Communities and Local Government CommitteeWritten submission from Oxford City Council

Summary

The biggest return on investment would be to invest directly in building new Council Housing.

There is a clear and significant role for the public sector to provide support in kind both on its own land and through reducing planning uncertainties and thus risk.

The potential for the HRA reform to be a force for good in reinvigorating new housing supply is significant providing the Government gives greater local flexibility under its Localism Agenda.

The Affordable Rent proposals are unlikely to be effective in the medium to long term; in particular Oxford will see investment in its affordable housing leach away despite the considerable housing needs in the area.

Introduction

The City Council welcomes the opportunity to respond to the Call for Evidence from the Select Committee. It has particular concerns about the Government’s Affordable Rent proposals and the reduction in grant funding.

The City has an acute housing shortage, particularly in the social rented sector. The Council remains committed to maximising housing development as far as it can within the tight administrative boundaries of the city and the constraints of the Green Belt, attractive landscape setting and flood plain. The adopted Core Strategy has a policy seeking 50% affordable housing from sites of 10 units or more with 80% of such affordable housing to be social rented, unless there are demonstrable viability constraints.

The following key points are considered to have particular implications for the future of Oxford and its economic prosperity.

1. How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms

To answer this question in terms of both social and economic policy, it is important to step back and start by considering whether public funds are better directed to investment in bricks and mortar or to housing benefits ie subsidies to landlords?

Between the 1940s and 1980s national social policy prioritised the former approach through the purchase of land by public bodies, the construction of houses on this land and renting these properties directly to tenants, thereby minimising the housing benefit budget.

In more recent decades, private landowners and developers have been placed under a range of obligations through the planning system to provide affordable housing, and Registered Providers have been pressed into becoming the principal providers of social housing. This has had the effect of shifting the balance of public funding for social and affordable housing towards the benefits system and away from support for land acquisition and house building costs. The rate of new homes provision has dropped markedly in the past decade with resulting increases in housing waiting lists.

The present government’s policy of “Affordable Rents” seeks to further reduce the direct public funding for social housing through the recycling of rental incomes into land acquisition and construction; and simultaneously, to reduce the support to tenants’ rental costs by restrictions on Housing Benefits and Local Housing Allowance. The effect of these twin policies will inevitably be to reduce still further the ability of the public sector to provide affordable homes for those most in need.

Affordable rents at 80% of market rents will not be covered by Local Housing Allowance in Oxford. For example the LHA rate for the whole of the Oxfordshire Broad Market Area for a three bed house is £213.46 whilst the 80% level of private market rent is £252.00, (June 2011 prices). There remains considerable doubt too that providers will be willing to charge a rent lower than 80%. In fact private rents in Oxford are considerably higher than in the rest of the Oxfordshire BMA. A point made by Shelter this week in its Private Rent Watch Report , which declared that “The least affordable local authority area outside London is Oxford, where typical rents account for 55% of average earnings” Therefore the Affordable Rent policy will not create extra funding for housing in Oxford.

It can be predicted that the effect of these policies will be to direct the construction of “affordable housing” towards locations where private developers can make the most profit and where the Affordable Rent level is closest to Local Housing Allowance rates. This will mean that the location of new affordable housing will not be determined by the level of need for such housing and demand will continue to be massively out of balance with supply—both in volume and spatial distribution. The effect may be such that the Return on Investment from State funding is positive but at the cost of providing homes in the wrong place for the wrong groups of people.

The City Council has analysed the potential impact of the affordable rent policy and concluded that it will make a very limited contribution to meeting the housing needs of the 6,000 plus families who are currently registered on its housing waiting list. Our firm view is that the biggest return on government investment would be to work with local authorities and to invest directly again in building new Council Housing.

2. What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening

The public sector has potentially a very key role in tackling the backlog demand for social housing through the provision of support in kind through the use of sites that it owns and, more indirectly, through reducing planning uncertainties and risk.

In the current economic climate increased perceived uncertainties and risks are leading private landowners, developers and their funders to increase profit margins and thus reduce the capital available to provide affordable housing.

The City Council has embarked on an exemplar project to deliver the greatest number of affordable homes at social rent as is possible in the current economic circumstances. It has formed a Joint Venture partnership to develop an urban extension of around 1,000 houses on its own land. Because it is also the planning authority, it is in position to also provide a clearer planning framework in terms of both timing and S106 costs.

Regrettably, other parts of the public sector are not adopting this approach. For example, the British Rail Residuary Body is seeking to sell land within Oxford on the open market with significant uncertainties for developers over the development potential and with significant planning uncertainty. In short, by obliging a private investor to absorb a very high level of development risk, the government is squandering the potential to secure the best available affordable housing yield from the site.

Another barrier to a rational approach to land use is the pattern of restrictions on land, which has the potential to be developed, and the Government’s ambiguous stance towards Localism. While espousing a rhetoric of localism, it is reinforcing central controls through the draft National Planning Policy Framework, especially the policy on Green Belts.

There is land adjacent to the urban area of Oxford that is both in public ownership and of low environmental quality. This land is well located to be developed as a significant and sustainable urban extension to the city of at least 4,000 homes. It would make a considerable contribution towards meeting both the public and private housing needs of the city and the sub-region served by the Local Enterprise Partnership. This land was designated for an urban extension in the adopted South East Plan (regional spatial strategy).

However it lies in the Green Belt and there is very little prospect of it being developed because the NPPF and other government announcements indicate that Green Belts will be protected without exceptions, and the RSS housing targets and spatial allocations will be abolished. It remains the case nevertheless that development of this land would be the most cost effective way of providing affordable housing around Oxford and would only involve the loss of 1% of the Green Belt around the City. This is not “urban sprawl” but the sensible use of publicly owned land in a sustainable way.

As has been argued in the past, including in the Barker Review, jumping green belts to provide housing in dormitory settlements is an unsustainable approach to land use planning. Yet this is has been the policy in Oxfordshire for almost 20 years. The result is that while some 75% of residents live and work in Oxford, 75% of residents in the dormitory market towns of Witney and Bicester commute out of these towns, many of them back across the Green Belt into Oxford.

3. How the reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply

The extra borrowing headroom proposed in the reform of the council HRA system is welcome although the removal of the cap limit would be more effective in delivering housing units.

However, the recent announcement by Ministers that Right to Buy discounts will be increased together with central government retaining a substantial percentage of RTB receipts, will potentially create a situation in which local authorities will be like a family who take out a mortgage and then have to stand by while the property on which it is secured is gradually demolished. The ability of Councils to repay the substantial housing debt that they will take on as part of the HRA reforms would be significantly undermined as the size of their stock is reduced through RTB purchases. This would in turn limit Councils’ ability to fund new house building and, in a location such as Oxford where land values are high and developable land in short supply, would mean that value taken out of the council’s stock would most likely be used to build affordable homes in other locations where easier and more profitable development conditions obtain.

If the Government genuinely wishes to stimulate the development of affordable housing in locations where it is most needed, complete local flexibility is needed, including retention of 100% of Right to Buy receipts coupled with a statutory obligation to use those receipts to improve the quality and/or quantity of affordable social housing.

Local authorities have the potential to play an important role in providing direct or facilitating new housing supply. Councils are able to internally borrow capital and also have access to more affordable finance than Registered Providers or the private sector, thus ensuring bigger returns on investment.

The potential for the HRA reform to be a force for good in reinvigorating new housing supply is significant providing the Government gives greater local flexibility under its Localism Agenda.

4. How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term

The Affordable Rent proposals will not be effective in increasing funds available for new housing, not least because they are accompanied by a 65% cut in the HCA budget. In practice, new housing will be funded in the near future by Registered Providers (RPs) drawing from their reserves, together with some limited HCA grant and limited borrowing.

However, the security of the RPs’ rental income is diminished by the proposal to introduce a Universal Credit, including an element that was previously covered through housing benefit, to be paid to the tenants directly and no longer to the landlord. This will create an insecure income stream for RPs and Councils, reducing their ability to raise new finance. This is not sustainable in the long term and the current four year proposal will lead to reduced funds rather that an increase in funding over the medium to long term.

The other serious implication is that the RPs, through new voids and churn on their stock, will draw value out of high-price market areas, such as Oxford, and use this to build in less expensive areas with lower market rents.

Therefore, the Affordable Rent proposals are unlikely to be effective in the medium to long term, in particular Oxford will see investment in its affordable housing leach away despite the considerable housing needs in the area.

Taken together, the above considerations highlight the risk of disinvestment and value extraction from social housing stock in areas of high housing need and high housing cost (where the former is often a symptom of the latter), leading to inappropriate development of social and other affordable housing in areas with lower land values (and often, concomitantly, lower housing need).

October 2011