Affordability and the Need for Affordable Housing

1. Affordability and the Need for Affordable Housing SG ‘ Firm Analytical Foundations’ Conference 22 April 2008 Prof Glen Bramley

2. Outline of Session • Policy context – Firm Foundations, supply & affordability • Local affordability & need model • Update & projections • Baseline scenario • Alternative assumptions & impacts • The Geography Question • Different measures are different • Some policy issues

3. Supply and Affordability • Scottish Housing Market Review and Firm Foundations identify inadequate/unresponsive housing supply and affordability as key problems • Parallel with Barker Review in England • Belief that increasing supply will lead to moderation in market prices – developing economic model • Setting national target to raise output to 35,000 pa • Established Housing Supply Task Force to focus on unblocking supply • Main focus on planning – SPP3 - regional targets - identification of strategic growth opportunities • But must be environmentally & socially sustainable

5. Local Affordability & Need Model • What model is & does- models local income distributions in detail- estimates affordability to buy or rent in market for <35 hhd- combines with est gross household formation etc -> need- compares with supply of social relets -> net need- traces backlog need for given supply, tenure, vacancies, etc. • Not a full-scale econometric model of market- but some behavioural models (hhd formation, relets)- some market feedbacks imposed based on judgements- key trends in incomes, prices imposed • Snapshots (2005 & 2006) +forward projections to 2021- base data updated to 2005-06- 5 year steps - tied to hhd projections – LA level • Results last time – see CS Report 72

6. Differences this time • Affordability based on cheaper of purchase or private rent • Updated prices (higher) and incomes (bit higher) • 16 forward scenarios to 2021 based on different assumptions- A prices trend with incomes, vs B 15% price correction to 2011- Lending multipliers 3.5 (single) vs 4.0 - Price threshold lower quartile vs lowest decile- PR affordy 25% of net income vs 30% • Comments, in light of recent events- Price correction now likely, following credit crunch- Scottish data, & prudence, support 3.5; English data 4.0- LQ is recommended practice; LD raises issues about quality- PR 30% more realistic & consistent with guidance (25% of gross)- but what will happen to PR rent levels?- should we also be modelling access to deposits? (model does allow for large deposits through ‘wealth adjustment’)

7. Re-run of Affordability Model

8. Comments on Baseline • Affordability improves gradually • Net need a bit lower than previous study, but rising and plateau-ing (until price correction introduced) • Still some sizeable surpluses in places • New hhd formation fluctuating • Relets declining due to falling stock • With provision of 7000 pa, backlog would fall gradually • Vacancies appear to grow, possibly -> more demoln • Owner occupation levelling off around 71% • PRS continues to grow (? BTL bubble?)

9. Affordable Needs Depend on Assumptions

10. Impact of Different Assumptions • Most of variant assumptions imply better affordability and lower need in future • Effects are not linear & additive • 15% price correction halves net need (- 5-6,000) • LM 4.0 reduces need by similar amount (5-6,000) • LD price threshold reduces need by 3-5,000 • Higher aff ratio for PR reduces need by 3-8,000 • Combinations reduce need by 4-9,000, leaving residual need of <1000 in later years • So it all depends on the assumptions…. • ….but does credit crunch mean we need to change more?

11. There is also the Geography Question • Main modelling done on unitary LA basis • CS Report 72 compares HMA’s and former DCs • Larger HMAs submerge some need • Smaller units make some difference in larger rural and mixed LA’s (Highland, Fife, Borders, etc) • No easy right answer, given data constraints • Current policy thinking emphasizes subregional analysis and cooperation

15. Affordability Measures • Proliferation of studies, indices, targets, etc.e.g. Wilcox, CLG/NHPAU, SG (FF), various Banks • Simple ratios of house price to income/earnings popular, and feature in govt targets • However, these neglect variations in interest rates, household structure, economic activity and income composition • E.g. in England correlation between GB measures and LQHPER are quite low

16. Comparison of Measures

17. Some Policy Issues • Setting normative affordability standards • Addressing LTV & deposits issue (savings scheme?) • Balance between overall supply-> market affordabilityand affordable housing provision • Providing more affordable housing without much money • Making more effective use of planning powers & s.75 • Role of intermediate (LCHO) provision, esp OMHS • Building a lot more housing than prospective household growth - rising vacancies, demolition, low demand • Acceptability of PRS as solution for different groups e.g. families, homeless, esp given lack of security

18. Why Involve Planning? • Critics have argued inappropriate use of planning - lack of ‘rational nexus’ between AH and specific site - stealth tax – should be overt- not job of hb industry to subsidise social housing • Counter view (inc Barker) that planning constraint responsible for affordability problem & should compensate- plan area level nexus- betterment taxation efficient and equitable- there will never be enough public subsidy for soc hsg • In practice policy has 3 drivers- land to put social/afford housing on- getting subsidy from land value - promoting mixed communities

20. Contribution of Grant & s.106

21. Main Conclusions on PAH • Not a substitute for general land release and market housing supply (inc assoc infrastructure)- but in pressured scenic areas it may be • It can be made to work, but it takes a long time • Land value & subsidy issues critical • Ideal from Social Justice viewpoint- paid for by tax on landowner windfalls- promotes mixed communities (inc demographic mix?)- increases affordable supply in pressured areas