The impact of build costs and planning reform on social housing supply in England

Posted: 8th December 2021 New Economics Foundation, Supported by Altair's Podplan

Newcastle, Northumberland, Birmingham and Nottingham among councils at risk of seeing no social and affordable housing delivered through the planning system due to rising building costs 

At least 11 local authorities are set to see social and affordable housing supply through the planning system eliminated due to escalating build cost increases, according to new analysis from the New Economics Foundation (NEF), working with Altair Ltd as development viability and financial modelling partners.

The research shows that eight of these councils are in the north and midlands, where the collapse of social and affordable housing delivery would remove a vital tool for post-pandemic recovery and undermine the government’s ‘levelling up’ agenda.

The new research analysed a sample of two local authorities from each region of England, 18 in total, to test the resilience of social and affordable housing supply to further build cost increases. In every region, social and affordable housing supply through Section

106 of the Town and Country Planning Act 1990 (the planning mechanism used to require social and affordable housing in market-led schemes) is at risk:

  • In the south and east, three out of eight councils assessed – Ashford in Kent, Crawley in West Sussex and East Cambridgeshire – risk seeing no social and affordable housing delivered through the planning system. Cornwall risks seeing social and affordable housing slashed from 35% to 16%.
  • In the north and midlands, eight out of 10 councils in the sample – Newcastle and Northumberland, Blackpool, Doncaster and Hull, Birmingham, Nottingham and Rushcliffe – would see social and affordable housing supply through the planning system eliminated.
  • In Salford, just 2% of homes on market-led schemes would be built as social and affordable housing in the event of ongoing build cost increases.

The research points to labour and materials shortages and events such as Covid-19, Suez canal blockages and Brexit, as contributing to accelerating build costs across England. The Office for National Statistics data puts the costs of construction materials at 19.8% higher in July 2021 compared to July 2020.

Build costs are forecasted to continue rising, at the same time as demand for housing is likely to cool due to the end of the stamp duty reduction and furlough, and rising interest rates. As a result, new planning applications across 2021 remain 16% below pre-pandemic levels according to a Savills report, and the inevitable consequence will be a fall in market housing supply. Social housing can boost housing supply throughout England, since demand for social housing relies not on people’s ability to buy unaffordable market homes, but instead on their ability to pay a controlled rent.

Over the years, successive governments have switched funding and policy support away from social rent towards less affordable rented tenures, as well as towards low-cost homeownership. The analysis shows that while social rent accounted for 87% of the 66,000 affordable homes built in England in 1992–93, social rent made up just 11% of the 59,000 affordable homes built in 2019–20. Similarly, social rent accounted for 100% of the 57,000 affordable homes for rent built in 1992–93, but just 17% of the 38,000 affordable homes for rent built in 2019–20. Meanwhile, the share of affordable housing supply made up of low-cost homeownership tenures rose from 13% to 35%.

There is a pressing risk that many current and planned housing schemes will become unprofitable for developers, and that social and affordable homes on these schemes will be ‘flipped’ to market housing to meet profit expectations and so ensure building goes ahead.

NEF argues that any planning changes that will add to pressure on build costs, like those on increasing development standards in the government’s ‘Planning for the Future’ 2020 white paper, must be carefully considered. The white paper also suggested standardising the practice of ‘flipping’ social and affordable homes to market homes to protect profit levels from the impact of rising build costs or lower-than-expected house prices, which would further put social housing supply at risk.

With the Planning Bill on pause, NEF is urging the government to design a new planning system that will include ambitious requirements for social rent housing delivery and improve land market incentives and transparency. The report sets out the following recommendations:

  • Improve the infrastructure levy to maximise social housing supply, allowing councils to vary the levy rate according to the profitability of housebuilding in different neighbourhoods.
  • Update law and guidance requiring disposals of land in public or charitable ownership to achieve the “best terms reasonably obtainable” to enable and encourage the sale and use of such land for housing schemes that maximise social housing.
  • Amend the Land Compensation Act 1961 to incentivise private landowners to sell their land at values that make ambitious, sustainable, well-designed, locally affordable housing schemes possible, backed up by improved HM Land Registry data.

Rose Grayston, senior programme manager at NEF, said:

“Even under benign conditions, the current planning system cannot provide the social and affordable homes communities need. But housebuilding is not enjoying benign conditions: the country is currently experiencing escalating build costs because a host of international and domestic events have disrupted labour markets and supply chains.

“Our new research shows that across councils in every region of England, the social and affordable housing is under threat from continuing build cost increases. But for many councils in the north and the midlands, our modelling shows a risk that social and affordable housing supply will disappear entirely, posing a threat to the government’s ‘levelling up’ agenda.

“Communities in the north and midlands could be left without the same tools as southern councils to prevent homelessness and sustain construction jobs, making it harder for these places to bounce back from the ravages of the pandemic. It’s critical that the government acts to reform the planning system in England to deliver the homes communities want and need by diversifying the housing supply.”

 

 

The report, Squeezed out: How build costs and planning reform risk slashing social housing supply in England, is available at: https://neweconomics.org/2021/12/squeezed-out

The New Economics Foundation is a charitable think tank, wholly independent of political parties and committed to being transparent about how they are funded.

To find out more about Altair’s development viability and financial modelling tool: Podplan, please click here to watch a video, or contact David Howson, Director, Altair.

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