The ‘spend 30% of your income on rent’ rule is now obsolete
We’ve all heard about the 30 per cent rule of thumb. And for those who haven’t, it’s the idea that a household should spend no more than 30 per cent of its income on housing costs. This has long been accepted in academic circles and is often included in blogs, websites and rent calculators.
Propertyfinder.ae’s experts take a closer look at the 30 per cent rule for measuring affordability. Results led us to ask ourselves: does this rule make sense for everyone today? And should it even be a rule at all? The short answer would be no.
First, because it’s obsolete. The 30 per cent rule for measuring affordability can be traced back to 1969, when housing regulations in the US capped public housing rent at 25 per cent of a tenant’s income (reaching 30 per cent in the early 80s). The amendment was passed as a response to increasing rents. At that time, the government chose this percentage based on what consumers were spending rather than what they should be spending.
Second, because it ignores other financial factors such as loans and mortgages, and it is not applicable to everyone. In fact, different households earning the same annual income spend considerably different amounts of money on basic necessities.
Rule of thumb
The problem with making an average a financial rule of thumb is that it does not take into account the variations of what individuals do and the changes in balance sheets and financial obligations of today’s consumers vs those of the 60s.
With the help of Vince Truong from US CFP and partner at Holborn Assets, propertyfinder.ae gathered information on various income brackets to find out the real percentage of monthly salaries spent on housing expenses. This is what we found out. * Individuals and families with a lower income ranging from Dh8,000 and Dh15,000 spend between 37 per cent and 52 per cent of their monthly salaries on housing expenses. The percentage is at the highest when it comes to families with children, and it is far off the 30 per cent rule. * Households earning between Dh15,000 and Dh25,000 a month tend to spend between 34 per cent and 49 per cent of their monthly incomes, where families with children spend noticeably higher than singles or families without children. * Residents earning between Dh20,000 and Dh35,000 are the closest to the rule of thumb, as they spend between 27 per cent and 33 per cent of their monthly incomes on their homes. * Residents at the higher end of the job market earning from Dh50,000 and above tend to spend between 18 per cent and 33 per cent of their income on rent depending on their marital status. Singles definitely spend less at 18 per cent while families of two kids spend 33 per cent.
Varied needs
These numbers show that all renters’ needs are not alike. Depending on marital status, level of income, lifestyle, etc., the percentage people decide to spend on their rent will vary.
So, forget the 30 per cent rule. Instead, track your spending. Create a budget tracking all your current expenses in order of priorities to see how much is left for housing. This way, you will have a clear picture of your financial situation and can try different scenarios to determine how much you can afford to pay.