Housing Need and Demand Assessment

2023

IMAGE: Orkney Islands Council crest and logo above the title “Housing Need and Demand Assessment 2023”.

The Orkney Islands Council Housing Need and Demand Assessment has been signed off by:

Head of Community Learning, Leisure and Housing

Frances Troup

Date – 10 July 2023

Head of Planning and Community Protection

Roddy MacKay

Date – 10 July 2023

IMAGE: Signature page showing the names and handwritten signatures of Frances Troup and Roddy MacKay, both dated 10 July 2023.

Contents

1. INTRODUCTION — 2
   • 1.0 Purpose of Document — 2
   • 1.1 Governance — 5
   • 1.2 Orkney’s Housing Market Areas — 6
   • 1.3 Quality control — 8
   • 1.4 Monitoring and Review — 8
2. HOUSING MARKET DRIVERS — 9
   • 2.1 Demographic Trends — 9
   • Population — 9
   • Household Projections — 10
   • Household composition — 10
   • Net Migration — 13
   • 2.2 Affordability Trends — 15
   • House prices — 15
   • Income — 16
   • House price affordability — 17
   • Volume of sales — 18
   • Access to mortgage finance — 19
   • Private Rents — 20
   • Social Rents — 23
   • 2.3 Economic Trends — 25
   • Economic Growth — 25
   • Employment and unemployment — 26
   • Constrained employment — 28
   • Potential economic growth — 29
3. HOUSING STOCK PROFILE, PRESSURES & MANAGEMENT ISSUES — 32
   • 3.1 Dwelling size — 32
   • 3.2 Dwelling type — 33
   • 3.3 Housing tenure — 35
   • 3.4 Empty homes — 37
   • 3.5 Dwelling condition — 43
   • 3.6 Occupancy — 44
   • 3.7 Concealed households — 44
   • 3.8 Stock turnover — 46
   • 3.9 Voids — 49
   • 3.10 Stock management — 50
4. ESTIMATING HOUSING NEED — 54
   • 4.0 Introduction — 54
   • 4.1 HNDA scenarios — 54
   • 4.2 Step 1: Estimating the existing housing need — 55
   • 4.3 Step 2: Future Scenarios — 56
   • 4.4 Step 3: HNDA Tool Assumptions — 57
   • 4.5 Step 4: HNDA Tool Results — 59
5. SPECIALIST HOUSING — 66
   • 1.0 Introduction — 66
   • 5.1 Population estimates by age — 66
   • 5.2 Specialist Provision Templates — 67
   • 5.3 Template 1: Accessible and adapted housing — 68
   • 5.4 Template 2: Wheelchair housing — 72
   • 5.5 Template 3: Non-permanent housing — 75
   • 5.6 Template 4: Supported Accommodation — 87
   • 5.7 Template 5: Care and Support Services for Independent Living at Home — 95
   • 5.8 Template 6: Site Provision — 102
   • Appendix 1 – HNDA core processes and outputs — 108
   • Appendix 2 – Orkney’s Housing Market Areas — 111
   • Appendix 3 – HNDA Tool Scenario Criteria and sensitivity tests — 116

Key Findings Template: Estimate of Additional (New) Future Housing Units

Housing Need and Demand Assessment

2023–2042

Annual Need – Years 1 to 5

Annual Need – Years 5 to 10

Annual Need – Years 10 to 15

Annual Need – Years 15 to 20

Cumulative Total at End of Projection Period

IMAGE: Key findings table showing existing need of 198 households to be cleared over five years, household projections for 2023–2042, and annual and cumulative housing requirements under principal, high migration and low migration scenarios.

1. INTRODUCTION

1.0 Purpose of Document

1.0.1

Local strategic planning for housing is driven by the assessment of housing need. The Housing (Scotland) Act 2001 places a duty on local authorities to develop Local Housing Strategies (LHS), informed by an assessment of housing need and demand and the provision of related services in their area. In addition, the Town and Country (Scotland) Act 1997 (as amended) requires Local and Strategic Planning Authorities to plan for land use in their area, including the allocation of land for housing. The Housing Need and Demand Assessment (HNDA) will fulfil this function and inform both processes.

1.0.2

Figure 1.1 outlines the process linking the HNDA to the LHS and Local Development Plan.

Figure 0-1 – The Housing Planning Framework

IMAGE: Flow diagram showing the relationship between definition of housing market areas, creation of the Housing Market Partnership, the Housing Need and Demand Assessment, consideration and agreement of housing supply targets, the Local Housing Strategy, development plans, strategic housing investment plans, monitoring and review, and programme delivery.

The diagram contains the following stages:

• Definition of housing market areas
• Creation of Housing Market Partnership
• Housing Need and Demand Assessment (HNDA)
• Housing Market Partnership consideration of HNDA outcomes
• Housing Market Partnership agree Housing Supply Target (HST)
• Local Housing Strategy (Housing Supply Target)
• Development Plan: Main Issues Report (Housing Supply Target)
• Development Plans: Proposed Plans (Housing Land Requirement)
• Strategic Housing Investment Plans (SHIP)
• Strategic Local Programme Agreement (SLPA)
• Development Plan Action Programme
• Monitoring and Review (Housing land audit / Action Programme review / HNDA review / LHS monitoring / Development Plan review etc.)
• Programme Delivery

1.0.3

In 2020, the Scottish Government published revised guidance materials for local authorities undertaking the HNDA. This includes an updated HNDA Tool (a suite of Excel spreadsheets) designed to calculate the requirement for new-build housing and to enable local authorities to develop long-term strategic views of housing need and demand based on nationally produced data sets where possible.

1.0.4

In the context of the HNDA, housing need refers to households lacking their own housing or living in housing which is inadequate or unsuitable, who are unlikely to be able to meet their needs in the housing market without some assistance. Housing demand is the quantity and type/quality of housing which households wish to buy or rent and are able to afford.

1.0.5

Estimates of housing need and demand fall into two categories and HNDAs must evidence both. These are:

• Future need for households yet to form, and
• Existing (or backlog) need experienced by households at the present time (i.e. a snapshot in time)

1.0.6

The HNDA outlines a range of estimates to try and account for a number of alternative future outcomes. Orkney’s HNDA focuses on three key scenarios. These are outlined further in Chapter 4.

1.0.7

The purpose of the HNDA is the evidence base for future policy development, decision-making and resource allocation processes; and specifically it should underpin the following key areas of housing policy and planning:

a) Housing Supply Target(s) (HSTs) - to inform the setting of a Housing Supply Target for use in the Local Housing Strategy and Development Plan. The Housing Supply Target sets out the amount and type of housing that is actually deliverable within Orkney over the period of the plan.

b) Stock management – to develop an understanding of the current and future demand for housing by size, type, tenure and location in order to optimise the provision, management and use of housing stock. This in turn feeds into policy and planning decisions about future stock in the Local Housing Strategy. The HNDA does NOT estimate the size or type of stock that is required in future. The HNDA Tool output estimates need by tenure. The size and type of stock required is a policy decision. However these decisions will be informed by the evidence provided on past and current stock in Chapter 3 of the HNDA.

c) Housing investment - to inform future housing investment decisions, for example through Strategic Housing Investment Plans (SHIPs).

d) Specialist Provision - to inform the provision and use of specialist housing and housing-related services to enable independent living for all, as expressed in policy in the Local Housing Strategy and to inform planning decisions e.g. land for Gypsy/Travellers. See Chapter 5 for more information on Specialist Provision.

e) Geographic distribution of land - to inform the spatial allocation of land through the Development Plan for new housing at both Housing Market Area level and Local Authority level.

1.0.8

The HNDA is purely a factual evidence base. Setting Housing Supply Targets is a policy decision which is influenced by a range of factors, including wider strategic imperatives; resources and funding availability; land and infrastructure capacity; and the capacity of the local construction sector, amongst others. Consideration of these factors can result in a Housing Supply Target figure which may be lower or higher than the housing estimate in the HNDA. In the context of Orkney, there is a clear mandate from the Housing Market Partnership and wider stakeholders to promote a housing system that supports economic growth and delivers community sustainability. Therefore, while it lies out with the scope of the robust and credible HNDA itself, the housing supply targets for the Local Housing Strategy and Local Development Plan will be set at an ambitiously aspirational, albeit realistic, target based on the level of need identified in the HNDA assessment.

1.0.9

It is also important to note that this assessment is not a definitive “answer” to the question of housing needs and demand in Orkney, rather it is a view of the broad scale of housing issues based on a range of prudent and logical assumptions, in order to gain a good understanding of the likely range of ‘answers’ to the question of housing needs and demand. The modelling presented in this report is not predictive in a simplistic sense though it does give the Council and its partners a valuable resource for developing strategic responses to future housing issues within Orkney.

1.0.10

Appendix 1 outlines the core processes and outputs that are required for a HNDA to be considered robust and credible.

1.1 Governance

1.1.1

The HNDA has been produced in collaboration between staff in the Council’s Housing Service and Indigo House Consulting with input from other Council Services and bodies as required.

1.1.2

In line with best practice the Housing Needs and Demand Assessment has been developed in consultation with the Housing Market Partnership. The Partnership includes:

OIC Departments

• Education, Leisure & Housing
• Neighbourhood Services & Infrastructure
• Enterprise & Sustainable Regeneration
• Strategy, Performance & Business Solutions
• Orkney Health and Care
• Orkney Housing Association - OHAL
• Orkney College UHI
• NHS Orkney
• R. Clouston Ltd (house builder)
• Orkney Builders (house builder)
• Scottish Government More Homes Division
• Heriot Watt University
• Scottish Water
• Highland & Islands Enterprise

1.1.3

The Housing Market Partnership considered the results from the assessment tool and agreed the scenarios that were produced.

1.1.4

The Head of Community Learning, Leisure and Housing, and the Head of Planning and Community Protection signed off for the Housing Needs and Demand Assessment Process. The minutes of the Housing Market Partnership meetings are available on request.

1.2 Orkney’s Housing Market Areas

1.2.1

A Housing Market Area (HMA) is a definable geographical area where the demand for housing is relatively self-contained, i.e. a large percentage of people moving house or settling in the area will have sought a dwelling only in that area.

1.2.2

It is acknowledged that rurality presents some specific issues for HNDA practitioners, including: defining HMAs – especially in sparsely populated areas; and small numbers in the data reducing its precision and robustness. While there is no single, definitive method for establishing HMAs, there are a number of potential approaches outlined in the relevant guidance (see in particular the Local Housing Systems Analysis Good Practice Guide, Communities Scotland, 2004). These include:

• Analysis of the origin and destination of house buyers (using sasines data)
• Travel to Work Areas, mainly defined using census data
• Community boundaries such as Community Council areas
• Pre-defined boundaries (e.g. secondary school catchments)
• Local knowledge or instinct based modelling

1.2.3

The HNDAs five HMAs have been developed to take into account school role catchment areas, parish and Community Council boundaries, locally understood property sale areas and Scottish Government datazones. These are outlined in Map 1.1 below.

1.2.4

The five HMAs are:

• Kirkwall
• Stromness
• West Mainland
• East Mainland and Linked South Isles; and
• The Isles

1.2.5

In order to test whether the five HMAs still represented reasonably self-contained housing markets, analysis of the origin and destination data of house purchasers was examined for the period 2015-2020. This analysis is included in Appendix 2. This analysis concludes that the five HMAs previously developed are largely self-contained, albeit with some moves between Kirkwall and the East and West Mainland areas in particular.

1.2.6

It is recommended to retain the 5 Housing Market Areas used in the HNDA tool for the analysis in the current HNDA but review the impact of new build developments in future.

1.2.7

The use of HMAs will also benefit the development of the Local Housing Strategy and the Local Development Plan as they allow the HNDA to provide housing need projections on a sub-Orkney scale. This was not possible as part of the previous HNDA which reported solely on an Orkney wide basis and this new approach is seen as a major step forward. Map 1.1 below shows Orkney five HMA’s.

Map 1.1 Orkney’s Housing Market Areas

IMAGE: Map of Orkney divided into five Housing Market Areas: Kirkwall, Stromness, West Mainland, East Mainland and Linked South Isles, and The Isles. The map legend identifies each area by a different colour. Source: Orkney Islands Council.

1.2.8

The agreed HMAs utilise the 2011 Scottish Government datazone boundaries rather than the 2001 boundaries. This is primarily because the 2011 boundaries are a much better reflection of Orkney’s local geographical boundaries. Some of the available data is still produced in 2001 format and this has been adapted to the 2011 datazone areas as accurately as possible.

1.2.9

HNDAs use a range of geographies, each of which has a specific use in LHSs and Development Plans. Some elements of the HNDA may only require presentation at local authority level and others at Housing Market Area level. The HNDA guidance particularly emphasises the point that “avoiding unnecessary disaggregation will reduce the complexity of the HNDA and the amount of time and resource needed for drafting”. As with all statistical estimates the more the data is disaggregated, the less precise the estimates become. For this reason authorities are encouraged to populate the Centre for Housing Market Analysis’ (CHMA) HNDA tool with the largest geographies possible.

1.2.10

However, for the results of the HNDA to be fully utilised within the Local Housing Strategy and Local Development Plan the Housing Market Partnership made the decision to request sub-Orkney level HMA’s in the HNDA tool even though some of them would be quite small.

1.2.11

The Scottish Government guidance states that HNDAs are designed to give broad, long run estimates of what future need might be, rather than precision forecasts on what the future will be. Therefore, the final HNDA combines quantitative indicators with qualitative analysis to produce a transparent, reasoned and reasonable understanding of the overall need and demand in the area and of the operation and key trends driving the local housing market.

1.3 Quality control

1.3.1

The analysis and drafting of the HNDA has been overseen by a technical group including analysts from the Council and Indigo House. All outputs have been peer reviewed by that group, the Indigo House Director and the Housing Market Partnership.

1.4 Monitoring and Review

1.4.1

The Scottish Government require the HNDA to be comprehensively reviewed every five years with yearly updates to the key figures. In the interim Housing Services will continue to monitor trends in key areas regularly to assist in the development of other strategies and policies, for example the Strategic Housing Investment Plan. Should there be any significant changes or new data released, reports to Council and/or the Housing Market Partnership will be drafted to provide an update.

2. HOUSING MARKET DRIVERS

2.0.1

This chapter identifies key factors driving the local housing market, including household formation, population and migration, housing affordability including income, house prices, rent levels, access to finance and key drivers of the local and national economy. This information is used to inform the choice of scenarios run in the HNDA Tool.

2.1 Demographic Trends

Population

2.1.1

Orkney had an estimated population of 22,540 people in 2021, with a slightly older age profile compared with Scotland overall, with proportionately fewer people aged 16-24 and 25-44 years and proportionately more people in the older age groups.

Figure 2.2: Age profile of Orkney and Scotland population (%)

IMAGE: Bar chart comparing the percentage of the Orkney and Scotland populations by age group. Orkney values are 8% for ages 16 to 24, 22.1% for ages 25 to 44, 29.5% for ages 45 to 64, 13.1% for ages 65 to 74, and 11.5% for ages 75 and over. Scotland values are 10.2%, 26.4%, 27.2%, 10.9%, and 8.7%, respectively. Source: NRS mid-year estimates 2021.

2.1.2

Since 2001, the population in Orkney has increased by 17%, compared with 8% across Scotland. There has been a 7% reduction in the population aged 0-15 years, compared with 6% across Scotland. The working-age population (aged 16-64 years old) has increased by 10% compared with 6% in Scotland, while the population aged 65 years or older increased by over 70%, compared with 33% for Scotland as a whole. This very significant ageing in the Orkney population impacts on the projections for future households.

Table 2.1: Change in the working-age profile of Orkney residents between 2001 and 2021 compared with Scotland

Source: https://www.nrscotland.gov.uk/statistics-and-data

Household Projections

2.1.3

A key determinant of housing need is the number of households that there are expected to be in future. The household projections used in the Housing Need and Demand Assessment (HNDA) based on 2018-based projections show three scenarios – the principal is based on ongoing trends projected forward, while the high migration scenario projects based on more people moving to Orkney and the low migration scenario based on fewer people moving to Orkney.

Figure 2.3: Orkney household projections (2018-2043)

IMAGE: Line chart showing Orkney household projections from 2018 to 2043 under three scenarios: Principal, Low migration and High migration. The scenarios are close until around 2030, after which the high migration projection rises highest, the principal projection remains in the middle, and the low migration projection remains lowest. The vertical axis ranges from approximately 10,000 to 11,600 households.

2.1.4

There is a fairly modest difference between the scenarios until around 2030, when the estimates diverge slightly so that by ten years later (2040) the low migration scenario has around 100 households fewer than the principal scenario while the high migration scenario has around 70 more households.

Household composition

2.1.5

Household projections are also available by household type and age by local authority by year for 2018-2043 period.

Table 2.2: Household projections by type, various scenarios

Principal

High migration

Low migration

Source: NRS household projections (2018-based)

2.1.6

In all scenarios, there is projected to be a significant increase in single and two-person households and a reduction in the number of families over time.

2.1.7

There are also sub-LA projections, providing population estimates at a lower level of geography. This 2018-based principal population projections by sex and single year of age, from 2018-2030 for –

• East Mainland, South Ronaldsay and Burray
• Kirkwall East
• Kirkwall West and Orphir
• North Isles
• Stromness and South Isles
• West Mainland.

Table 2.3: Population projections by area and dependency ratios over time (principal)

Source: https://www.improvementservice.org.uk/products-and-services/data-and-intelligence2/sub-council-area-population-projections

2.1.8

The table above shows the largest increase in population projected between 2018 and 2030 in Kirkwall West, followed by East Mainland, South Ronaldsay and Burray. The greatest loss is predicted in the North Isles (-13%) and Kirkwall East (-7%).

2.1.9

These are also the two locations with the highest dependency ratio projected by 2030 – that is the proportion of working people relative to those that are not working (whether younger people, older or economically inactive for other reasons). So, the relative age of the projected population is associated with more population loss over time.

2.1.10

The figure below shows the estimated change in the profile of households by age of reference group between 2018 and 2028, with the greatest expected proportionate growth in the older households. There is also some growth projected in the 16-19 age group and 35-44 years age groups, but a drop in the proportion aged 20-34 years.

Figure 2.4: Projected change in age of household reference person (2018-2028)

IMAGE: Bar chart comparing projected percentage changes in households by age of household reference person in Orkney and Scotland between 2018 and 2028. Orkney shows the greatest increases among older age groups, especially people aged 85–89 and 90 and over, while the 20–34 age groups show declines. Source: 2018-based Household Projections (Council area profiles).

Net Migration

2.1.11

Overall, there has been positive net migration to Orkney in recent years, ranging from less than 60 people in 2002 to more than 250 in 2018, and almost 200 people most recently, in 2021.

Figure 2.5: Orkney net migration (2002-2021)

IMAGE: Bar chart showing annual net migration to the Orkney Islands from 2002 to 2021. The values are: 58, 142, 261, 135, 200, 143, 95, 88, 163, 99, 106, 80, 67, 100, 223, 204, 253, 145, 167 and 218, respectively.

2.1.12

The most recent migration figure represented net in migration in all age groups, except those aged 15-19 years and 65-69 years. There was a net migration outflow of 19 people aged 15-19 years and 8 people aged 65-69 years. There were 54 more children aged 0-14 years and an additional 185 people of roughly working age (between 20-64 years).

2.1.13

A key indicator for sustainable economic growth in future is the working age and non-working age balance in the population. Recent research for Highlands and Islands Enterprise found very high dependency ratios (the proportion of people of non-working age compared with those of working age) across the Highlands and Islands, with the Orkney Islands predicted to have a dependency ratio at 85.7 by 2043, compared with 81.8 across the Highlands and Islands and 65.9 across Scotland.

2.1.14

These projections are based on past trends and do not take into account the economic development projected for Orkney over the next 20-30 years as discussed later. The migration projections are based on the five years prior to the base year (2018) so this would be based on lower rates than more recently – an average of 135 net migrants per year between 2013-2017 compared with an average of 197 per year between 2017-2021. This means the principal projection gives around 60 fewer new migrants per year than recent figures suggest.

2.1.15

It should also be noted that these official statistics do not take into account the supplementary population – agency staff and contractors that live in Orkney required for a range of public and private sector services, who are permanently resident elsewhere, but who nevertheless require housing accommodation on Orkney. These workers will not be included in household population statistics. The Essential Workers Housing Strategy research commissioned by OIC in 2023 shows that there has been an increasing requirement for agency/interim/locum staff to deliver the essential public services in the islands, and it is projected that this type of employment will continue for at least the next decade due to the ageing resident workforce. As at March 2023 there are at least 165 bedspaces constantly used by agency staff required by the public sector who are mainly housed by employers in the private rented sector. There is no specific housing for this group of workers (apart from Graham House nurses home) and therefore they are displacing permanent residents.

2.1.16

The Essential housing strategy also included surveys with recent or possible movers that have moved or want to move to Orkney for work, and Orkney employers. These showed clear quantitative and qualitative evidence of migration being constrained due the lack of housing for incoming permanent workers. The vast majority of recent movers (80%) said it was difficult or very difficult to find housing when they moved to Orkney, and 60% of employers said that it was difficult to recruit employees, with the two main reasons cited being lack of people available to recruit within Orkney (77%) and lack of suitable housing for potential employees (62%). Furthermore, 34% of businesses said that over the past three years or so, employees have been unable to stay with their business / organisation due to a lack of suitable housing and 54% said that potential recruits have not been able to join them due to a lack of suitable housing.

HNDA tool

The HMP agreed to three core scenarios with the principal scenario based on more recent migration rates and the higher migration variant based on higher than expected migration to meet constrained workforce requirements (see below). The low migration scenario is based on the unadjusted NRS low migration estimates.

In consultation with the Island Development Trusts, it was agreed not to produce a scenario to reflect projected population decline in the Isles.

2.2 Affordability Trends

House prices

2.2.1

Average house prices in the Orkney Islands have increased over time and are now much closer to the Scottish average than previously. The average house price in 2021-22 was £186,956, compared with £201,744 for Scotland overall. Average Orkney prices have edged above those of Shetland and remain significantly higher than in the Outer Hebrides.

Figure 2.6: Average house prices, Orkney compared with Scotland and other comparator areas

IMAGE: Bar chart comparing average property prices in the Orkney Islands, Shetland Islands, Na h-Eileanan Siar and Scotland. Orkney has an average price of £186,956, Scotland has an average price of £201,744, and Orkney prices are higher than Shetland and substantially higher than Na h-Eileanan Siar.

2.2.2

The Q4 2022 Scottish Housing Market Review reported data from UK HPI that the elevated level of house price growth since the Covid-19 pandemic continued in Q3 2022, although there are signs it might be slowing, with the average Scottish house price increasing by an annual 8.8% to £193K, down from 11.7% in Q2 2022.

2.2.3

In the HNDA tool the default scenario in house price growth is equivalent to the annualised growth rate of the average Scottish house price (UK HPI) over the last ten years, which is 1.6% per annum. In the lead up to the 2008 financial crisis, the growth rate of the average Scottish house price was persistently high (around 15% year on year growth in the three years prior to the 2008 financial crisis, according to the UK HPI). However, in the aftermath of the 2008 financial crisis, a combination of reduced mortgage availability and increased unemployment put downward pressure on the average Scottish house price.

2.2.4

Over the past ten years though, volatility in Scottish house price growth has moderated, with a fairly stable average growth rate of around 1.6% per annum. The HNDA tool Guidance stated that latest Scottish Fiscal Commission forecast of house prices (published in February 2020, pre-Covid-19) predicted that the year-on-year change in the Scottish house price would be 1.9% from 2021-22 until the end of the forecast period (2024-25). The HNDA core/default setting is slightly lower; however, owing to the adverse economic effect of Covid-19 that has transpired since this forecast was produced, we think that this is a reasonable, long-term assumption.

2.2.5

Orkney house prices have grown at a faster rate than across Scotland more recently, which is why prices are starting to converge on the Scottish average. Over the last ten years, this increase has been an average of 5% each year.

The HMP agreed to scenarios based on moderately high price growth and very high price growth variants as most likely, rather than the default modest house price growth.

Income

2.2.6

The 2022 CACI income data has been explored to look at how incomes compare to house prices. East Mainland incomes are highest, with a lower quartile income of £25,559 compared with the Isles at just £15,512.

Table 2.4: Incomes by area (CACI data)

Source: CACI Data: 2022

2.2.7

The Essential Worker Housing Strategy found that the incomes of incoming workers tended to be higher, compared with Orkney residents – ranging from £35K-£52K for incoming workers compared with £25K-£26K for the average Orkney public sector keyworker recruit suggesting that more senior or specialist workers are recruited more commonly from outwith Orkney.

2.2.8

It is typical to consider affordability using a ratio of income to housing costs, with housing costs of around 25-35% of income as a typical affordable range. Given the current cost of living crisis and increased energy costs, it is likely that a lower threshold of closer to 25% would be more appropriate.

2.2.9

At the lower end of the income spectrum, in the Isles, an income of £15,512 would mean an affordable housing cost would be £323 per month at a 25% affordability ratio and £452 at 35%. For the higher income areas with lower quartile incomes of over £25,000, this range would be between £532 and £745 per month.

2.2.10

Recent work by the Fraser of Allander Institute has reported an unprecedented stagnation of earnings and household incomes in Scotland (as in the UK) in the decade following 2009/10. Between 2009/10 and 2019/20, household disposable income grew at less than half the rate it had in the previous three decades. By 2021, typical weekly earnings were around £80 per week below what they would have been had long-run trends before 2010 continued. They also reported that income inequality in Scotland, while lower than in the UK as a whole, is above the average of European countries. Inequalities of earnings, wealth and educational attainment are also relatively high in Scotland, and have remained persistently so for many years.

2.2.11

Annual Survey of Hours and Earnings data show average earnings growth between 2009 and 2021 of 3.7% in Orkney and 2.5% in Scotland (from NOMIS). Up until recently, this would have represented high real terms income growth (based on inflation of 2%). However, inflation has recently outstripped these income growth rates in the most recent period. The OBR’s most recent projections are for RPI inflation to reduce to 2.8% by 2027 (from 8.9% in 2022).

The core assumption of modest income growth in the HNDA tool may be optimistic in the short term but more likely over the longer period. The HMP agreed to scenarios based on modest income growth, with higher income growth in the high migration variant.

House price affordability

2.2.12

A lower quartile house price in the cheapest market (in the Isles) – at £63,750 – would be £352.33 per month, based on a 5.5% mortgage interest rate and 10% deposit. On the East Mainland the mortgage payment on the lower quartile price with a 10% deposit would be £788.25. The Isles are more affordable, while the East Mainland is on the margins of affordability. However, there were only around 50 sales on the Isles in two years so supply in the cheaper areas may constrain the market there. There is also likely to be considerable difficulty securing mortgages with lower income levels at present.

Table 2.5: House prices by location 2019/2020

Source: CHMA datapack/Sasines data, 2019/20

2.2.13

Using income multiple as an indicator of affordability (as used in the HNDA Tool), the ratio of lower quartile house price to income is 4.1 in the Isles ranging to 6.1 in Stromness (compared with the default multiplier threshold of 3.9 in the HNDA tool).

2.2.14

So lower quartile house prices are not generally affordable at lower quartile incomes. Median house prices are closer to being affordable but still range from 3.8 in the Isles to 4.8 in Stromness.

Table 2.6: Affordability ratios - House price to income ratios by location

Sources – 2022 CACI data, 2019/20 house prices (CHMA datapack)

Volume of sales

2.2.15

The latest data on sales volumes (up to 2021/22), shows that sales of properties in Orkney had increased over recent years before the pandemic in 2020. Previously, the last dip in sales was after the global economic crisis in 2008. This, alongside data on price increases indicates a more recent increase in demand for owner-occupied housing.

Figure 2.7: House sales over time, Orkney Islands

IMAGE: Chart showing the number of house sales in Orkney over time. The chart indicates increased sales in recent years, with a dip after the 2008 global economic crisis and a further change during the Covid-19 pandemic.

Access to mortgage finance

2.2.16

The HNDA tool test for mortgage affordability is that the house price is no more than 3.9 times the household’s income. To calculate this, the mean loan-to-value ratio for a first-time-buyer mortgage in Scotland in 2019/20 (82%) and mean loan-to-income ratio (3.2) were obtained from UK Finance. To get the house price to income ratio, 3.2 is divided by 82%.

2.2.17

The ‘rental choice’ default in the Tool is set at 60%. This assumes, of those who can afford mortgage repayments, only 60% also have the deposit to actually go on to buy.

2.2.18

The latest Scottish Housing Market Report showed a challenging picture for home ownership. Lending to both first-time buyers and home movers fell in Q3 2022, with new mortgage advances to first-time buyers decreasing by an annual 15.9% whilst for home movers they decreased by 8.1%. The large annual decrease can be explained by the high number of new mortgages advanced in Q3 2021 and rises in interest rates (Source: UK Finance).

2.2.19

The Bank of England increased the Base Rate nine times since December 2021, taking the rate from 0.1% to 3.5%. This was estimated to increase the monthly payment by around £300 on an average new variable rate mortgage and by £170 on an average outstanding variable rate mortgage in Scotland.

2.2.20

In Q3 2022, the mean Loan-to-Value (LTV) ratio on new mortgages advanced to first-time buyers in Scotland stood at 83.1%, an annual increase of 1.3 percentage points. Meanwhile, the mean LTV ratio for home movers in Scotland stood at 71.7% in Q3 2022, up 0.5 percentage points over the one year period.

2.2.21

ONS data shows that, In the financial year ending 31 March 2021, the average home sold in England cost the equivalent of 8.7 times the average annual disposable household income, while in Wales the ratio was 6.0, and in Scotland it was 5.5. This suggests that, although access to mortgage finance is becoming more difficult, Scotland is more affordable and the HNDA tool assumption of a multiplier of 3.9 is reasonable for lower income households.

The HNDA default is used in the HNDA tool – 3.9 mortgage multiplier and 60% who can afford to buy will do so. This allows for people who could afford a mortgage not having a deposit and so not being able to secure mortgage finance. The HMP expressed concern that houses are often sold off-grid or with very high ‘offers over’ prices, so a 50% rate was tested as one of the sensitivity tests (Appendix 3) to reflect more constrained ownership.

Private Rents

2.2.22

The average 2-bed rent in the Highlands and islands was £643 – the Broad Rental Market Area that includes the Orkney Islands. The 2-bedroom Local Housing Allowance rate is £126.58 per week or just under £550 per month. Rents in the Highlands and Islands have increased at a rate slightly below the Scottish average, between 2010 and 2022.

Figure 2.8: Rents by BRMA (2021)

IMAGE: Bar chart comparing average monthly rents for two-bedroom properties in Scottish Broad Rental Market Areas in 2021. The Highlands and Islands value is £643 per month, while Lothian has the highest value at approximately £1,000 per month. Scotland is highlighted at approximately £730 per month.

Figure 2.9: Change in rents by BRMA (2021-2022 and cumulative 2010-2022)

IMAGE: Bar chart comparing cumulative rent changes from 2010 to 2022 with changes from 2021 to 2022 across Scottish Broad Rental Market Areas. The Highlands and Islands shows cumulative growth of approximately 29% and annual growth of approximately 6%.

Table 2.7: Local Housing Allowance rates

LHA rates from April 2022, Orkney Islands Council

2.2.23

A look online at available lets shows these in short supply, with a 4-bed property in the Isles for £550 and a 3-bed modern apartment on the West Mainland advertised for £750 per month on one site and Facebook having two 1-bed flats advertised for £425 and £525 per month. These cheaper rents would be affordable for people earning between £20,000-£25,000 (the range between a 25% and 35% of income). The £750 per month rent would be affordable for people earning between £26,000-£36,000.

2.2.24

Orkney Islands Property Developments Ltd rents data showed 1-bedroom properties at around £400-£450 with larger properties at around £600-£700 a month. Another letting agent (D&H Law) indicated rents of £600-700 for 2-bedroom properties in Kirkwall with prices in Stromness similar. These rents would be affordable at incomes of around £20,500-£28,000 for a £600 rent and salary of £24,000 to £33,600 at a £700 rent.

2.2.25

Rents were higher (£850) for 3-bedroom property in Kirkwall with outside space. That would need an income of £30,000- 40,000 per annum to be affordable. That would be around the median income for Orkney (£34,468).

2.2.26

Smaller private rented properties with rents at below the 2-bed LHA rate (£550) are affordable at lower quartile incomes in East and West Mainland and Stromness but on the margins of affordability in Kirkwall and the Isles (where lower quartile incomes were £15,500 to £19,300).

2.2.27

The private landlord survey undertaken as part of the Essential Worker Housing Strategy research in 2023 asked private landlords for indications of rent levels with responses as shown below. Over 70% of landlords stated that rents were increasing either significantly or a bit over the past 3 years. There is also an expectation that demand will continue to increase over the next 3 years - 60% think that demand will increase, including 36% that think it will increase significantly. When “don’t know” responses are factored out, the relevant figures are 78% and 46% respectively.

Table 2.8: Were you to put the following types of property on the market for long-term residential let, what is the approximate monthly rent level that you would look for?

Source: Orkney Islands Private landlord survey 2023

Table 2.9: If you have long-term residential lettings, how would you describe the demand that you have for the privately rented properties that you have in Orkney?

Source: Orkney Islands Private landlord survey 2023

2.2.28

The Q4 2022 Scottish Housing Market report found that Private housing rental prices continued to increase in November 2022, rising by an annual 4.4% in nominal terms, the highest since the series began. (Source: ONS). Data based entirely on new let rents, such as letting agent data, shows higher growth rates in recent months.

Given the lack of PRS supply in Orkney at present and the generally high increases in private rents, a higher expected rent growth scenario in the HNDA tool is used (very high growth for high migration).

Social Rents

2.2.29

Social rents are relatively more affordable than private rents, as the latest Annual Return on the Charter data shows (weekly rents, compared with the Scottish average).

2.2.30

Comparing a three-apartment (2-bed) rent with lower quartile incomes, these social rents would be broadly affordable at lower quartile incomes even in the Isles. £86.32 per week equates to 28% of the lower quartile income in the Isles and 23% of the lower quartile income for Orkney as a whole. A rent of £92.50 per week is 31% of the lower quartile income in the Isles and 24% of the lower quartile income for Orkney as a whole.

Table 2.10: Average weekly rents - Orkney Housing Association and Orkney Islands Council

Source: https://www.housingregulator.gov.scot/landlord-performance/landlords

2.2.31

Affordability analysis by Arneil Johnstone in 2021 found that OIC rents were on average 8% higher than comparable local authority rents and OIC had the seventh highest rents in Scotland, on average, compared with other local authorities. Rents were on average 2% lower than local RSL rents, though, with rent increases at below the Scottish average in recent years. Projected OIC rents for the next 5 years were expected to sit on average 22% below the Local Housing Allowance rate.

2.2.32

The default rent to income affordability ratios to test market rents in the HNDA tool are reasonable and in line with long-standing approaches to affordability assessment. If a household spends less than 25% of their income on rent the Tool assumes they can afford to rent in the private sector. This threshold has been used historically as the threshold for PRS affordability. If a household spends between 25% to 35% of their income on rent the Tool assumes they are suitable for below market rent. If a household spends more than 35% of their income (including housing benefit) on rent the Tool assumes they are suitable for social rent.