Growth and Infrastructure Bill

Memorandum submitted by Shelter (GIB 89)

Summary

· The Government has a significant opportunity to reverse the failure of successive governments to address Britain’s housing crisis. Clear leadership is needed to send a strong signal to young families unable to afford a place of their own that the Government is on their side. This is why Shelter broadly welcomed the recent new package of measures on housing and planning, some of which will be delivered through this bill.

· In the short-term, a boost to house building will deliver jobs and growth and could be central to economic recovery. However, more importantly, bold action now could tackle the growing long-term problem of young families not being able to meet their aspirations. With fewer families owning their own homes and more living in the unstable private rented sector, housing is a growing concern across the country for those who are worried about the prospects for the next generation. This is why it is so important for the Government to not only consider short-term stimulus but also find ways to fix our broken housing system for the long-term.

· It is crucial that the G overnment honours its guarantee that more affordable homes will be delivered under these proposals , so that the measures succeed in meeting the needs of families. Clause 5 of the bill poses a serious risk to the delivery of affordable homes by enabling the modification of existing Section 106 agreements. We urge the Government to build in safeguards to ensure that this reform does not jeopardise the delivery of affordable housing.

· The Government must also look beyond the planning system if it is serious about delivering substantial numbers of new homes. As well respected economists at FTI Consulting have shown, planning reform will not be sufficient to provide the homes we desperately need, and repeated changes can be counter-productive by creating greater uncertainty for developers making them more risk averse. Instead, the government should look at ways of promoting more competition in the sector, encouraging better use of land and exploring new models of financing house building.

The risk of undermining the delivery of affordable housing (clause 5)

1. We are concerned that Clause 5 of the Bill, which allows the modification or discharge of the affordable housing elements of Section 106 agreements, will lead to significantly less affordable housing being delivered and therefore may undermine the potential for Government measures to meet the needs of ordinary families.

2. Historically, cross-subsidy via Section 106 has been responsible for delivering about half of all the affordable housing built. The other two pillars have been capital grants and the borrowing capacity of housing associations based on their rental income, both of which have been severely paired down in recent years. Capital subsidy was cut by 60% in the 2010 Comprehensive Spending Review (CSR), and changes to the benefit regime have undermined social landlords’ ability to borrow and reinvest in new homes. If the potential for S ection 106 to provide cross-subsidy is undermined , this will impact on the long-term ability of the government to supply affordable homes. We welcome the Government’s separate commitment to spend £300 million on affordable housing. However, on balance, this will not make up for the lost value of section 106 in terms of providing affordable housing if clause 5 is implemented as a long term measure.

3. Proper provision of affordable housing and infrastructure delivered through Section 106 is essential to the quality of new developments. The supposed trade-off between the quantity and quality of housing underlying this reform is a false one. Development is not a zero sum game. The consequence of forcing through low-quality development is that a) the buildings may not be sustainable long term, and b) , as the planning minister made clear in his recent speech to the Town and Country Planning Association (TCPA), this generates local resentment which undermines public support for development. Furthermore, t he costs that developers expect to bear through development, including the cost of planning obligations and building regulations, are factored into the price that they pay for the land. By reducing obligations on existing planning permissions , the current viability of some sites may be improved in the short term, but in the medium term the effect will be to increase land value s for the benefit of existing landholders who can increase the amount that they charge the developers. This does not increase quality , it lower s it and increase s the return to the landholder.    Ultimately, these reforms will benefit landholders more than developers.

4. There is an implied assumption within Clause 5 that affordable housing obligations are inherently a brake on development. In fact, affordable housing provision can actually increase numbers of market homes built (as well as overall supply numbers) by supporting a more resilient mixed economy that is less susceptible to cyclical pressure. For example, rates of private house building were greatest in the same period that public supply was at its peak, as builders were able to build for both markets. After the credit crunch, developers kept schemes delivering by switching market homes to affordable. More generally, Section 106 ensures schemes are mixed tenure and provision of affordable homes that are pre-sold, typically to Housing Associations. The number of private sale homes that can be built in a single year, however, is subject to typical business practice restrictions known as the ‘market suite’ limit. Under this practice developers greatly stagger the construction and sale of homes on a new development as they do not want to risk flooding the local market. For this reason, affordable home requirements can actually speed up – not slow down – building developments.

Proposed safeguards to Section 106 changes (clause 5)

5. Clause 5 is being argued for on the basis that Section 106 agreements allegedly make developments "economically unviable". At a minimum, the refore, proposed measures should require more transparency on how the viability of agreements will be assessed. Where developers claim that schemes are not viable due to Section 106 commitments , scheme finances should be open for thorough public scrutiny . It should be the duty of the develope r to demonstrate that an agreement negotiated and voluntarily entered into is no longer viable, and also to ensure that adequate public compensation is received for that renegotiation.    

6. Any reduction of Section 106 obligations should be strictly time-limited, and developers should be required to make firm, legally enforceable commitments to build out the schemes promptly. Without these provisions there is the danger that schemes would still not be built for many years to come, meaning that affordable housing would have been sacrificed for nothing.

7. If obligations are reduced on the grounds that this is what is necessary for short-term viability , but subsequently the market turns and significant profits are made on the site, there should then be a ‘ claw back provision allowing for a commuted sum to be paid to compensate the local authority for the affordable housing which was not built . This will require transparency on the part of developers so that the level of viability over the whole life of the scheme is clear , not just at the moment when the planning obligations are reduced.

8. Principally, we believe that if Clause 5 goes ahead, it should be a temporary measure, with the inclusion of a medium-term ‘sunset clause’. This would mean the relaxation of Section 106 to help stimulate economic growth right now would be prevented from from creating long-term damage to the supply of affordable housing.

Beyond planning reform – how do we get more homes built?

9. Changes to planning laws will not be enough to provide the homes that we desperately need. The Localism Act contained a number of measures to liberalise planning, but since its passage in early 2011 w e have yet to see any increase in house building . Le gislation is not the best mechanism for getting rapid ch ange in behaviour on the ground; other measures need to be explored to kick-start development, especially for the sites that currently have planning persmission .    Further reforms to planning may even introduce perverse incentives that encourage developers to stall construction as they face further uncertainty and await confirmation on renegotiations.

10. The limitations of planning reform as a way of getting homes built quickly was clearly explained by the House Builders Federation in their oral evidence to the committee on 13 th November: "If I grant you a consent for 2,000 houses, you are not going to go out and build them tomorrow. There will be a trajectory over time of how they will come forward on a development. For all sorts of reasons, even in the best possible market, those houses would not all turn up overnight. They would come on line over a 10, 15 or even 20-year development process."

11. It is reasonable to assume that where developers are keeping stalled developments rather than selling them , it is because they believe the schemes will be profi table over a longer time period , once the market improves . It is not clear that the renegotiation of a S ection 106 agreement , even if it improves the short-term viability of a scheme , will be sufficient to over-ride the market incentive to wait for significant profitability to return in five, 10, or 20 years .

12. Other factors are holding back development over the long term. These include:

· Unlike other markets, such as consumer goods, the number of homes built is limited by the availability of land to build on , rather than just by customer demand . Land can be used for a variety of social and economic purposes, so we will always need a system for communities to decide how best to parcel it up. With land inevitably limited, value s are pushed up . The result is that developers have to focus on finding and managing land, not just building. It can be more profitable for them to hold on to land they own and wait for its value to increase over time instead of building on it.

· The slow pace of house building compared to developing other consumer products for market. Given the necessity of finding land, meeting planning requirements, design and construction, developers do not know where house prices will be by the time they sell the property. They thus face considerable uncertainty as to whether their investment will be worth it by the time homes are sold. This encourages developers to err on the side of caution and to prioritise margin over volume.

· The dominance of the house building market by a handful of large firms that have the scale, cash and expertise to build efficiently. This concentration is partly due to the fact that house building is an expensive process and involves a lot of stages – from up-front finance and land acquisition to planning and construction. But it is also a result of information asymmetries and barriers to entry, particularly in the land market. This leads to a lack of competition and ultimately poorer quality homes, higher prices and less quantity.

These points are evidenced in detail in both FTI Consulting’s report, Understanding Supply Constraints in the Housing Market
and IPPR’s study We must fix it: delivering reform of the building sector to meet the UK’s housing and economic challenges .

13. All of these inter-related features of the present market create risks, distort behaviour and constrain supply. In this context, we do not believe amending the planning framework will be enough to unlock stalled development. Instead, we suggest:

Encouraging competition in the sector by helping new entrants, including small businesses and self builders, and improving their access to land.

Exploring new models of sustainable finance for homes, both for developers and for individuals.

Incentivising better and quicker land use. The tax system is a good lever to do this.

Building public support for housing by ensuring that new homes are well designed and connected to decent infrastructure.

Developing housing products that meet a broader range of consumer needs and preferences.

14. We support the Government’s prioritisation of housing delivery and attempts to use available levers to boost building of new homes. However, we urge Ministers to introduce safeguards to the section 106 reforms to ensure that the homes built are affordable for struggling families. We also advise Government to take a wider view of the constraints to housing supply and take further, especially non-legislative, measures to boost delivery.

December 2012

Prepared 10th December 2012