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Read on for our latest member blog, from Richard Cook, Associate – Economics at the Pegasus Group. This blog follows on from Richard’s presentation at the IED Annual Conference in November 2017.

In his Autumn Budget last year, the Chancellor pledged to increase the construction of new homes to 300,000 per annum by the mid-2020s.

As a rule of thumb, local authorities generally require housing schemes above a certain size (for example, ten units) to deliver between 30% and 40% affordable dwellings. Apply this to the government’s target and you’re looking at a requirement of around 100,000 affordable homes per year.

A question to ask here is: what exactly constitutes “affordable”? The National Planning Policy Framework defines it as:

• Social rented housing: owned by local authorities and private registered providers.
• Affordable rented housing: rent is no more than 80% of local market rent.
• Intermediate housing: homes for sale or rent at a cost above social rent, but below market levels.

Analysis by the Office for National Statistics shows that between 1997 and 2016 house prices in England and Wales increased by 259%. Median earnings rose by 68% over the same period, making affordability a significant issue when it comes to housing. The latest data shows that just over 40,000 affordable homes were delivered in 2016-17 and at no time in the last decade has the figure been anywhere near the annual requirement of 100,000 homes.

This begs the question of what challenges need to be overcome to start delivering more affordable homes. I could produce a long list of responses to this, but I’ll keep it brief and outline three issues with the current system:

Viability: Where developers are asked to provide a certain percentage of affordable homes on schemes, a viability report will often be commissioned to explore the extent to which this requirement makes a scheme financially viable. This can be a particular issue in areas with low land values.

Integrating affordable housing and private housing: Affordable housing needs to be integrated with the rest of a development, rather than being segregated. This isn’t always the case and means there can often be a stigma attached to it.

Building by local authorities: Historically, local authorities built homes on a large scale. In 1969 they built around 136,000 homes but this figure declined substantially until 1999 when only 50 homes were completed. While the number has been rising in recent years, only 2,000 homes were completed by local authorities in 2016.

The scale of housing need means the issues I’ve outlined aren’t going to be solved overnight. The government has a major role to play and has launched several initiatives to try to boost supply, including Starter Homes and the Affordable Homes Programme. The latter is administered by Homes England – launched on 11th January as the successor to the Homes and Communities Agency. The new agency is aiming to develop a commercial approach to developing sites in areas of high demand and strategic importance, so hopefully this speeds up delivery and is reflected in the statistics over the next few years. 

I think Housing Associations are going to become increasingly important in meeting demand, especially as they can potentially deliver sites that are unviable for private sector developers. Housing Associations are also becoming more innovative in the way they deliver schemes – a good example of this can be found here in relation to a site in Sheffield. I’ve highlighted how building by local authorities has declined substantially, but their role remains important and there are still examples of where they are taking the lead in delivering affordable homes – have a look at the Housing Affordability Fund in Manchester.

Modern methods of construction also need to be considered. This includes modular construction, where the build timeframe can be cut by six months or more when compared to traditional methods. Companies such as Legal & General and Laing O’Rourke are leading the way on this front and I think that modular construction will become far more prevalent over the next 2-3 years as costs start to come down.

If the challenges to delivering more affordable homes can be overcome, the benefits to local growth will be significant. New housing not only brings economic benefits to an area in the form of jobs, increased spend etc, it also has a positive environmental and social impact – which all helps with the wider place-making agenda and in delivering growth that is fully inclusive.

Richard Cook is Associate – Economics at the Pegasus Group. This blog follows on from Richard’s presentation at the IED Annual Conference in November 2017.