Affordable housing: repairing the system

Fixing the broken housing system

5 July 2017

Sarah Sayce argues that overreliance on the private sector, methods for valuing land and the way viability assessments are working mean that there is less provision for affordable housing and communities are missing out

The government published its housing white paper in February, and its main pronouncement is that the system is broken. Despite repeated attempts to understand how to stimulate supply, the government remains convinced that the failure to build sufficient houses is due both to a planning system that is riddled with delays and to a reluctance by landowners, including those in the public sector, to bring land forward.

Yet these are not new complaints; many readers will remember Kate Barker’s reviews of housing supply in 2004 and land-use planning in 2006. Solutions put forward by successive governments have focused on speeding up the planning system and making it easier for developers to get consent, culminating in the 2012 National Planning Policy Framework (NPPF), with its presumption in favour of sustainable development and other planning relaxations.

In private hands

Scant regard has been paid to one very obvious reason for supply shortfall, however This is the almost total reliance on the private sector to supply dwellings either for sale on the open market or for the social sector through direct provision or section 106 contributions. Indeed, the great sell-off of council housing in the 1980s left local authorities in a position where they could not contribute effectively to new stock.

The result was that local authority building, which had provided up to two-thirds of new provision in the 1960s and early 1970s, fell away to a contribution of virtually nothing from 1990 onwards, as the London Housing Commission and the Institute for Public Policy Research reported in 2016.

Since then, local authorities have become the owners of increasingly unattractive portfolios that have in many cases passed to housing associations. Furthermore, the provision of affordable housing, according to the government’s own statistics, fell by 52% in 2015/16.

The white paper’s diagnosis is that large developers build too few houses and planners do not identify land for sufficient new building. It proposes to ensure that more land comes forward, using compulsory purchase orders (CPOs) if necessary, so institutions and small builders are more fully involved and more innovative and diverse in terms of provision and tenure.

While this is all very laudable, there is little that addresses one particular broken provision of the current system: namely, ensuring there are sufficient levels of contributions from developers, which currently underpin the supply of affordable housing through section 106 agreements.


The current system results in rising land prices and falling affordable housing supply

There is an intention that the NPPF will ensure a minimum of 10% affordable housing, but other than that, the white paper simply says the government 'is exploring an improved approach to developer contributions'.

Many adopted development plans specify far more than the unambitious 10% in the proposed revisions to the NPPF. I would draw the government’s attention to research that colleagues and I undertook for a consortium of London boroughs last year, which wanted to understand how, in a time of rapidly rising land and house prices, developers were able to argue that the levels of affordable housing provision required by approved planning policy were not economically viable.

The research found that the test for economic viability, as set out in the NPPF, is unintentionally inflating land values and having a significant, negative impact on affordable housing provision.

Indeed, we concluded that the cumulative changes to planning policies, as they operate in practice, have shifted the balance of power between developers, landowners and communities, mainly benefitting landowners through inflated land prices while affordable housing provision has stuttered.

Since the financial crash in 2008, average London house prices have nearly doubled and, according to one source, land values have risen by 150%, yet annual new affordable housing supply in the capital has dropped by 37%. This is counterintuitive, because such rises should have enabled rather than reduced affordable housing provision. How did this unacceptable situation arise?

Can do, will do

The good news is that much of the NPPF and subsequent changes to planning regulation have fostered a 'can do, will do' attitude among developers. This was the government’s intention, and it has worked.

However, the NPPF also embedded the concept of economic viability and the notion that developers should obtain competitive returns. There is nothing wrong in this: property development is notoriously risky, and without a realistic prospect of a positive return, the development pipeline soon falters. The history of failed development taxes tells us so.

Nonetheless, our analyses of the legislative position and of appeal decisions, together with a range of in-depth interviews, revealed deep flaws in the way the system is operating, particularly in how land value is calculated for viability testing. This is a major cause of reduced affordable housing supply.

The argument depends on the way that land is valued for the purposes of assessing whether it is economically viable to provide policy-approved levels of contribution, which in turn hinges on whether the price paid by the developer for the land is sound and defensible.

Under current policy, developers can negotiate away from plan-level provision based on an assessment of viability calculated on an assumed benchmark or threshold land value. But how should this be calculated?

We found strongly opposing views, which mirror the differences that can emerge from interpretations of the RICS Financial viability in planning guidance note and the Harman report from the cross-industry Local Housing Delivery Group.

Some consultants acting for developers and landowners argued that the price paid for the land should be used as the benchmark, as long as it can be supported by comparable evidence from other transactions or offers.

Others disagreed, and supported the notion of an 'existing use-plus' approach, which better allows for fulfilment of the policy requirements because it limits the amount of land value that can be built into the valuer’s calculations to establish what is 'economically viable'.

The result of the first approach, supported by some planning appeal decisions – though not by all – is that the more a developer pays, the less the contribution it can make to affordable housing provision without compromising its economic return. Therefore, there is no incentive for a developer to negotiate the land price down.

The result is rising land prices and falling provision of affordable housing, with no significant boost to overall housing supply. This creates a vicious circle in which manipulation of the NPPF’s intent results in the community losing out and landowners benefitting from inflated prices.

Recommendations

We recommended that changes be made to economic viability testing immediately, including reducing testing to only those sites where there are clear barriers to supply.

We also argued for firmer affordable housing targets – similar to the Community Infrastructure Levy, which the research revealed was now widely supported as clear, transparent and therefore something with which developers can work.

Importantly, we concluded that viability assessments should take into account the current use value of land; indeed, we need a complete rethink of how the development appraisal model is applied to determine developer contributions.

We also recommended that this should include a better understanding of just what constitutes a developer’s economic return, because the research interviews revealed a lack of common understanding or expectation about this and a failure to adjust to the benign development climate in London over the study period.

But these measures may not be sufficient. Our research also found support for CPOs and reconsideration of other mechanisms such as community land auctions or even – dare we say – some level of additional development levy.

This is clearly an area in which RICS is well placed to take a lead by offering professional guidance to practitioners and technical policy advice to government to ensure it can assist in creating a well-functioning, transparent and fair system that ensures the community benefits from the land development process.

Current guidance requires overhaul: reliance on it has proved to be part of the problem by establishing a situation where, arguably, the more the developer pays for land the less the community gains in section 106 contributions.

An approach in which the importance of comparable evidence cannot be overemphasised is helping to inflate landowners’ expectations and may, in some cases, be depriving the community of the social housing it needs.

In conclusion: the situation considered untenable by Barker in the last decade is still deemed broken in 2017. Let’s all ensure we do not wait another decade to fix it.

Sarah Sayce FRICS is Professor of Sustainable Real Estate, Royal Agricultural University

Further information

Download a complete “Affordable housing: repairing the system” PDF