Rising rents and an extended period of flat income growth have surfaced concerns over apartment affordability. While few debate that some apartment residents are dedicating more of their income to rent, how acute and how widespread the trend is up for discussion, said executives and researchers at the 2016 NMHC Research Forum.
According to NMHC analysis of government data, the percentage of apartment renters spending more than 30 percent of their incomes reached 54 percent in 2013, which was up from 48 percent a decade before but down from a peak of 57 percent in 2011. The share of those even more housing cost burdened, meaning more than 50 percent of their incomes were going to pay rent, was 30 percent, a six percentage point uptick from 2003.
However, apartment executives said the data paints the issue of affordability with too broad a brush and that further analysis shows that some of the affordability strains are localized in the market.
Zillow Chief Economist Svenja Goodell’s analysis looked at average housing cost ratios and reached a slightly different conclusion. True, apartment residents’ share of income spent on rent has increased from an average of 24 percent (1985-1999) to 30 percent as of 4Q 2015, but some of the concern is rooted less in the actual ratio and more in the rate of increase, especially when compared with housing cost ratios for homeowners. According to her analysis, average share of income spent on a mortgage has declined from a historical norm of 24 percent (1985-1999) to 15 percent as of 4Q 2015.
Looking at housing costs by building class shows an even starker contrast. In fact, Philip Martin, vice president of market research for Waterton, argued that with an average rent-to-income ratio of roughly 26 percent, there’s relative affordability at Class A and B properties.
“Especially with the ‘B’ quality assets, apartments are quite affordable,” he said.
Analysis from Richard Hughes, senior vice president, strategic revenue systems for RealPage, and Jay Parsons, vice president of MPF Research, further supported that point. Reported median rent-to-income ratios for every apartment REIT were well under 25 percent, suggesting that institutional-grade apartments are struggling less with affordability issues. And in fact, additional research shows that product class and rent-to-income ratios are inversely correlated.
“There is a significant affordability issue, but the further you get down the line-the mom and pops, the lower class buildings-the bigger the issue,” Parsons explained.