Memorandum by Professor Tony Crook, Ms
Sarah Monk, Dr Steven Rowley and Professor Christine Whitehead[106]
(SRH 41)
KEY POINTS
— Section 106 both enables land and
provides finance— the land is particularly important as
RSLs cannot usually compete on market for "normal" sites.
— Section 106 contributes to mixed
communities as well as supplementing public subsidy.
— Output has been increasing over past
five years and is now 55% of all new affordable housing.
— The bulk of Section 106 affordable
housing goes to the most pressured areas in the South— there
has been a major shift in the location of provision to more pressured/expensive
areas.
— While nearly three quareters of Section
106 units also require public subsidy, this is partly because
of competing planning gain and/or costly sites (brownfield).
— Planning Gain Supplement is designed
to provide infrastructure funding, capture planning gain from
the full range of sites including smaller sites currently below
Section 106 threshold, and speed up the planning process.
— Section 106 is both a funding and
a delivery mechanism, whereas PGS is just a funding mechanism,
partially hypothecated on infrastructure.
— Section 106 meets identified local
needs yet is flexible in relation to specific sites while PGS
is nationally collected.
— Barker report recognised the benefits
of maintaining Section 106 for affordable housing to be allocated
prior to assessing PGS.
— Current Section 106 can be made to
work better—very few schemes above threshold do not include
affordable housing (the evidence on proportions of sites includes
large numbers below threshold).
INTRODUCTION
We are pleased to have the opportunity to submit
evidence on this important topic. Over the last seven years we
have collaborated on a series of studies examining the output
and outcomes of the use of planning gain (or Section 106 agreements)
to secure more affordable housing in England. We are restricting
our evidence to this aspect of the supply of affordable rented
housing.In this short note of evidence we review the key findings
and policy implications of five large scale studies which draw
not only on official statistics and case studies of local authorities,
but detailed examination of 80 sites for which Section 106 agreements
were signed in or before the year 2000.[107]
We look at the numbers produced, where they are located and how
they are funded. We conclude by identifying the implications of
our findings for future policy in this aspect of rented housing
provision.
THE ROLE
OF PLANNING
GAIN POLICY
Almost all estimates of the number of new affordable
homes required to meet newly arising needs in England and to clear
the accumulated backlog are far in excess of what is currently
being produced. Moreover, in recent years the number of new affordable
homes completed has been falling, from just under 45,000 in 2000-01
to 29,000 in 2002-03, albeit with a recent welcome increase since
then of 4,000 to reach a total of 33,000 in each of the last two
years (2003-04 and 2004-05) for which we have data.
The decline reflects several factors, including
the availability of public funding (that is Social Housing Grant
or SHG) and the increasing difficulty that Registered Social Landlords
(RSLs) have in finding suitable sites. This is where Section 106
agreements potentially help to increase new output. They enable
local planning authorities to negotiate contributions of affordable
housing from private developers when they apply for permission
to develop new housing schemes, provided the authorities have
clear statements of need and affordable housing policies in their
local development frameworks.
The reasons for using Section 106 to increase
the supply of affordable housing are open to several interpretations.
Section 106 can be seen mainly or partly as a means of ensuring
that land is available for social and other affordable housing
by requiring the private sector to make provision on market development
sites. Hence it can also be a way of building socially mixed communities
by ensuring affordable and market housing are constructed on the
same site.
Another interpretation is that Section 106 is
a means of subsidising affordable housing and hence of providing
an alternative (or supplement) to SHG subsidy. This can happen
when developers agree to provide sites or affordable housing at
less than the market price for the land or less than the cost
of providing the houses. This ensures that the requirement for
SHG is less than otherwise—even possibly meaning that no
public subsidy is needed at all. In these circumstances developers'
costs may be passed on to landowners by paying less than the price
that would have to be paid for the land if the Section 106 obligations
did not exist. If the developers' costs are defrayed this way
we can think of it as a kind of betterment tax (ie a tax on the
development value of the land) but one which is locally negotiated,
specific to the site, and hypothecated for affordable housing.
The use of Section 106 for securing affordable
housing is but one use of this planning gain mechanism. Hence
supplying affordable housing through Section 106 can be one of
several competing demands that planners place on developers' contributions.
Whatever interpretation is appropriate (securing
land, securing finance, or securing both), one of the problems
with using Section 106 is that the supply of affordable homes
is inevitably dependent on the varying fortunes of the private
house building market.This potential problem becomes more chronic
the greater the proportion of new affordable homes that are secured
by Section 106 agreements.
The numbers: how many new affordable homes are
secured by Section 106?
In many respects the news is good— and
getting better. In the five years since 1998-99 new affordable
homes approved in new Section 106 agreements have risen from 14,000
a year to 37,000 a year in 2004-05. It takes time for approvals
to come through as completions, but these too have been rising
steadily from 9,000 in 1999-2000 to 18,000 in 2004-05. Our evidence
suggests that most approvals are ultimately completed and the
numbers negotiated are actually delivered. Where there are changes
between agreement and completions these are on large development
sites where delays are common and are not specifically related
to the affordable housing element of agreements but to the complexities
of the development process on large schemes. We estimate that
approximately 80% of affordable homes that are negotiated through
Section 106 agreements are delivered, a percentage that is consistent
with the proportion of all dwellings on sites with planning permission
that are completed.
As the numbers completed have risen, they have
accounted for a growing share of the total of all new affordable
homes, so that by 2004-05 they were 55% of all affordable completions,
a significant increase on 21% in 1999-2000. This suggests that
we have a growing and now significant dependence on Section 106
for our ability to meet need. However this increase reflects as
much a fall in traditionally funded output as it does the increase
in Section 106 completions—and shows that planning gain
is only just adequate to substitute for the decline in houses
funded by conventional means.
Most of the homes secured and completed are
for social rented units but many are for other affordable types,
including shared ownership and key worker housing. Our evidence
suggests that the proportion that is shared ownership has been
recently increasing, especially in the southern regions, including
London. Our evidence also shows that planning authorities achieve
their site-specific targets, especially where they have clear
and explicit site-specific policies about targets. It also shows
that affordable housing contributions are successfully negotiated
on almost all above threshold sites, but that much smaller proportions
of below threshold sites have such contributions.
Land and location: where are the Section 106 affordable
homes being built?
Most of these new homes are to be found in the
pressured regions of southern England. These account for 71% of
all Section 106 completions in England. In the three regions of
the East of England, East Midlands and the South East, Section
106 homes account for 70% of all new affordable homes (in London
the proportion is 44% reflecting the importance of traditional
funding sources to the capital). This overall pattern should not
be surprising: first, it is where housing need is greatest and,
second, these are also the regions where the housing market has
been at its most buoyant, making it possible for planners to negotiate
with private developers for both land and funding for affordable
homes.
Our evidence also shows that the affordable
homes on Section 106 sites are in the more expensive areas of
England. They are either in the more expensive parts of "down"
market areas or in the less expensive parts of up market areas
(using neighbourhood classifications as proxies for "market"
and house prices as proxies for "expensive"). This is
not surprising. The sites have to be in areas where the private
market is active and where development values are sufficiently
high to extract developers' contributions. To this extent Section
106 opens up areas where social rented housing has not been prevalent
in the past and changes the geography of new affordable housing.
Because most of the provision has been made "on site"
(rather than on other sites with exclusively affordable housing)
Section 106 also makes an important contribution to the mixed
communities agenda. In many schemes the affordable homes are "pepper-potted"
within the market housing. At the same time the market housing
is often modified from that which would have been built had schemes
been made up only of market units, with many more small dwellings
and higher density schemes. There is also some evidence that shared
ownership may be squeezing out social rented housing as well (shared
ownership units are favoured by developers over social rented
units primarily for financial reasons) and that the Section 106
units may not match the best environmental and design standards.
As well as opening up land in areas where RSLs
have not traditionally developed and where they would find it
difficult to compete, evidence also shows how increasingly dependent
they are for land supply acquired through Section 106 wherever
it is located. A growing proportion of RSLs' sites now come through
planning gain. Other sites are now increasingly difficult and
expensive to acquire, making planning gain increasingly critical
to the delivery of all new affordable homes.
Much of the land that is available for "non
Section 106" affordable housing development comes from the
public sector, including "infill" sites on local authority
housing estates, and the supply of this surplus land has been
in decline (although recent government initiatives related for
example to surplus NHS sites may mitigate this shortage to an
extent). Where sites are bought on the open market from the private
sector they tend to be small, brownfield sites which are problematic
and expensive to develop. Competition for these sites from the
private sector has also been growing especially in southern England
as an increasing proportion of private sector development is itself
focused on such sites including those inner city and city centre
sites developed for higher density and, often, flatted development.
FUNDING
Our research suggests that most (nearly three
quarters) of Section 106 affordable housing units have an injection
of public subsidy in the form of Social Housing Grant. At first
sight this is odd and does not sit easily with one of our interpretations
of Section 106, ie that developer contributions replace the need
for subsidy. This might suggest policy "failure" but
ignores the context within which Section 106 works best. Our evidence
shows that planning gain delivers affordable housing in high price
areas where land is expensive. What developers' contributions
appear to have done to date is to reduce the price of this expensive
land to one that RSLs can afford within Housing Corporation funding
guidelines. So, despite significant developers' contributions,
mounting on average to 5% of the gross development value across
Section 106 sites (both the market and non-market elements), SHG
is still needed to make the homes affordable and the schemes viable.
In a recent calculation we have estimated that developers' contributions
on schemes agreed in 2003-04 were valued at £1,200 million.
In looking at how Section 106 provides funding, we also need to
recognise that Section 106 negotiations between developers and
planners are not just about affordable housing contributions,
but are usually about a much wider range of contributions, both
in terms of physical off-site infrastructure and wider community
needs, including school buildings. Affordable housing is not necessarily
the highest priority and hence there may be little by way of developers'
contributions left over once other requirements have been negotiated
and agreed. Thus both the expense of the land and the competing
claims on planning gain explain the need for SHG, although without
a clear negotiating and "accounting" framework there
may well be risks that SHG inadvertently cross-subsidises these
other planning "gains".
Summary: achievements to date
Our overall assessment is that Section 106 has
produced worthwhile results. Significant numbers of affordable
homes have been produced, the numbers are growing and mixed communities
have been created, all in areas of great housing need and at a
time when RSLs are finding it increasingly difficult to get hold
of sites. As a numbers and location policy this has therefore
been a success story (although its ability to work as well on
brownfield as on greenfield sites is less evident).
As for funding, the policy is less successful,
even if the reasons for this are reasonably clear. They partly
lie in the fundamentals; that is the economics of developing expensive
sites for social rented and other affordable housing where there
are competing demands for planning gain. They also lie partly
in the negotiating expertise and strength of local planning and
housing officials. With clear policies that are consistently implemented
(including those that explicitly say that SHG will not be available)
and with good negotiating teams, planning authorities can achieve
good funding outcomes although they may limit the numbers and
location aspects of the "game". In these circumstances
as well it may be that landowners "pay" and that there
is little call on SHG.It is important not to write off the funding
aspects of Section 106 as failure. About a quarter of schemes
have had no SHG and in others it has been less than "full
tariff". Hence SHG has been "stretched" and this
has almost certainly secured the recent increase in output. We
can be fairly confident that without Section 106 and this "stretch"
of SHG the recent upturn in total affordable homes produced would
not have happened.
Conclusions: can planning authorities do better?
Is there another way?
Our overall evidence suggests that the Section
106 policy has now been successfully established. Local authorities
are implementing it better, especially as they gain in experience
and developers recognise that it is "the only game in town".
Significant numbers are coming through the system and we can expect
more to come, perhaps reaching up 25,000 a year with possibly
less recall to SHG. Success will depend on a whole range of factors,
not the least the state of the private house-building market,
while getting more funding from developers will require clearer
policies and better negotiations.
But in the meantime Government has been looking
at alternatives, partly because it is worried about the planning
gain system generally, in terms of transparency, certainty and
speed of decision making.
This is why it considered introducing an optional
charge or tariff. This would give developers the choice of paying
an optional fixed charge (hence certainty) or of attempting to
negotiate, thus accepting greater uncertainty in the hope of paying
or contributing (presumably) less. The proposed optional charge
would include "in kind" and on site contributions of
affordable housing as well as "cash payments". The latter
would permit local authorities to fund housing providers to purchase
land elsewhere to provide the affordable element not provided
on the Section 106 site. Whether such sites can be easily acquired
at an acceptable price and in locations where they will contribute
to promoting mixed communities is a moot point. Our work on this
suggests that it is doubtful that optional charges would produce
better value for money and that it would be difficult to fix the
charge at the right level that both ensured developments proceeded
and secured adequate affordable housing.
Whilst the Government considers optional charges
it is also considering Kate Barker's proposed Planning Gain Supplement
(PGS) as the primary means of taxing the betterment arising from
the granting of planning permission, with Section 106 being retained
to address site-specific externalities and the provision of affordable
housing. The introduction of a PGS provides a potential opportunity
to tax development value formally rather then through the complex
site-by-site negotiations that currently characterise Section
106. The moot questions are whether this approach would reduce
land supply (as in all past attempts to tax development value)
and what impact it would have on the residual use of Section 106
to secure affordable homes. Under current proposals the Section
106 contributions would be "netted off" from the development
value that would be the subject of the PGS tax rate. However,
should the PGS rate be less than the effective "tax rate"
on the Section 106 contribution (ie the cost of Section 106 as
a percentage of development value) developers will have an incentive
to minimise what they provide through Section 106 so as to benefit
from the lower rate of PGS. On the other hand if the PGS rate
is set higher than the effective Section 106 rate, developers
may well have an incentive to contribute more affordable housing
than at present. We can be fairly confident that there will be
a lot of uncertainty both in terms of possible PGS disincentives
to bring land forward and the impact it will have on "residual"
Section 106.
It is important to note that Government has
said that a PGS is necessary to contribute to infrastructure and
as such would be in addition to Section 106 for affordable housing.
PGS would also apply to all development, thus capturing planning
gain from small sites that are currently below the threshold for
Section 106. The formulaic approach would replace lengthy negotiations
and so help to speed up the planning system (although the evidence
from earlier attempts suggests that this is aspiration rather
than reality). However, PGS is purely a funding mechanism, whereas
Section 106 is both a funding and a delivery mechanism. In addition,
because Section 106 is negotiated on a site by site basis, it
provides the flexibility that allows, for example, difficult sites
to go ahead with a lower contribution. The Barker approach of
Section 106 for affordable housing remaining (perhaps on a tariff
basis) before calculation of PGS should help to ensure continued
provision—but until the rules are in place the incentives
are not clear cut either for developers or local authorities.
This uncertainty alone is likely to reduce the affordable housing
take.
Our provisional judgement is that the risks
of introducing both an optional charge and a PGS are both high
and that the current Section 106 game can be made to work better.
We doubt that either alternative can yield more than the current
system in terms of numbers whilst both would put the wider mixed
communities and RSL land needs agendas at risk.
106 Prof Tony Crook is Pro Vice Chancellor & Prof
of Housing Studies and Dr Steven Rowley is Research Fellow in
the Department of Town & Regional Planning at the University
of Sheffield; Sarah Monk is Deputy Director of the Centre for
Housing & Planning Research at the University of Cambridge,
and Prof Christine Whitehead is Prof of Housing in the Dept of
Economics at the LSE. Back
107
These are: Planning gain and affordable housing: making it
count York, Joseph Rowntree Foundation, 2000; Land &
finance for affordable housing, York, Joseph Rowntree Foundation,
2005; The value for money of delivering affordable housing
through Section 106, London, ODPM, 2005; Delivering affordable
housing through Section 106: outputs and outcomes, York, Joseph
Rowntree Foundation, 2006; Valuing Planning Obligations in
England, London, DCLG, 2006. Back
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