales will be restricted by covenant in respect of retention of the discount to market value. 

Shared ownership is sold on a leasehold basis where the lessee acquires a proportion of the dwelling, between 25% to 75%, but commonly between 40% to 50%, and is charged a subsidised rent on the unowned proportion. This is usually levied at 2.5% of the unowned equity annually. Unlike First Homes, the lessee usually has the right to buy the unowned equity, known as staircasing. 

To consider access thresholds for market housing we apply 4 x salary plus 10% deposit to assess the entry level thresholds. To consider access thresholds for First Homes we apply 4 x salary plus 5% deposit. The 5% deposit is included because lenders are only exposed to a percentage of the dwelling’s value and yet they will have first charge on the value of the whole dwelling. 

To consider access thresholds for shared ownership we apply 3 x times salary plus 5% deposit to assess the entry level thresholds. The reason for the lower salary multiple is that the rental element needs to be accounted for within the overall affordability assessment hence more income needs to be retained to meet on-going rental payments. The 5% deposit is included because lenders are only exposed to a percentage of the dwelling and yet they will usually have first charge on the whole dwelling. 

Table 7.4 below sets out the gross household income required to access housing at various entry levels.

With all categories of households in existing housing need, newly arising need or falling into housing need (A&B), a gross number within each category is established and then an assessment is carried out to establish how many of these households can afford to meet their needs in the housing market without subsidy. The steps are set out below in the next section.

Data calculation to assess affordable housing need 

A. Calculation of gross unmet current affordable housing need

First let us recap on the categories of households that constitute the gross unmet current affordable housing need. These are:

• The number of homeless households;
• The number of those in priority need who are currently housed in temporary accommodation;
• The number of households in over-crowded housing;
• The number of concealed households;
• The number of affordable housing existing tenants in need (i.e., in unsuitable dwellings); and
• The number of households from other tenures in need and those that cannot afford their own homes, either to rent, or to own, where that is their aspiration.

The first step is to establish the total number of households who have a housing need irrespective of whether they can afford to resolve their housing problem. The ‘current housing need’ categories and the data source through which we establish a gross figure are set out in the table below. 

Households from other tenures in need

As set out in the introduction to this chapter the NPPF 2021 expanded the definition of those in affordable housing need to include the number of households from other tenures in need and those that cannot afford their own homes, either to rent, or to own, where that is their aspiration. There is no specific guidance or established practice as to how to assess this figure.

So, for the purposes of this assessment, we have considered households who are currently renting privately (and can afford to do so without subsidy) and whose preference is to buy a home but cannot afford to do so. Those who cannot afford to rent irrespective of their aspirations are assessed through other categories of existing housing need. Likewise, the aspiration of ownership for those in social housing is addressed through the Government’s policies on right to acquire and right to part own for social housing tenants. 

This category of households is referred to in the table above as ‘households from other tenures in need’. The English Housing Survey (Private Rented Housing) 2019/20 report indicates that 59% of private renters expect to buy a property. This figure is far higher in the younger rental cohorts with 77% of renters aged 25 to 34 and 65% of renters aged 35 to 44 expecting to buy a property. 

Of those private renters who do not expect to buy, the majority cite the cost of buying as the main reason. It should also be noted that a proportion of those not expecting to buy were happy to rent privately, giving reasons such as being happy with their current situation and preferring the flexibility of renting.  

The number of private renter households in Torbay at the time of the Census 2011 was 13,696. In

2018, 59.7% of private sector tenants were in receipt of housing benefit. As set out in the paragraph above we will discount these households as, at the point of the assessment, these households are unlikely to afford a mortgage and are likely to be accounted for within the other categories of affordable housing need. This creates a residual cohort of 5,519 households.    

We have assumed that 59% of this cohort expect to buy a property in line with the English Housing Survey (EHS) findings. In the absence of local data we can only revert to the national dataset.

Of the 41% who do not expect to buy, a proportion report that they are satisfied in the PRS and as such need to be discounted from the calculation. The EHS provides the proportion of respondents who are satisfied with their current situation and/or prefer to rent privately yet responses are potentially double counted. Reviewing the responses within the context of the overall responses as to the question of barriers to ownership we have assumed that 35% of renters choose to live in the PRS. We also discount those households identified as overcrowded in the PRS as these households are already accounted for.  

Hence the calculation is as follows:

5,519 x 41% = 2,263; 2,263 less 35% = 1,471; 1,471 less 667 = 804.

The assessment 

Table 7.6 sets out the numbers in each category derived by way of the data analysis set out in table 7.5 and as described in the text above. These figures represent current need before an assessment of the household’s ability to financially meet their own needs without intervention and the net impact on overall. This initial stage is set out in table 7.7 and thereupon the resultant numbers are taken forward for affordability testing (table 7.8). These steps will establish the number of households in current housing need and that require subsidy to access housing. 

Source: Census 2011, TC waiting list data, DLUHC.

Table 7.7 determines the gross number of households with unmet housing need that will be taken forward for an income-based affordability assessment. However, the affordability assessment differs per cohort, as some income assumptions have already been made and a number of households are excluded from the affordability assessment on the basis of their net impact on housing need and assumptions on the households’ ability to meet their immediate needs through the release of capital. As such: 

• The affordability assessment excludes 90% of owner-occupiers (table 7.7 ref. no. 1) under the assumption that the vast majority of existing owner-occupiers will be able to afford housing within the private sector without subsidy once savings and equity are taken into account.
• The affordability assessment analysis also excludes ‘existing affordable housing tenants in need’ and ‘overcrowded households in affordable rented housing’ (table 7.7 ref. no. 2) because if said household’s need is met then a unit of affordable rented housing would be released, so there is no net effect on the overall calculation. The figures are included for the purpose of identifying the number of affordable housing tenants in unsuitable housing.
• The affordability assessment for ‘households from other tenures in need’ (table 7.7 ref. no. 3) will be assessed against the entry level incomes for the PRS and above, as we have already discounted private sector tenants in receipt of housing benefit.

The table below shows it is estimated that there are 3,889 existing households in housing need, of which 1,672 will be taken forward for affordability testing as explained. 

Source: DLUHC, Census 2011, English House Condition Survey

Having established the gross figure in the final of table 7.7, it is important to establish how many of these households might be able to afford market housing without the need for subsidy. 

Data on household income has been modelled using CACI Paycheck data which provides both average gross household income and distribution of income. 

We use this base again CACI household income data has been used to calculate the affordability numbers currently in need who can afford to meet their own needs without subsidy. To achieve this a gross household income distribution is applied across the identified household groups. For the purposes of the affordability assessment, it is assumed that the gross household income of existing households in need will be lower than for Torbay overall. Hence the distribution must be adjusted to reflect a lower average income amongst households with an existing housing need as compared to all Torbay households. 

So for the purposes of the income modelling for households currently housed (categories 1, 3, and 4 of table 7.7 above) household income distribution has been reduced to 85% of the distribution for all households. We refer to these categories as Group A in table 7.8 below. For households with no housing (category 5 of table 7.7 above) their average household income distribution has been reduced to 45% of the distribution for all households. We refer to this category as Group B in table 7.8 below. 

These two percentage figures have been based on analysis of the English Housing Survey with reference to the relative incomes of households in the private and social rented sectors as well as consideration of local intelligence from Devon Home Choice and information from local private letting agents. The analysis also cross references CACI Paycheck data comparing household income distribution in the wards within the lowest two deciles of the Indices of Multiple Deprivation in relation to the income distribution of the population as a whole. These assumptions are in line with the assumptions used within comparable housing needs assessments.

The original SHMA guidance 2007 states that existing housing need should be met within 5 years of the Plan. Subsequently housing needs assessment have extended the time taken to clear existing housing need. For Torbay’s purposes, due to the high-level homelessness indicated within the existing housing need calculation and the increasing problem of homelessness documented within the local authority area, it is important to address existing housing need with a degree of urgency. Hence for the purpose of this assessment, existing housing need is addressed over 5 years.    

B. Newly arising households likely to be in affordable housing need

New forming households

Analysis of 2018 based household projections and 2018 based subnational population projections allows us to assess household formation rates of the population under 45, that being the ceiling age for the purposes of this calculation in accordance with accepted guidance. We have calculated that 844 households will form annually between 2021 and 2031.

Having established newly arising housing need, we assess these households on affordability grounds. As with Group A within the existing housing need calculation we utilize the household income distribution for deciles 1 and 2 to reflect the lower salaries of new forming households at the start of their employment trajectory.   

Existing households falling into need

The second element of newly arising need is existing households that fall into need. To quantify the net flow of households the assessment looked at households who have been housed in general need housing within the year over the past three years. This excludes new forming households, who are accounted for as a forward projection within the first part of this calculation. New forming households from a waiting list perspective are those applicants living within an existing household, which is usually their family. Similarly, those transferring from an existing social/affordable rented property are also excluded as, when transferring, they will in turn release a unit of affordable rented housing and hence will have no net impact on overall need. From this we create an annualised estimate of existing households falling into need.  

This approach is consistent with the 2007 SHMA guidance which states that “Partnerships should estimate the number of existing households falling into need each year by looking at recent trends. This should include households who have entered the housing register and been housed within the year as well as households housed outside of the register (such as priority homeless household applicants).”

The same affordability test has been applied to households falling into need as for existing households in housing need (Group A) and new forming households. It is assumed that existing households falling into need will have a lower household income profile based upon the fact that they have fallen into housing need. Table 7.10 below sets out the number of households falling into need over the past 3 years who have been housed within the year.

Source: Devon Home Choice 2021

Bringing together the data 

The need for affordable housing for rent (A + B)

Having carried out the analysis to estimate gross unmet housing need, the report considers the net need for new affordable dwellings.  

Calculations A (current housing need) and B (newly arising housing need & existing households falling into need) together produce the gross annual need for affordable rented housing in Torbay. 

This is calculated as:

• 644 households per annum requiring Affordable Housing for Rent.

Having established gross annual affordable housing need we estimate the supply of affordable housing by looking retrospectively at historic delivery.

C. Supply of affordable housing

PPG HENA guidance states: “There will be a current supply of housing stock that can be used to accommodate households in affordable housing need as well as future supply. Assessing the total affordable housing supply requires identifying:

• the number of affordable dwellings that are going to be vacated by current occupiers that are fit for use by other households in need;
• suitable surplus stock (vacant properties); and
• the committed supply of new net affordable homes at the point of the assessment (number and size).”

Vacations and lettings

The table below sets out the supply of affordable rented housing through reletting of the existing stock that has been vacated by the previous tenant. To calculate the likely supply within the existing stock we consider historic lettings data over the last five years. The figures are for general needs lettings only and exclude lettings of new properties and transfers from other social rented homes, although we include the net position for social housing transfers in and out of the local authority area. These exclusions are made to ensure that the figures presented reflect relets from the existing stock.

To create the annual lettings figure, excluding newbuild properties let for the first time, it is usual to utilise historic data to provide an average annual figure. The Table below shows affordable rental lettings over the past five years. For the purposes of the assessment, we will utilise the average

(mean) lettings of existing affordable housing 2016/17 to 2019/20 as last year’s activity was noticeability restricted by the impacts of coronavirus.  

Source: Devon Home Choice letting statistics 2021, TDA, Torbay Council 

Suitable surplus stock

There is no suitable surplus stock identified within Torbay for the purposes of reprovision as affordable housing.   

Committed future supply

The committed future supply of affordable housing has been assessed as any site with a current permission that will yield affordable housing or where an application has been submitted and a permission is anticipated. This information is taken from the council’s records. Where the affordable housing tenure split has not been stipulated, we have applied the Policy H2 split of 2/3 affordable/ social rent and 1/3 shared ownership, although the policy does provide for some negotiation on a site by site basis. 

This provides a total committed supply of 303 affordable rented dwellings (social rent or affordable rent) which, annualised over the timeline of the Local Plan Update, provides for a supply of 30 rented dwellings per annum. This is relatively consistent with the historic supply as set out in Table 7.13.  

It is important to note that the committed supply arose under the policy framework set by Policy H2 of the Torbay Local Plan 2012-30 and so does not represent a “policy off” position for the number of affordable houses that would arise outside of the planning framework.   

Source: TDA 2021

In conclusion, table 7.15 below sets out an annual unmet need for Affordable Housing for Rent of 387. 

The need for Affordable Housing for Sale

Table 7.16 below summarises the gross number of households requiring Affordable Housing for Sale. This includes existing households in the private rented sector who aspire to own but cannot afford to do so. The methodology to assess this category is set out on pages 64 to 65.  

However new forming households and existing households falling into need are not considered in affordable housing need is they are able to afford market rent. 

Drawing together those whose housing needs could be met by Affordable Housing for Sale, we arrive at a gross figure of 346.   

In respect of the supply side (C), resales are not considered as the existing stock of intermediate housing is too limited for this to be significant. The table below sets out the committed supply of newbuild Affordable Housing for Sale. This provides a total committed supply of 116 Affordable Housing for Sale dwellings which, annualised over the timeline of the Local Plan Update, provides for a supply of 12 dwellings per annum.

Source: TDA 2021

The PRS category in table 7.16 includes those assessed to aspire to home ownership but only being able to afford private rent. It also includes other categories of households in need who can afford private rent but not an intermediate or market tenure. The affordability assessment for households to access First Homes and shared ownership was set at 30% discount and 50% share respectively. These discounts or shares can be increased or reduced respectively to lower the access thresholds required. Table 7.19 sets out the entry thresholds that would offer the opportunity for all private renters to access Affordable Housing for Sale.

Conclusion and implications for policy 

Hierarchy of housing need

The annual unmet housing need for Affordable Housing for Rent and Affordable Housing for Sale is on a relative par. The calculation of unmet housing need for Affordable Housing for Sale has been increased by the most recent NPPF and PPG statements on household aspiration to buy or rent irrespective of their current housing situation. 

However, meeting unmet housing aspiration (or unmet housing need) is not always possible at a micro level given other constraints to the local housing market. In policy terms the Council needs

to consider the relative impact of a household’s housing situation. It is clear a homeless household is impacted by their housing situation to a greater extent than a household living in the private rental sector who aspire to ownership. This is reflected in the Council’s allocations policies. 

This should also be reflected in the Council’s affordable housing planning policies and there is a strong argument to weight affordable housing provision delivered by way of planning obligation toward Affordable Housing for Rent as these tenures meet the needs of those in greatest housing need.   

Need for social rent v affordable rent 

The projection relating to the annual unmet need for Affordable Housing for Rent is derived from those households who cannot afford to rent privately or buy an Affordable Housing for Sale product or market product without subsidy. 

The net annual number of new affordable rented dwellings required to meet projected unmet housing need per annum is 385 as set out in Table 7.15. 

The prevailing NPPF definition for Affordable Housing for Rent includes both Social Rent and Affordable Rent. Social Rent is the traditional form of subsidised rented housing, and the majority of local authority and Registered Provider housing stock will be let as Social Rent. Affordable Rent was introduced in 2010. Affordable Rent is tied at a discount to market rent level, namely no more than 80% of equivalent market rents. Social Rent on the other hand is set by way of a standard formula which includes an assessment of historic stock value, number of bedrooms and comparative local factors, such as relative wage levels. Another important distinction to make is that Affordable Rent is always charged inclusive of service charges, while service charges can be charged in addition to Social Rent.    

As Affordable Rent is pegged at market rent levels, the rent level charged can vary significantly by area and by property type. In fact, most Registered Providers tie their Affordable Rent levels to Local Housing Allowance (LHA). This negates very localised variations and ensures a minimum level of affordability. 

There is less variation between property type and area with Social Rent. In fact, the current rent regime sets a formula or target rent for Social Rent which provides equivalence across the local authority area by property type. This regime, known as rent restructuring, was introduced in the early 2000s.    

A review of lettings data from Devon Home Choice indicates that there are some disparities between Social Rent and LHA derived Affordable Rent in Torbay. These disparities are more pronounced with larger, higher rental valued properties, while Social and Affordable rent levels are more consistent with smaller properties, in particular flats.  

However, for working families on low incomes and not in receipt of housing benefits who need larger properties, the difference between Social Rents and Affordable Rents can be prohibitive. The Government has recognised that, in some areas, Affordable Rents have become a disincentive for households looking to move into fulltime work. In higher value areas, Homes England grant will be made available at a higher rate to support Social Rent during the 2021/2026 programme. Torbay is one of these designated areas, so grant is available to support Social Rent in Torbay. 

This supports the case for continuing a required mix of both Social and Affordable Rent within affordable housing policies.  

Chapter 6 | Chapter 8