Memorandum by Centre for Residential Development,
Nottingham Trent University and Three Dragons (AFH 55)
1. INTRODUCTION
The Centre for Residential Development at The
Nottingham Trent University and Three Dragons have separately
and together, over the last two years, undertaken research on
aspects of affordable housing for a number of organisations including
the DTLR, GLA, English Partnerships and Communities Scotland.
This memorandum reflects our collected views developed through
our research activities and independent evaluation.
We comment on:
— the definition of "affordable";
— the role of low cost home ownership.
(How resources should be balanced between social housing and options
for owner occupation);
— planning gain and funding. (The extent
to which planning gain can fund the level of affordable housing
required); and
— scale of provision for housing.
We also provide at Annex A comments on the use
of tariffs. These comments build on our response to Reforming
Planning Obligations, DTLR, 2001.
2. THE DEFINITION
OF AFFORDABLE
HOUSING
A flexible definition of "affordable"
is helpful and should be retained. Flexibility allows local areas
to respond to local needs and to changes in market/economic circumstances.
A model which, for instance, only delivered social rented housing
would not benefit all households who wish to rent (but cannot
afford market rents) or assist in meeting demand for low cost
home ownership. The housing needs of households who cannot/do
not want to buy are not all the same—one size does not fit
all.
We have significant reservations about the quality
of local housing needs assessments (HNAs). The figures produced
by needs assessments are sometimes less than convincing. Too often
local needs assessments show high levels of demand for social
renting on the basis that this is what young people can currently
afford without taking account of potential income growth when
they leave home. In the case of older households little account
is taken of equity in existing properties. HNAs, which indicate
that potential demand for affordable housing exceeds total new
supply, are not helpful to local authorities in framing policy.
HNAs also provide a snapshot of potential demand for affordable
housing. Further guidance on HNAs is required. Local authorities
should be advised of key indicators (eg relationship between house
prices and local incomes, number of empty and difficult to let
properties) to monitor within and between HNAs to indicate how
needs for affordable housing are changing.
But that flexible definition must provide a
genuinely affordable product. Because new properties are on average
30 per cent more expensive than comparable second-hand properties
a modest initial discount on purchase of a newbuild property rarely
provides a product that is affordable either initially or in the
long term.
In our view, Government should reinforce its
current policy position that affordable units should be less expensive
than "houses generally available on the open market"
(para 4 Circular 6/98) and local authorities need to be more robust
in the way they word and implement policy.
3. THE ROLE
OF LOW
COST HOME
OWNERSHIP
Low cost home ownership (LCHO) can help meet
the needs of middle income households in higher priced areas.
Our researches on this subject complement evidence from Rowntree
and other sources suggesting that in parts of London and the South
East in particular but also in the South West and the East of
England, potential demand for LCHO exceeds supply by as much as
ten-fold. We recognise that demand for social renting can also
exceed supply, but believe that local authorities should be encouraged
to promote a range of housing options to meet local need. This
could most effectively be done by ring-fenced funding for LCHO
in those regions where there is clear evidence of need.
Not all middle income households will require
LCHO. For some households renting will be a more appropriate form
of tenure, reflecting their stage in household lifecycle.
4. PLANNING GAIN
AND FUNDING
Our experience is that local authorities are
increasingly looking to developer-led housing schemes to deliver
affordable housing. Targets set by councils for the amount of
affordable housing on each site seem often to be made with little
understanding of the economics of development. Councils may not
really know if they are expecting too much or are being timid
in what they ask for.
There is a need for a much better understanding
of the economics of residential development and the relationship
of this to the delivery of affordable housing and the production
of residential urban capacity studies. Our work for the GLA involved
the production of a model that provides information on a borough
by borough basis on the economics of affordable housing provision.
We believe that this type of information can be useful, along
with other considerations (eg local need), both in framing policy
and in assisting with site by site negotiations. (On-going ESRC
funded work at the Centre for Residential Development on assessing
the viability of urban housing development is extending understanding
of the economics of residential development).
There are three parties that can make a contribution
to the provision of affordable housing:
— the registered social landlord (RSL)
itself—through a loan taken against income from scheme and/or
use of own reserves;
— the developer—by profit forgone
on affordable housing units or a discount on land value);
— the public purse (through grants
to RSLs provided by the Housing Corporation or by local authorities).
There is a need to understand how these different
funding pots work and how they vary in different circumstances.
A major issue is that the level of public funding
for an individual scheme reflects build costs and land prices
in the area. This means that public subsidy is greatest in areas
of high house and land prices. Yet it is in these areas, where
the amount of developer contribution is potentially greatest,
that the private sector could contribute more. (eg our work for
the GLA showed that estimated residual values in one Inner London
borough were of the order of £25 million per hectare, yet
the public subsidy available for the provision of affordable housing
was £108,000 for a two bed unit. This compares with a typical
outer London borough where the estimated residual value was £2.5
million but the public subsidy for the same unit was £55,0000.)
This means that the most effective use is not being made of public
funds to maximise the delivery of affordable housing. The rules
governing the use of Housing Corporation funding for the provision
of affordable housing on mixed tenure sites should be reviewed
and consideration given to the reduction of the subsidy available
in high value areas and to maximising the contribution from residual
value.
Funding for affordable housing from commercial
uses
There is a case for eliminating discrimination
between different sorts of development and requiring all types
of development to contribute to financing affordable housing.
Similarly the threshold below which residential development sites
are not required to make a contribution to affordable housing
provision should be abolished. There can be no justification for
penalising developers of larger sites and there is ample evidence
that in many districts those sites that come forward are typically
below the current thresholds and it is not unusual to find authorities
where the typical site is below five units.
Tariffs
The extension of the requirement to contribute
to affordable housing provision requires a level playing field.
We therefore support the proposal for a tariff system contained
in the recent consultation paper on planning obligations. We think
that tariffs are more transparent, allow for local flexibility
and can apply equally to housing and other development types.
However if councils do not understand how much for to ask under
present regime, how will they know how to set tariffs? In Annex
A we set out a possible mechanism based on the residual valuation
method used for the GLA.
5. SCALE OF
PROVISION OF
HOUSING
It is pointless to increase the proportion of
total housing supply that is allocated to affordable housing if
the overall supply is insufficient to meet the need. The question
of the right level of overall housing production is a complex
one that we do not propose to address in detail here. It must
however be of concern to the Committee and inform its views on
affordable housing supply.
In this context we would point out that house
building in the UK is now at a historically low level. In 2001
the lowest level of housebuilding in peacetime for 77 years was
recorded, ie fewer houses were built in 2001 than in any year
since 1924, excluding World War II. In London last year, there
were 184,000 extra households, but only 58,000 houses were built.
The UK in recent years has spent 3 per cent of GDP on housing
investment compared with 7.5 per cent in Germany and 6.3 per cent
in France.
Annex A
Tariffs: a proposed mechanism for setting a local
tariff
For a tariff to be "affordable" by
a developer in the sense of leaving the developer with enough
money to make a necessary profit and pay for land, the tariff
would have to be set in a way that related to the overall profitability
of the development. Technically, the tariff should not be greater
than the economic rent or excess profit that might arise from
a development. If it is greater than this it will stop development.
Setting a tariff that is related in a detailed
and case by case fashion to the profitability of a development
will be difficult. Information on developer revenues and costs
on a site-specific basis would be necessary to do this in a consistent
fashion. However, if one accepts that (1) development costs vary
much less than house prices and (2) residential land values are
determined residually ie they are determined by what the developer
can afford out of revenue from house sales after non-land costs
have been allowed for, house prices provide an important clue
to residual value before land payments.
As a generalisation, it is likely that where
house prices are high development values, and residual values
will be high. It follows that there is scope to set the tariff
at a higher percentage level where house prices are high and a
lower percentage level where house prices are low. The tariff
could be expressed as a proportion of development value or gross
expected revenue from a development. The overall tariff proportion
and the actual sum received on a site-specific basis could be
calculated by reference to local house prices and published information
about development costs. This information could be derived on
an authority by authority basis, allowing individual councils
to set individual tariffs at the authority level. There would
still be room for site by site negotiation to allow for variations
in development costs.
Notional worked example
Financial contribution = X per cent of expected
gross revenue from selling dwellings on a site with no affordable
housing.
(where X is determined by the percentage target
for affordable housing provision set in the local plan or UDP)
A series of calculations is then performed as
follows
Full market value
Expected gross revenue R1 = (No of units x market
value)—(development cost per unit (including residual land
value) x no of units)
Market value with affordable housing
Expected gross revenue R2 = (No of units x market
value) + (no of units x affordable
value)—(development cost per unit x no of units)
Financial contribution = R1-R2.
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