The Economics of Social Housing

The Economics of Social Housing Economics of Social Housing Version 1 Jan 2009

Learning objectives • The aim of this session is to equip you with a basic understanding of the economic factors driving affordable housing – supply and demand • We will survey the history of the UK housing market in general and then focus on the recent history of UK social housing • We will then outline the economic mechanisms that drive social housing with special attention to S106 • And we will assess how well S106 has performed • Finally we will explain how and why the credit crunch happened and what its impact has been on UK affordable housing Economics of Social Housing Version 1.0

Contents • Executive summary • The macroeconomics of housing overall: supply and demand trends • Or why the need for social housing is driven by macroeconomics – restricted supply relative to demand • The macroeconomics of social housing: supply and demand trends • The economics of planning policy to deliver affordable housing • Or how affordable housing has been provided as a tax on developers and as a means of avoiding grants • Economic assessment of planning-driven provision of affordable housing • Or how well S106 addresses the economic issues of affordable housing • UK affordable housing in the credit crunch • The credit crunch and its economic impact UK housing • What happened, why, and what it means Economics of Social Housing Version 1.0

Key findings • The UK does not build enough houses to keep up with demand especially in the south east – we need around 155,000 new houses annually to cope with household growth • Affordable housing has changed its role from being a chosen form of housing to being primarily a safety net for the very poorest in society • Planning (S106) does not give the UK enough affordable homes • Government spending on affordable housing is broadly the static– but the money goes on demand (rent) not on supply (house building) • The HCA aims to transform UK housing by significant house building in smart, “joined-up” ways. The credit crunch could compromise its ambitions if private house building does not participate Economics of Social Housing Version 1.0

The macroeconomics of housing overall: supply trends The UK’s overall supply of housing has grown in every period since 1939 National housing supply does not respond to increasing prices and rising demand UK house building is less responsive than other countries Housing is in short supply in the south but in surplus in the north Land supply has declined especially in the south due to planning Restricted supply has driven up house prices and reduced affordability in cycles The macroeconomics of housing overall: demand trends Mortgages are more affordable, so demand for housing has increased But first time buyers are worse off because the cost of deposits has risen Housing demand will be driven by changing types of household Planning constraints deliver national preferences, but imperfectly The macroeconomics of social housing: supply The overall net supply of social housing has declined since 1979 Most of the stock of social housing are existing units Local Authority spending on maintenance and management has risen Subsidies for housing are little reduced but have shifted to the demand side The macroeconomics of social housing: demand Underlying drivers of social housing have improved, but affordability is still an issue The role of social housing is now to provide a safety net for the poorest Far fewer social tenants are now employed compared to previous decades Overcrowding is still an issue, driving the need for social housing Social tenants enjoy less space per person, and are more dissatisfied The real value to tenants of social housing is significant Social housing’s real value to tenants varies across the country Executive summary (1) Economics of Social Housing Version 1.0

The economics of planning policy to deliver affordable housing Planning policy has forced developers to create social housing S106-driven affordable housing is a stable component of housing completions S106 has grown as affordable housing additions has declined Regional supply of affordable housing matches demand, but not due to S106 Economic assessment of planning-driven provision of affordable housing Affordable housing via S106 may not increase the total supply of housing S106 does deliver affordable housing but is not necessarily fair S106 house building still needs public money and developers get a good deal Local authorities lack commercial skills to make S106 fully effective The impact of the credit crunch What happened Began when banks lent too much on risks they didn’t understand Liquidity and banks’ confidence destroyed Trust and therefore credit evaporated Why it happened Roots are in US affordable housing Innovations in finance created the crunch The world gorged on credit The whole system was incentivised to exploit credit through securitisation Subprime lending went wrong because it was risky, hidden – and predatory Scale of securitisation and CDOs created a chain reaction The whole finance system into shock Banking crises often happen, but innovations made this one worse than usual How it affects the UK Securitisation was the lifeblood of the UK mortgage market but it has collapsed Overall housing market decimated Threatens all house building Changes the game for affordable housing Much depends on the HCA Executive summary (2) Economics of Social Housing Version 1.0

Key Sources • Stephens, Whitehead, and Munro: Lessons From the Past, Challenges for the Future for Housing Policy: Evaluation of English Housing Policy 1975–2000, ODPM, 2005 • Hills: Ends And Means: The Future Roles Of Social Housing In England, ESRC Research Centre for Analysis of Social Exclusion / Department of Communities and Local Government, 2007 • Monk: The Provision Of Affordable Housing Through Section 106, Royal Institute of Chartered Surveyors, 2007 Economics of Social Housing Version 1.0

Changing housing stock composition since 1939 UK Housing stock has doubled since WW2 UK housing stock doubled to 22 million units since 1939 Owner occupation has grown continuously, other tenures have varied over time. Private rentals fell from the 1940s until the late 1980s, but grew to 11% of stock by 2004. The Right to Buy and less new building reduced social housing to only 18.5% of the stock by 2004. Source: Hills 2007 The UK’s overall supply of housing has grown in every period since 1939 Economics of Social Housing Version 1.0

House building has declined and price elasticity of supply has been near zero since 1990 Supply of new houses reduced significantly after 1980, as shown in Figure 2.1 from Stephens et al 2005, which looks at trends in new build completions since the end of WW2 Public/social sector output was high until the late 1970s. The private sector has not replaced public sector supply of new housing Private output rose in response to house increases in the boom of the late 1980s But private output did not increase in response to booming prices in the boom late 1990s-early 2000s. Supply elasticity was low, but is now virtually zero Supply has been low in both north and south, despite growing demand in the south Declining supply of houses since 1975 is shown in Figure 2.2 from Stephens et al which looks at new building in the ‘North’ (including the midlands) and ‘South’ (including London). The decline was steeper in the early part of the period, when public sector output declined from its previously high levels. Again, despite booming house prices, house supply has declined, due to falling private sector output. Output has declined in both the north and the south, despite the much stronger demand in the south. National housing supply does not respond to increasing prices and rising demand Source: Stephens et al 2005 Economics of Social Housing Version 1.0

The UK is less responsive than other countries to changes in prices UK house building is only half as responsive as the French, a third as responsive as the US and only a quarter as responsive as German house building. Over the last 10-15 years, UK supply has become almost totally unresponsive, so as prices have risen, the supply of houses has not increased at all. Planning has been a constraint on the supply of new houses in the UK Housing targets define how much land local authorities allow for development. But regional and local housing targets do not respond to housing demand - the UK's supply of new housing responds relatively little, compared to other countries, to changes in house prices. House building is politically contentious Local costs of development can be high and those already housed have a much stronger voice than those in need of housing. Land is often unsuitable Much undeveloped land is either in areas of low demand, or does not possess required infrastructure. Brownfield land has high development costs House building is a structurally inflexible industry The house building industry market and planning risks mean the industry which is reluctant to invest for the long term and employ direct labour, which may hold back production rates. UK house building is less responsive than other countries Source: Barker 2004 Economics of Social Housing Version 1.0

Surplus housing stocks have declined in most areas Figure 2.3 from Stephens et al shows the balance between households and dwellings, expressed as the percentage surplus dwellings over households. Housing surpluses rose in most areas before 1980 and were substantial in the South East, due to public sector house building. After 1980, surplus declined in all regions, as public sector supply was cut back. In the 1990s, housing surplus shrank in London and the South East, while low demand in the North East led to growing surpluses. Surpluses vary across regions, with surplus stocks in the north and shortages in the south Figure 2.4 shows the annual rate of dwelling growth minus the annual rate of household growth for five-year periods from 1975 to 2001, distinguishing the north from the south. Surpluses of houses over households grew in the late 1970s but fell back in the early 1980s. Between 1985 and 1996, household and dwelling growth were reasonably in step. Since 1996, dwelling growth ran ahead of households in the north while falling short in the south. There is increasing shortage in the south and increasing surplus in the north. Housing is in short supply in the south but in surplus in the north Source: Stephens et al 2005 Economics of Social Housing Version 1.0

Land supply is constrained in urban regions Figure 2.5 from Stephens shows the stock of outstanding planning permissions for private housing, per thousand resident households. Supply was more generous in the relatively rural East Midlands, East of England and South West. The stock supply was more limited in the more urban regions, both north and south. Stock supply rose slightly between 1988 and 1994 reflecting the 1980s boom and recession cycle. Stock supply fell in most regions up to 1997. The fall was modest in the three northern regions, substantial elsewhere, and very high in the South East. Planning permissions have declined since 1990 Figure 2.6 from Stephens looks at a measure of the flow supply of new planning permissions. Supply rose in the late 1980s boom period, but has since fallen more or less continuously. The fall was proportionately greater in the south. London has always had a low supply and dropped further in the late 1990s. In the south, supply has fallen to about half its peak rate of 1988. Land supply has declined especially in the south due to planning Source: Stephens et al 2005 Economics of Social Housing Version 1.0

Regional housing and land price show that planning restrictions pushes up house prices Economic theory says that if planning cuts the number of houses which can be built below the volume demanded by the market then house prices will increase. Real house prices have been in a cycle of booms and busts since 1969. Each boom ends at a higher level of (real) pricing. This cycle of boom and bust shows that Britain has a low elasticity of supply of new housing. I.e. housing supply is static, but long term demand is rising. This is partly because of planning constraints In the long term prices have risen significantly (3.3% pa in real terms over this whole 35 year period for UK, or 2.1% since the cyclically comparable year of 1973). Both cycles and growth are stronger in some regions than others. In London prices in 2005 were over 3.5 times their level in 1969, whilst for the North they have only slightly more than doubled. Regional affordability ratios indicate that planning restrictions drive up prices The same cyclical pattern exists in terms of affordability – the ratio of house prices to incomes. Figure 2.10 shows the ratio of average house price to average disposable household income for the same regions, for the period since 1984. The latest boom is not ‘worse’, in terms of driving higher ratios, than the previous one, though the real price rises in 2002 and 2003 have pushed these ratios to higher levels. Houses are more expensive, but people were still as likely on average to be able to afford them as in previous periods, at least up till 2001. Very low interest rates since the mid 1990s make a given ratio of income to house price more affordable than they were in 1989. Changes in the distribution of income may, of course, have made affordability worse for some groups. Restricted supply has driven up house prices and reduced affordability in cycles Source: Stephens et al 2005 Economics of Social Housing Version 1.0

Interest payments are low Total interest payments are now 8.9% of disposable income compared with a high of over 15% in 1990 (Chart 2.2) Repossessions have been at a fraction of their peak in 1991 when over 70,000 properties were taken into possession (Chart 2.3). Mortgage rates are low Mortgage rates have been at their lowest for forty years – average building society rates were 5.2% in May, compared with 11% between 1979 and 1997. Over the last 50 years the proportion of households that own their own home has increased substantially – to over 70% in 2003 (Chart 2.4). Nine out of ten households would prefer to own their own home if they could. Mortgages are more affordable, so demand for housing has increased Source: Barker 2004 Economics of Social Housing Version 1.0

One of the costs of long-term under supply is higher house prices and a lack of market affordability. Higher house prices make it harder for younger, less well-off households to buy their own home. Rising prices mean higher deposit costs so it is harder for first time buyers to enter the housing market. They often need help from relatives: in London over a third of first time buyers between 1995 and 2001 used gifts, family loans, inheritances or windfalls to fund deposits In contrast, in many European countries the ratio of house prices to incomes is lower than it was 30 years ago. But first time buyers are worse off because the cost of deposits has risen Source: Barker 2004 Economics of Social Housing Version 1.0

Volumes of households are increasing because of social changes Households are rising at around 155,000 a year from 1996 to 2021. Many are single parent or single person households. Household increases are greatest in the south Increase in households is concentrated in London and the South East – where there is already the most demand for housing. London and the South East are expected to see 80,000 extra households each year to 2021. Housing demand will be driven by changing types of household Source: Barker 2004 Economics of Social Housing Version 1.0

Planning constraints deliver national preferences, but imperfectly • Planning constraints on housing supply fulfils policy aims and reflects national preferences • The housing market expresses national preferences for land use, where the UK wants to preserve land. This protects the countryside and addresses urban decline. • The UK overall is a relatively densely populated country (242 persons per sq. km), on a par with Germany (230 persons per sq. km). • It is significantly less dense than Belgium (337 per sq. km) or the Netherlands (390 per sq. km). • But England is much more dense at 380 persons per sq. km. • Constrained supply creates problems of affordability and constraints on economic growth – these are the price of urban regeneration and preservation of green belt and rural landscape. • But planning may constrain supply unnecessarily • Some development would have a high cost to society (such as urban parks and fields with rights of way). But some argue planning stops building on land with a lower social value. • Planning is an insider-outsider problem: house owners inside the housing market have more power over decisions than those outside and their decisions reflect their own interests rather than those of the wider community. • Only increased housing supply can enhance affordability • Greater affordability for all cannot be achieved by increasing government subsidy to home ownership. It can help some groups (e.g. “key workers”). • But if subsidies increase demand and supply is held constant, then prices will rise. • If some households do not receive a subsidy they might be squeezed out of the market. • Wider affordability can only be sustainable by increasing the supply of housing Source: Barker 2004 Economics of Social Housing Version 1.0

Contents • Executive summary • The macroeconomics of housing overall: supply and demand trends • Or why the need for social housing is driven by macroeconomics – restricted supply relative to demand • The macroeconomics of social housing: supply and demand trends • The economics of planning policy to deliver affordable housing • Or how affordable housing has been provided as a tax on developers and as a means of avoiding grants • Economic assessment of planning-driven provision of affordable housing • Or how well S106 addresses the economic issues of affordable housing • The credit crunch and its impact on affordable housing provision • What happened, why, and what it means for affordable house building Economics of Social Housing Version 1.0

The macroeconomics of social housing: supply Economics of Social Housing Version 1.0

Changing housing stock since 1939 Social rented stock peaked in 1979 Social housing grew rapidly after WW2, to 31% of stock in 1979, dominated by local authority housing. The Right to Buy and less new building reduced social housing to only 18.5% by 2004. New building is by housing associations – who took stock from councils. In 2004 housing associations had almost as many units (1.8M) as local authorities (2.2M). Changing social housing stock since 1991 The net supply of new-build social rented dwellings has fallen since 1991 Less social housing was built. Many social houses were bought under Right to Buy - sales peaked in 2003-04 and 2004-05. People bought council houses before maximum discounts reduced. Net housing stocks shrank by more than 60,000 in 2003-04 and 2004-05. The pace of reduction has slowed. Source: Hills 2007 The overall net supply of social housing has declined since 1979 Economics of Social Housing Version 1.0

Most of the stock of social housing are existing units • Social housing stock is dominated by existing units • The diagram compares the structure of social housing in 1996 and 2005. • It shows that 93% of the 4 million social rented units in 2005 were already within the sector nine years earlier. • Existing stock is more significant than newly-built stock. Even if 40,000 new units were added each year from 2006 to 2016, 90% of the UK’s 2016 social rented stock would have been in existence in 2006 • Local authority stock has been replaced by housing association stock • The local authority sector has reduced through demolitions, sales and transfers to housing associations • The housing association sector has grown through those transfers, new building, and acquisitions of existing properties. • Stock quality is improving overall • Social homes failing to reach the Decent Homes standard has almost halved from 2.3 million to 1.2 million Source: Hills 2007 Economics of Social Housing Version 1.0

Local Authority spending on maintenance and management has risen • Councils spend more on maintenance, and rent income matches spending • Local authority maintenance spending was constant until 2002-03, but grew since then. • Council properties get an average of £34 per week for supervision, management and repair, plus £11 per week for major repairs, and £10 per week for interest on borrowing. • £52 per week is collected in gross rents • Council house spending is sustainable – a holding pattern – because rent almost covers costs (there is a small government subsidy). • Building many new houses would increase cost vastly • Housing associations spend about the same on maintenance • Housing associations spent £40 per week for each property, compared to £56 per week collected in rents • These figures are not strictly comparable with those for local authorities, but suggest that rental income was slightly higher and current spending on management, maintenance and provision for major repair slightly lower per dwelling. Source: Hills 2007 Economics of Social Housing Version 1.0

Subsidies for housing are little reduced but have shifted to the demand side • Total public support to housing is little lower in real terms now than in the mid-1970s • But there has been a decisive shift from supply-side to demand-side subsidy. • Supply subsidies that allow producers to supply housing at lower cost have fallen • Capital subsidies (grants to housing associations to build new dwellings) fell rapidly in the second half of the 1970s, and again after the early 1990s, before rising after 1999-00. • Demand subsidies have grown • Demand subsidies allow consumers to spend more than they would otherwise. • Housing Benefit grew to around between £10-12 billion since 1993-94 • Reducing benefits for private sector renters was offset by growth in benefit for social tenants Source: Hills 2007 Economics of Social Housing Version 1.0

The macroeconomics of social housing: demand Economics of Social Housing Version 1.0

Underlying drivers of social housing have improved, but affordability is still an issue • Many indicators of housing market stress have improved as overall housing conditions have improved • Mortgage arrears and repossessions are a fraction of the peaks of the early 1990s. • Annual mortgage repossessions were 0.1% per year, a seventh of the rate in the early 1990s, until 2009. • Literal homelessness – sleeping rough –fell between 1998 and 2001, since when it has been stable. • Households placed in “bed and breakfasts” by local authorities has fallen since 2002, back to the levels of the mid 1990s – but use of temporary accommodation has doubled • “Concealed households” (households that could form separately) fell from 165,000 in 1991 to 140,000 in 2000 and have fallen slightly since then • Separate households sharing dwellings (couples or lone parents living within another household) fell from 390,000 in 1996 to 207,000 in 2006 (up from a low point in 2004). Numbers seem down significantly over the last decade. • These indicators have not disappeared and much is still to be done • But affordability is the key driver of social housing Source: Hills 2007 Economics of Social Housing Version 1.0

Geography of social housing waiting lists Council waiting lists are up 53% on 2002 Immigration and ageing populations have driven demand for council housing Many of the growing number of people in temporary rented housing form lengthening queues for social housing House building has not kept up Social housing waiting lists are worse now than in 2002 Source: The Times, 12-09-2008 Economics of Social Housing Version 1.0

The role of social housing is now to provide a safety net for the poorest • Over the last quarter century the role of social housing has changed. • The social housing sector has become much smaller as a proportion of the total, although nearly 4 million households still live within it. • In the past many people chose to live in social housing. Post-War provision was aimed at households on a range of incomes. With rising real incomes and the Right to Buy, many of those social renters bought their own council houses or bought other houses, many of them ex-rental. • Demand for social housing is now driven by need where in the past it was a matter of choice. • Since the 1980s provision has become more tightly constrained and new lettings focussed on those in greatest need. • Most people have been able to afford to buy houses despite rising prices and constrained supply, as real incomes rose and interest rates dropped • But people who could not afford to participate in the housing market often had severe needs for affordable housing. • Social tenants are now much more likely to have low incomes and not to be in employment than in the past, and to be “stuck” in social housing. • Social tenants in paid employment fell from 47% to 32% between 1981 and 2006. • 70% of social tenants have incomes within the poorest 40% of the overall income distribution • Tenants have high rates of disability, are more likely than others to be lone parents or single people, and to be aged over 60. 27% of all black or minority ethnic householders are social tenants (including around half of Bangladeshi and 43% of black Caribbean and black African householders), compared to 17% of white householders. • More than 80% of those living in social housing today were also within the sector ten years ago Economics of Social Housing Version 1.0

Social tenants are now consistently poorer, compared to previous decades • Social tenants have increasingly concentrated in the lowest income groups since the 1980s • This is a major change from the position in the 1960s and 1970s. • In 1979, 20% of the richest tenth lived in social housing. • Now hardly any of those in the top fifth of earners have social housing. • Better-off tenants purchased under the Right to Buy, or paid to move elsewhere. • By 2004-05 a third of people living in social housing had incomes in the poorest fifth of the income distribution. 70% were in the poorest two-fifths. (Hills, p87). This was driven by changes in employment status. • Social tenants in employment has fallen from 47% to 32%; full-time employment from 43% to 22%. • In contrast employed private renters have risen from 58% to 69%; employed house owners are stable, falling from 70 to 68% (with increasing retirees). • Part time work rose rapidly, to just under 50% in 2005, driven by increasing numbers of lone parents. • “Unemployed” social tenants have fallen but many are “other inactive” (63% are lone parents) and in the “permanently sick or disabled”, to nearly one quarter of all those of working age. Source: Hills 2007 Economics of Social Housing Version 1.0

Overcrowding is still an issue, driving the need for social housing • Overcrowding is a consistent issue for social renters and a growing issue for private renters • For most of the last decade, about 500,000 households have been in dwellings failing the “bedroom standard”, with little clear trend, although in the private rented sector the number has risen from 63,000 to 110,000 (Figure 4.7). The rate of overcrowding against this standard is higher in the social rented sector than in owner occupation. • It is also higher in London than elsewhere, at 11% of social housing households. This rate rises to 28 and 29% for black African and Bangladeshi householders. • Overcrowding in London has increased since 1998-99, mostly in the private rented sector, doubling from 25,000 to over 50,000 by 2005-06. • The “bedroom standard” of number of bedrooms needed for their household size and composition allows one bedroom for each couple or person over 21 in a household, plus bedrooms for children on the assumption that two of the same sex can share, as can two children of different sex aged under 10. Source: Hills 2007 Economics of Social Housing Version 1.0

Social tenants enjoy less space per person, and are more dissatisfied • Space drives satisfaction with homes • For any given level of space social tenants are far more likely to be dissatisfied • 30% of social tenants with the least space are dissatisfied, compared to 10% of owners. • Overcrowded social tenants have fewer options to move and will be affected longer • Largely unemployed social tenants are affected for more of their time each day. • Owners choose a trade-off between space and price; social tenants have not. • Social tenants have a quarter less space per person than owner-occupiers • 28% of both private and social tenant households are in the most crowded fifth overall, but only 17% of owners, although density varies across all tenures. • The most crowded tenth has 15.4 m2 per person • The least crowded tenth 91.5 square metres, six times as much. • Higher income may not mean more space • In all tenures, more income means more space per person. • Owner-occupiers’ space per household rises with income. But tenants' space varies little by income. Source: Hills 2007 Economics of Social Housing Version 1.0

The real value to tenants of social housing is significant • The advantage to tenants of rents that generate a sub-economic return is in the hundreds of billions. • The “economic subsidy” (the difference between actual rents and those giving an economic return) reached £6.6 billion in England in 2004, higher in real terms than in 1996. • Three-fifths of this total went to social tenants in London, the South East and South West. In Northern regions and the Midlands, actual social rents were £10-20 per week below those that would give a comparable return on housing capital values to those in the private sector, but in the East and South East the difference was £40-50, and in London about £70-80. (Source: Communities and Local Government analysis, HCA.) • London’s higher capital values mean economic rent would be £138 per week for local authority properties, or £150 per week for housing associations. • Actual social rents do not vary much across the country, so there are much higher levels of subsidy in London than in lower cost regions – averaging £71 per week for local authorities and £80 per week for housing associations. • The net present value of a subsidy at this level to tenants who stay for 15 or 20 years is around £32,000 across the country and more than £65,000 in London. • With a national average value for social rented dwellings of £105,000 in 2004 the overall housing stock is worth £400 billion. • Net of management, maintenance and repair, rents were yielding around 1% on this capital value (0.9% for local authorities, 1.2% for associations), well below an economic rate of return Economics of Social Housing Version 1.0

Social housing’s real value to tenants varies across the country Source: Hills 2007 Economics of Social Housing Version 1.0

Since the 1990s local authorities have used planning powers to promote the provision of affordable housing. The aim is to make developers (or landowners) pay for affordable housing. Local authorities negotiate with developers for the inclusion of an element of ‘affordable housing’ within general housing sites. The policy covers both social rented housing and Low Cost Home Ownership (LCHO) Developed at the end of the 1980s, the aim was to address the needs of lower income households Poorer people were being priced out of local housing markets during the boom Then in the slump in the housing market, repossessions by mortgage lenders added to the housing burden. Neither Local authorities nor the Housing Corporation could provide enough affordable housing. The Right to Buy (1980) meant local authorities were losing their stock and Local Authorities could not afford to replace it. The policy operates through Section 106 of the Town and Country Planning Act 1990 (S106) S106 agreements mitigate against the impact of development by providing additional infrastructure, or – increasingly – to require the inclusion of affordable housing requirements at the cost of the developer. The policy affects the supply side, complementing the public focus on demand side subsidy Although often the whole site may be built out by the builder, the houses are transferred to the RSL at a price which reflects the reduced land value. In some cases, the houses may be transferred at less than construction cost, entailing a cross-subsidy from the market part of the site Planning policy has forced developers to create social housing Economics of Social Housing Version 1.0

S106-driven completions are increasing S106 is vital in London, less so in the north S106 is more important in London and the South East than in northern regions. This is as would be predicted, on the basis of development land values. S106-driven affordable housing is a stable component of housing completions Source: Stephens et al 2005 Economics of Social Housing Version 1.0

S106 is half of affordable house building S106 output has risen by fast since 1999-2000 S106 rose from 5% to 12% of total private completions from 1999 to 2007. S106 drove 21% of all affordable housing completions in 1999-2000, rising to 55% in 2004-05 – but falling back to 50% in 2005/6 Most S106 starts are in major residential developments 26% of large developments had S106 housing in 1997-98; 40% in 2003-04. S106 housing is substantial in value £1.15 billion in England in 2003-04 (Barker 2006). But affordable housing volumes do not grow as a result of S106 The volume of affordable dwellings built depends on Government grants and overall house building In the late 1990s both declined so fewer affordable homes were built. Affordable housing delivery therefore fell 30% between 2000-01 and 2001-02, a fall of over one third. From 2001 both funding and house building rose - but slowly Growth in affordable housing has been slow. Output levels are only 75% of 1999 levels S106 succeeds in delivering affordable housing without public subsidy. Only when the government starts to increase finance do output levels rise. Crook et al demonstrate this by looking in more detail at S106 completions. S106 has grown as affordable housing additions has declined Source: RICS Economics of Social Housing Version 1.0

Affordable housing via S106 may not increase the total supply of housing • S106 does generate some new social housing without the need for grant • According to Stephens 30% of affordable housing provided on S106 sites is provided without Social Housing Grant. • This part of the output is ‘additional’. • The other 70% of S106 schemes that get grants have some additionality because they “stretch” SHG to create more homes – but these schemes tend to be on more expensive sites. • S106 does not offset the decline in publicly-subsidised house building. • S106 completions are not enough to substitute for the decline in affordable homes built in the traditional way with government grant to housing associations – S106 completions rose by 30% but the total rose by only 15%. • At the turn of the century total output was 45,000 units. Total output was 33,000 in 2004-05. • The Housing Corporation still built 50% or more of public housing in 2005/6 • Since 1974 the Housing Corporation has been the major provider of capital finance for RSLs, using the Approved Development Programme (ADP). ADP accounted for the funding of 50% of affordable housing in 2005/6. • The amount delivered with no support increased from 18% in 2004/5 to 25% in 2005/6. • The remainder is funded through a mixture of subsidy and developer contribution. • The policy remains disappointing in terms of the amount of ‘additional’ provision and cross-subsidy from development gains actually achieved. • The policy has changed the geography of new social housing, and it is achieving the new aim of promoting mixed communities. • However, developer contributions as a proportion of overall development values on mixed sites remains low, in the range of 2-12%. • Therefore, the policy could achieve more, if there were better land supply, and consistent policy. • But there are limits to the development gain which can be tapped given other demands for infrastructure and brownfield land remediation. Economics of Social Housing Version 1.0

S106 provides affordable housing on sites that RSLs cannot afford to buy S106 changed the geography of affordable housing RSLs can now access high value sites Mixed developments are more common S106 increased take-up of brown-field land. In areas where land supply is completely tied up in the private sector, S106 is the only way RSLs can develop. RSLs used to have access to ex-local government owned land, or public sector land (e.g. NHS Trusts) but often this has run out. S106 agreements are usually fully implemented S106 is accepted by developers Local Authorities report that in the vast majority of cases S106 agreements are implemented in full (RICS and Stephens quoting Monk et al 2006). Both developers and Local Authorities would like S106 agreements to be better specified but both sides have learnt a great deal S106 is effectively a tax on larger residential developments S106 is a tax, but developers do not know what the tax rate will be before development Developers are uncertain about how this tax is applied – and the lack of clarity is a little unfair House builders do not offer S106 as philanthropy. It is a coercive system. Affordable housing is the price paid for planning permission. It is part of the cost of development, a cross-subsidy from development value to affordable housing Developers and LA s agree that greater consistency and clarity are required. S106 delays developments 45% of S106 development agreements (11,500 cases) take more than six months to complete 11% (around 3,700 developments) take over a year to negotiate (Barker 2006). S106 agreements can cause delay and frustration. S106 does deliver affordable housing but is not necessarily fair Source: Stephens, RICS Source: RICS Economics of Social Housing Version 1.0

S106 housing is usually funded by public bodies as well as developers Local authorities help fund most S106-based social housing by providing land at lower cost Average SHG rates were typically 40-60% of scheme costs but could be higher in the South. Grant rates for shared ownership were roughly 20% to 30%. Costs per unit including land range from below £30,000 for a small rural exception site used for shared ownership up to £135,000 for rented flats in a central London luxury development. In the majority of cases the land was given free or heavily discounted. Costs excluding land were typically around £50,000 but rising to £60,000 – £70,000 in the South East and up to £80,000 in London. Costs for shared ownership were considerably lower. Developer contributions are large absolutely, but not relatively Local authorities are good at using S106 to gain land and money from developers In 2005/6 developer contributions of discounted or free land went up to 2,519 hectares from 40 Ha in 2004/5. But most of this was in the South West (up from only 8 hectares in 2004/5 to 2475 hectares in 2005/6). Financial contributions increased from £40M in 2004/5 to £142M in 2005/6. Most of this was in the South East (£103M in 2005/6, compared to £11M) Developers’ contributions are only a small percentage of scheme development values RICS surveys of developers and LAs found that developers contribute 2-12% of scheme value Since land values are 40%+ of total value, S106-based developer contributions are relatively low E.g. a 25% developer contribution (by area) turned out to be only 6% of the whole scheme value. S106 house building still needs public money and developers get a good deal Economics of Social Housing Version 1.0

Local authorities lack commercial skills to make S106 fully effective • Local authorities have not always understood S106 • The aim of getting developers/landowners to contribute to affordable housing is implicitly clear enough to expert observers • But the policy has been criticised for its lack of practical clarity right from the start • Additional guidance has been issued and PPG3 has been revised twice. • Local authorities do not fully understand the legal limits to their negotiating power • LAs still complain that it is not clear whether they should be maximising the developer contribution, or simply asking for a ‘reasonable’ amount – and they do not know what might be reasonable. • Planners lack the skills to negotiate effectively • Planners as a profession are uneasy of their right to impose social housing development on developers • Planners are not necessarily trained for financial assessment and negotiation • Planners biggest problem is when developers claim that providing the affordable housing desired by the LA renders their scheme uneconomic. LA’s planning, housing and legal departments need skills in development economics, to assess site viability issues. • Best practice is emerging • The best councils have clearly identified which staff take responsibility for S06 and can specify the type, tenure mix, and even size and location of the housing. Some have model S106 agreements to try and standardise the process Economics of Social Housing Version 1.0

Prices in the UK housing market are being “corrected” – they are falling dramatically Property prices were probably “overvalued” anyway. UK housing bubble one of the worst in the world. UK households are the most indebted in G7. Global financial market stresses have destroyed the capital available for lending on UK mortgage markets Weaker economic growth means less money around, so less demand for houses Prices down at the fastest annual rate since the early 1970s Further price falls ahead – only about half way through? Capital Economics forecast a crash and expect 12% price drops in 2009, 10% in 2010. The Mortgage market will be disrupted for a long time There is no revival of securitisation imminent, so no new supply of mortgage lending. Virtual closure of the securitisation market has disproportionately big effect on UK mortgage finance. Mortgage market has plummeted to unprecedented depths Unemployment and repossessions on the rise Buy-to-let market is at risk Average length of housing cycles is around a decade Some economists (Oxford Economics) forecast a price rise from late 2010 Long-term demographic and economic factors will drive up real incomes and house prices - eventually But real (inflation-adjusted) prices will regain their 2007 peak only in 2017. The credit crunch has decimated the overall housing market Economics of Social Housing Version 1.0

The credit crunch threatens all house building • Achievement of the Government’s house building targets are threatened • Housing Green Paper, Homes for the future targets 2 million new homes by 2016, 3 million 2020, higher environmental standards and commitments. • Public investment of £8 billion over 2008-11 in affordable housing . • These targets are under significant threat. • Market house building stalled - developers face falling demand from customers and pressure on asset values and business models. • Affordable housing under pressure - programmes were reliant on cross subsidy from shared ownership and open market sale properties. • Starts are down and continuing to fall • NHBC's September 2008 numbers show 23,185 applications to start new homes in the combined private and public sectors in the three months to the end of September - 54% lower y-o-y. private sector (i.e. excluding housing associations) down even faster - 13,358, down 67% on 2007). • New home starts in England during Q3 2008 fell 50% year-on-year to 20,239. • Completions are also down • Completions fell 20% in Q3 2008 - 33,299 Economics of Social Housing Version 1.0

Shared ownership market is dwindling Banks are not liquid so there few lenders for shared ownership, hence buyers cannot borrow. Lenders property valuations are dropping fast Shared ownership flats often cannot be sold on Shared ownership buyers treated as sub-prime - Low income with potential default Location is now vital – there is a glut of apartments in Northern towns RSL’s shared ownership properties are now in competition with developers who are desperate to get anything for their flats S106’s have benefited in the short term but may decline in medium term There has been a slowdown in S106 development – as house builders hold back on new starts, S106 opportunities have reduced. But developers are renegotiating s106 deals to increase proportions of affordable housing Housing associations are seen as less risky buyers than owner-occupiers or property investors The benefit to affordable housing was unexpected, is small in overall scale, and may not last long. This could be the end for S106 in the medium term When property prices are in freefall, S106 may not be the best way to capture planning gains. Surviving developers want to do affordable housing Commercial developers are now shifting more of their work into affordable housing Only the government has cash / can borrow so RSLs LAs are now premium clients Land price opportunities Residential land values will decline to the end of 2009 – probably more than property values (as occurred in previous residential property downturns), since banks are unwilling to provide finance This creates opportunities for housing associations and public sector to buy land more cheaply and increase supply Mortgage rescue and support for mortgage interest could stop the rise in waiting lists The government will support up to 6,000 of the most vulnerable homeowners facing repossession through a £200m mortgage rescue scheme The DWP aims to provide more income support for mortgage interest to keep unemployed house owners in their homes The credit crunch changes the game for affordable housing Economics of Social Housing Version 1.0

The HCA comes into existence at an interesting time • The HCA combines pre-existing government bodies in one strengthened entity • Functions and assets of English Partnerships • Investment functions of the Housing Corporation • Delivery programmes from Communities and Local Government • The Academy for Sustainable Communities. • The HCA aims to do economic regeneration, house building and community development in a “joined up” way • The HCA aims to cover all housing and regeneration issues in a local area, helping local bodies with cash, knowledge of best practice, and cross-departmental working / problem solving • The HCA works across central and local government, housing associations, private sector builders and developers, the voluntary and community sectors, Regional Development Agencies and industry bodies • The HCA has significant power • A wide brief from government “do anything … for the purposes of its objects or for purposes incidental to those purposes”. • The HCA can build/ organise housing and infrastructure, give money, form companies, do training and offer advice • It has compulsory purchase powers Economics of Social Housing Version 1.0

As private and S106 house building declines, the HCA will be key • The HCA is now the primary investor in affordable housing • No-one else has any money to invest… the HCA claims it has an annual budget of £5bn, making it the biggest regeneration and development agency in Europe • Funding for 2008-11 is £17.3bn, with £8.4bn in the National Affordable Housing Programme • The HCA is the Housing Corporation (funds social housing) and national regeneration agency, English Partnerships, plus delivery functions from the Department of Communities and Local Government (DCLG). • Takes on the government target of 3m new homes in England by 2020, as well as improving social housing, tackling homelessness and regenerating cities. • “Local government’s best delivery partner” – Bob Kerslake • The HCA’s scope is to support the UK’s housing and community development: • Improvement of the supply and quality of housing in England • Regeneration or development of land or infrastructure in England • Support regeneration and development of communities (“or their continued well-being”) • Support sustainable development and good design that meets people’s needs • Co-operation with the Tenant Services Authority (TSA), the new social housing regulator on social housing. Economics of Social Housing Version 1.0

The HCA will build affordable homes with private house builders The aim is to deliver 155,000 additional new homes a year. The aim is to increase the supply of new housing and address wider issues of affordability by increasing supply relative to demand. Some – but not all – homes are for low cost home ownership and social rent. The aim is to Increase social rented homes by 50%, to 45,000 in 2010-11, with 25,000 affordable homes a year and 240,000 new homes by 2016. The HCA’s funding mechanisms are varied House builders must bid for the work. 143 firms have “Investment Partner” accreditation. £200M extra per year for housebuilding around London. The HCA has fairly wide financial scope – projects up to £10M don’t need Departmental approval. Private sector partners as well as housing associations – and for the first time, local authorities – council housing is back. S106 is being both tightened up and loosened Developers who want grant have to make their case using “recognised economic tools” i.e. it is harder for developers to wriggle out of making their full contribution. Developers taking grants have to meet design and quality standards. But if developers don’t want grant, they don’t have to meet the same standards of quality and design as grant-takers do. The HCA claims to have an opportunity to address known, deep seated issues The aim is to build houses sensibly – with access to infrastructure and jobs. Mixed tenure is encouraged – developments that are more than 25 social rented homes with no other types of tenure will rarely be funded. All homes to be built affordable homes to be more spacious than previously. Investment in housing renewal and repair. Relationship between registered social landlords and councils may change HCA hopes to be avenue for closer cooperation between central government and local authorities Government hopes to build more homes without increasing grant. In theory, the National Affordable Housing Programme addresses key issues Economics of Social Housing Version 1.0

The HCA may only take up slack left by private developers The HCA’s target of 155,000 new homes a year is about the same as current new house builds (completions for England in the 12 months to June 2008 were 161,100). If housebuilders stop building then the HCA will not succeed The HCA planned to rely on private developers via Public Private Partnerships £1 of HCA money is joined by £5 of developer money “The leverage is often five to one, so their investment, their willingness to take risks and participate in delivery capacity is crucial to the agency.” – Bob Kerslake, The Times, 12-09-08 But the HCA is putting in more government money instead Grants for housing association developments will rise The Government will put more equity into social homes, funded by bringing forward money from 2010-11 Bob Kerslake, The Times, 12-12-08. The desire to build mixed developments may be overcome by the collapse in house buying Private sector housing development has largely stopped, jeopardising S106 low-cost homes The HCA claims that housing associations already have 10,000 homes for private sale or shared ownership that they can’t sell because of the credit crunch. The aim seems to be a small-scale move back to “traditional” council housing with mixed-class tenants A third of the homes on an estate will be social rented homes at very low rates The rest will be at subsidised “intermediate rents” – about 80 per cent of market rates – for those earning less than £60,000. Housing association homes that cannot be sold will be rented to those on council waiting lists, people on low incomes, and key workers and would-be first-time buyers. This could bail out housing associations which are under threat if they cannot sell units. The HCA is shifting strategy fast to deal with the collapse in house building Economics of Social Housing Version 1.0

The Economics of Social Housing

The Economics of Social Housing

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