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Select Committee on Communities and Local Government Committee Written Evidence


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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