Funding social and other type of ‘affordable’ housebuilding through private-sector cross-subsidy has its place, but a ‘generational increase’ cannot be achieved without more direct public investment.
In recent decades, policymaking on affordable housebuilding has been focused on delivering larger quantities as part of private-led developments. These efforts have been relatively successful – around ten times as much affordable housing is now provided by private housebuilders without any additional public subsidy than was achieved 20 years ago.
As the Government looks to increase affordable housebuilding, it will be worth asking whether there is even more to be achieved with this approach. This blog looks at the limitations of doing so and argues that if the Government is to achieve a ‘generational increase’ in affordable housebuilding, in the places where it matters most, there is no alternative to substantially increasing direct public investment.
Note: This blog uses the Government definition of ‘affordable housing’, which includes housing for social rent, as well as ‘affordable’ rates (80 per cent) of market rent and shared ownership. For more discussion of changing forms of affordable housing see Box 3 in ‘Restarting housebuilding II: Social housing and the public sector’.
As Figure 1 shows, since the early 2000s, and especially since 2010, an increasing proportion of affordable housing has been provided by private housebuilders as a condition of receiving planning permission.
This has provided a stream of below-market rate housing, even while public grants for affordable housing have halved (albeit generally with lower subsidies compared to market rate housing than were achieved in preceding decades).
The effect of increasing reliance on cross-subsidy has been to tie the fortunes of affordable and private housebuilding more closely together.
Recently, rising construction costs and higher mortgage interest rates have placed a downward pressure on private building and affordable building rates have followed them.
For as long as private housebuilding rates struggle to meet targets, affordable housebuilding will remain low.
Reliance on private sector cross-subsidy also means the location of affordable housebuilding is increasingly determined by the geography of private housebuilding. The correlation between private and public housebuilding rates became much stronger between 2005-2009, the most recent grant dependent period, and 2015-2019, the period of greatest reliance on private affordable housing delivery.
This has meant affordable housebuilding has lost its traditional urban bias. While grant-led building has remained disproportionately urban, reliance on private building has pushed affordable housebuilding toward rural areas.
This would matter less if rural areas had the highest demand for social housing, but this isn’t the case. As Figure 3 shows, cities tend to have the longest priority waiting lists. Cities also tend to have less affordable private rents, and more non-decent private rented stock than rural areas.
If public housing is to be targeted where need is greatest, it will need to separate itself from the current geography of private housebuilding.
Centre for Cities modelling shows that the maximum possible affordable housing deliverable through cross-subsidy varies enormously across the country, as shown in Figure 4.
The Government could achieve higher national affordable housebuilding rates by focusing housebuilding in high-value greenfield locations. Indeed, this is likely to be a by-product of new housing targets and viability guidance.
But, if affordable housebuilding rates are to increase everywhere, and at the scale called for by organisations like Shelter and Crisis, there is no substitute for increasing direct investment.
Currently, many private developers are struggling to find buyers for the affordable housing they committed to delivering, slowing both private and affordable housebuilding rates. Frozen social rents and new safety regulations have placed housing associations and local authorities under increased financial strain, leading them to prioritise spending on maintaining existing stock over buying more houses to manage.
The Government’s new ‘clearing service’ to try to ‘support buyers and sellers to find each other more effectively’ may help at the margins but it won’t change the financial circumstances creating the problem. In some cases, the problem is being ‘resolved’ by converting these properties to market-rate housing, with the developer making a payment to the local authority in lieu of delivering the affordable housing they promised. But, even if this money can be used to fund the same number of affordable houses, they would be delivered with a delay.
A neater short-term solution would be an immediate injection of public grant to plug the gap, giving local authorities and housing associations the money they need to buy this affordable housing as planned.
Beyond this solution though, the problems with Section 106 should be avoided by disentangling affordable housing delivery and private housebuilding. Public authorities should fund and directly coordinate most affordable housing delivery.
The limitations of delivering affordable housing through cross-subsidy don’t mean it shouldn’t be done. As discussed in Centre for Cities’ report on new towns, there are clear opportunities to use land value capture to increase delivery, where market values support it and public intervention can ensure land is acquired at relatively low costs.
But if affordable housebuilding is to be focused in cities, be delivered where cross-subsidy can’t support it, and be resilient to the ups and downs of the private market, public grant is required.
The Government’s recent uplift to the Affordable Homes Programme of £500 million over two years is a step in the right direction but the figure will not lead to a meaningful increase in public housebuilding.
Centre for Cities estimates that, to match affordable housebuilding rates seen between 1956 and 1979, this sum would need to grow to reach £16.6 billion every year. This is a significant, ten-fold increase on what is currently spent, but as Figure 5 shows, it is not without historical precedent.
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