Select Committee on Transport, Local Government and the Regions Memoranda


Memorandum by Centre for Residential Development, Nottingham Trent University and Three Dragons (AFH 55)

1.  INTRODUCTION

   The Centre for Residential Development at The Nottingham Trent University and Three Dragons have separately and together, over the last two years, undertaken research on aspects of affordable housing for a number of organisations including the DTLR, GLA, English Partnerships and Communities Scotland. This memorandum reflects our collected views developed through our research activities and independent evaluation.

  We comment on:

    —  the definition of "affordable";

    —  the role of low cost home ownership. (How resources should be balanced between social housing and options for owner occupation);

    —  planning gain and funding. (The extent to which planning gain can fund the level of affordable housing required); and

    —  scale of provision for housing.

  We also provide at Annex A comments on the use of tariffs. These comments build on our response to Reforming Planning Obligations, DTLR, 2001.

2.  THE DEFINITION OF AFFORDABLE HOUSING

  A flexible definition of "affordable" is helpful and should be retained. Flexibility allows local areas to respond to local needs and to changes in market/economic circumstances. A model which, for instance, only delivered social rented housing would not benefit all households who wish to rent (but cannot afford market rents) or assist in meeting demand for low cost home ownership. The housing needs of households who cannot/do not want to buy are not all the same—one size does not fit all.

  We have significant reservations about the quality of local housing needs assessments (HNAs). The figures produced by needs assessments are sometimes less than convincing. Too often local needs assessments show high levels of demand for social renting on the basis that this is what young people can currently afford without taking account of potential income growth when they leave home. In the case of older households little account is taken of equity in existing properties. HNAs, which indicate that potential demand for affordable housing exceeds total new supply, are not helpful to local authorities in framing policy. HNAs also provide a snapshot of potential demand for affordable housing. Further guidance on HNAs is required. Local authorities should be advised of key indicators (eg relationship between house prices and local incomes, number of empty and difficult to let properties) to monitor within and between HNAs to indicate how needs for affordable housing are changing.

  But that flexible definition must provide a genuinely affordable product. Because new properties are on average 30 per cent more expensive than comparable second-hand properties a modest initial discount on purchase of a newbuild property rarely provides a product that is affordable either initially or in the long term.

  In our view, Government should reinforce its current policy position that affordable units should be less expensive than "houses generally available on the open market" (para 4 Circular 6/98) and local authorities need to be more robust in the way they word and implement policy.

3.  THE ROLE OF LOW COST HOME OWNERSHIP

  Low cost home ownership (LCHO) can help meet the needs of middle income households in higher priced areas. Our researches on this subject complement evidence from Rowntree and other sources suggesting that in parts of London and the South East in particular but also in the South West and the East of England, potential demand for LCHO exceeds supply by as much as ten-fold. We recognise that demand for social renting can also exceed supply, but believe that local authorities should be encouraged to promote a range of housing options to meet local need. This could most effectively be done by ring-fenced funding for LCHO in those regions where there is clear evidence of need.

  Not all middle income households will require LCHO. For some households renting will be a more appropriate form of tenure, reflecting their stage in household lifecycle.

4.  PLANNING GAIN AND FUNDING

  Our experience is that local authorities are increasingly looking to developer-led housing schemes to deliver affordable housing. Targets set by councils for the amount of affordable housing on each site seem often to be made with little understanding of the economics of development. Councils may not really know if they are expecting too much or are being timid in what they ask for.

  There is a need for a much better understanding of the economics of residential development and the relationship of this to the delivery of affordable housing and the production of residential urban capacity studies. Our work for the GLA involved the production of a model that provides information on a borough by borough basis on the economics of affordable housing provision. We believe that this type of information can be useful, along with other considerations (eg local need), both in framing policy and in assisting with site by site negotiations. (On-going ESRC funded work at the Centre for Residential Development on assessing the viability of urban housing development is extending understanding of the economics of residential development).

  There are three parties that can make a contribution to the provision of affordable housing:

    —  the registered social landlord (RSL) itself—through a loan taken against income from scheme and/or use of own reserves;

    —  the developer—by profit forgone on affordable housing units or a discount on land value);

    —  the public purse (through grants to RSLs provided by the Housing Corporation or by local authorities).

  There is a need to understand how these different funding pots work and how they vary in different circumstances.

  A major issue is that the level of public funding for an individual scheme reflects build costs and land prices in the area. This means that public subsidy is greatest in areas of high house and land prices. Yet it is in these areas, where the amount of developer contribution is potentially greatest, that the private sector could contribute more. (eg our work for the GLA showed that estimated residual values in one Inner London borough were of the order of £25 million per hectare, yet the public subsidy available for the provision of affordable housing was £108,000 for a two bed unit. This compares with a typical outer London borough where the estimated residual value was £2.5 million but the public subsidy for the same unit was £55,0000.) This means that the most effective use is not being made of public funds to maximise the delivery of affordable housing. The rules governing the use of Housing Corporation funding for the provision of affordable housing on mixed tenure sites should be reviewed and consideration given to the reduction of the subsidy available in high value areas and to maximising the contribution from residual value.

Funding for affordable housing from commercial uses

  There is a case for eliminating discrimination between different sorts of development and requiring all types of development to contribute to financing affordable housing. Similarly the threshold below which residential development sites are not required to make a contribution to affordable housing provision should be abolished. There can be no justification for penalising developers of larger sites and there is ample evidence that in many districts those sites that come forward are typically below the current thresholds and it is not unusual to find authorities where the typical site is below five units.

Tariffs

  The extension of the requirement to contribute to affordable housing provision requires a level playing field. We therefore support the proposal for a tariff system contained in the recent consultation paper on planning obligations. We think that tariffs are more transparent, allow for local flexibility and can apply equally to housing and other development types. However if councils do not understand how much for to ask under present regime, how will they know how to set tariffs? In Annex A we set out a possible mechanism based on the residual valuation method used for the GLA.

5.  SCALE OF PROVISION OF HOUSING

  It is pointless to increase the proportion of total housing supply that is allocated to affordable housing if the overall supply is insufficient to meet the need. The question of the right level of overall housing production is a complex one that we do not propose to address in detail here. It must however be of concern to the Committee and inform its views on affordable housing supply.

  In this context we would point out that house building in the UK is now at a historically low level. In 2001 the lowest level of housebuilding in peacetime for 77 years was recorded, ie fewer houses were built in 2001 than in any year since 1924, excluding World War II. In London last year, there were 184,000 extra households, but only 58,000 houses were built. The UK in recent years has spent 3 per cent of GDP on housing investment compared with 7.5 per cent in Germany and 6.3 per cent in France.

Annex A

Tariffs: a proposed mechanism for setting a local tariff

  For a tariff to be "affordable" by a developer in the sense of leaving the developer with enough money to make a necessary profit and pay for land, the tariff would have to be set in a way that related to the overall profitability of the development. Technically, the tariff should not be greater than the economic rent or excess profit that might arise from a development. If it is greater than this it will stop development.

  Setting a tariff that is related in a detailed and case by case fashion to the profitability of a development will be difficult. Information on developer revenues and costs on a site-specific basis would be necessary to do this in a consistent fashion. However, if one accepts that (1) development costs vary much less than house prices and (2) residential land values are determined residually ie they are determined by what the developer can afford out of revenue from house sales after non-land costs have been allowed for, house prices provide an important clue to residual value before land payments.

  As a generalisation, it is likely that where house prices are high development values, and residual values will be high. It follows that there is scope to set the tariff at a higher percentage level where house prices are high and a lower percentage level where house prices are low. The tariff could be expressed as a proportion of development value or gross expected revenue from a development. The overall tariff proportion and the actual sum received on a site-specific basis could be calculated by reference to local house prices and published information about development costs. This information could be derived on an authority by authority basis, allowing individual councils to set individual tariffs at the authority level. There would still be room for site by site negotiation to allow for variations in development costs.

Notional worked example

  Financial contribution = X per cent of expected gross revenue from selling dwellings on a site with no affordable housing.

  (where X is determined by the percentage target for affordable housing provision set in the local plan or UDP)

  A series of calculations is then performed as follows

  Full market value

  Expected gross revenue R1 = (No of units x market value)—(development cost per unit (including residual land value) x no of units)

  Market value with affordable housing

  Expected gross revenue R2 = (No of units x market value) + (no of units x affordable

value)—(development cost per unit x no of units)

  Financial contribution = R1-R2.


 
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