The feasibility of building 150,000 social homes a year

Nov 26, 2019

The Conservative and Labour manifestos make significant pledges on housing policy. The focus of the Conservatives is supporting people into home-ownership, while the centrepiece of Labour’s manifesto is the pledge that local authorities build many more homes per year.

Whichever party leads the country after December’s election will face immediate pressures to start delivering on these pledges. How can they do this and what issues will they face?

In the first of two blogs, Policy Exchange’s Head of Housing Jack Airey considers the feasibility of Labour’s pledge to build 150,000 social homes a year.

Labour’s pledge: 150,000 affordable homes a year by 2024

Labour’s manifesto has been described as the party’s most radical since 1945. It pledges a much bigger state, both in terms of how much the government spends and borrows each year and in terms of government control over the economy.

One of the most eye-catching policies that fits both of these criteria is Labour’s pledge to spend £75 billion to fund the building of 150,000 affordable homes a year by 2024. It is expected that 100,000 of these homes will be built by local authorities and 50,000 will be built by housing associations. It has said these homes will be available at a rate linked to local incomes. This would be a new form of what is called Affordable Housing – i.e. homes rented or sold at below-market rates to people who meet eligibility criteria.

If these ambitions are met, it would be a big change in new housing supply:

Local authorities would build many more homes. Last year 2,640 affordable homes were directly built by English councils. An increase to 100,000 per year would be a 38 fold rise. The number of homes built by housing associations under these conditions would depend on how many other tenures they build alongside the 50,000 homes per year funded by central government capital grant. Last year, housing associations built 27,350 homes. As is the case now, housing associations may need to deliver homes at other affordable tenures closer to market prices (or at full market price) and use the profit from this to cross-subsidise the delivery of homes at a significant rental discount.
The type of Affordable Housing delivered would be much different. There are a number of tenures currently defined by the Government as counting as Affordable Housing and they are delivered at varying rates. Of the 57,485 homes delivered as Affordable Housing last year: 6,287 homes were built for Social Rent (around 50 per cent of market rent), 31,571 were built for Affordable Rent (up to 80 per cent of market rent) and 19,627 built for Shared Ownership (where shares of homes can be bought in stages and rent is paid on the rest) and Affordable Home Ownership (where homes can be bought at below market rates). Under Labour’s proposals, the Affordable Housing funded by central government would be sub-market rental housing linked to local income rates. Separately, it has also pledged to build low-cost homes reserved for local buyers, though it seems these discounts would be funded by a different spending pot (or delivered without grant, for instance by changing planning regulations).
New Affordable Housing will mostly be publicly-built rather than privately-built. Last year, just under half (49 per cent) of new Affordable Housing was built by private builders. These homes are built via Section 106 agreements where, as part of the terms of a developer being granted planning permission to build their development, a proportion of homes (normally around 30 per cent) must be provided as Affordable Housing available at one of the tenures described above. It is then sold onto housing associations that manage and let the homes to eligible tenants. The remaining half of new Affordable Housing is funded or built directly by housing associations (35 per cent), local authorities (10 per cent) and other providers. While private builders would still be expected to provide Affordable Housing as part of obtaining planning permission (though exactly how much would depend on the number of homes private developers build each year), the significant increase in public building would mean a much higher proportion of Affordable Housing delivery would be done by the public sector.

The proposed changes are significant. They raise a number of questions around how the pledge can be delivered.

Is £15 billion enough to support 150,000 affordable homes per year?

Labour’s £75 billion commitment would amount to £15 billion per year over the next parliament and £100,000 of capital grant per affordable home. This is much higher than current rates of capital grant which are on average £26,000 per home, reaching £72,600 for Social Rent homes. The higher rates of capital grant reflect the fact that Labour’s proposals would require affordable homes to be provided at lower rents. This would reduce future rental income which would reduce the amount that can be borrowed against to finance the rest of the development.

However, it might be the case that Labour’s proposed grant is not enough to deliver 150,000 homes at the scale they suggest – or indeed in the places where rental costs and development costs are highest. The National Housing Federation has found that to deliver the 90,000 Social Rent homes each year that they calculate are needed, an average grant of £183,000 per home is required. Outside of London, the grant required per Social Rent home would be £162,000 out of a total development cost of £323,000.

Can local authorities and housing associations efficiently manage development costs?

Labour might argue that they can reduce the costs of building affordable homes through other means, for instance encouraging local authorities to build on land they already own or providing local authorities and housing associations access to land owned by other parts of the public sector at discounted rates. This would reduce some of the costs of development. However, building on public land has been an ambition of several governments, with unsatisfactory results. Often government departments are slow at identifying and releasing surplus land, while there are financial rules dictating that they must achieve the highest capital receipts.

These rules can, of course, be changed. However there is not an unlimited supply of cheap and easily developable public land on which local authorities and housing associations can build. To deliver Labour’s pledge of 150,000 affordable homes per year, they would still need to compete with private developers and purchase land on the open market which, depending on its location and planning context (i.e. whether it has planning permission), can be very expensive.

The costs of delivering affordable homes would also be impacted by build costs. These include the costs of labour, materials, finance, groundworks, transport and utility network connections and all the other things related to development like design and project management. They also include the cost of securing planning permission – a housebuilding local authority would need to go through their local authority planning process like any other developer and they cannot expect to be treated any differently (if they did the local authority would be taken to court). The riskiness of the planning process makes securing planning permission a significant development cost. It averages £100,000 per hectare, compared to agricultural land values typically being £21,000 per hectare.

Do local authorities and housing associations have internal capacity to build 150,000 homes cost effectively and to high standards?

For local authorities and housing associations to deliver 150,000 affordable homes on the grant levels offered by Labour, they will have to be proficient at keeping all of these development costs as low as possible. Many housing associations already build homes. They therefore have some internal housebuilding capacity, with staff and expertise that can acquire land at a low cost, navigate the planning process, arrange development finance and manage the construction process. Some housing associations are proficient at managing this process, however there are many who do not benefit from the expertise or economies of scale that private developers have acquired over many years of building homes to tight margins.

More significantly, however, the large majority of the local authorities expected to build 100,000 homes a year by 2024 have little to no experience of building homes. In 2017/18, over two thirds of the 1,870 new council homes that were built in England were built by just six local authorities, while 288 local authorities with responsibility for housing of 326 built no new homes at all.

It will take a long time to build up the capacity of local authorities to build affordable homes in a cost-effective manner. They will need to employ people with the relevant expertise and experience in land purchasing, planning and finance – the same people that private developers and housing associations will also want to employ. They will also be competing in the same tight labour market for the same construction workers. A recent survey by the Federation of Master Builders found that there is already a shortage of skilled tradesman, for instance 64 per cent of construction companies are struggling to hire carpenters and joiners while 61 per cent are struggling to hire bricklayers.

If public housebuilders are competing with private developers for construction workers, this will also impact the delivery of private homes. Larger housebuilders have already reported labour shortages in the construction industry to be limiting the number of homes they build each year. Without a rapid increase in the number of construction workers, one effect of greater investment in public housebuilding might therefore be a reduction in private housebuilding which would, in turn, reduce the number of affordable homes built via Section 106 agreements without government grant.

More public housebuilding could lead to a revival in local construction companies. It would also be a chance for local authorities to lead on setting high standards of building – an issue the Shadow Chancellor, John McDonnell, has previously suggested would be a priority (he called for a more “beautiful and enjoyable” built environment in a past housing speech), but which was sadly absent from the Labour manifesto.

Yet with local authorities having minimal experience of building homes and limited expertise, the risk is that the cost of a local authority building a home is much more than the cost of homes built by housing associations and private developers. By attempting to increase council housebuilding by 3,800 per cent in five years, there is also a risk that construction quality is compromised.

Conclusion

Currently 83 per cent of England’s housing stock is privately owned and 17 per cent is publicly owned – much higher than the EU average which is 10 per cent publicly owned. “The only way to deliver on everyone’s right to a good home,” the Labour Party’s manifesto argues, is to shift that balance by “build[ing] publicly funded social housing.”

Whether you agree with this principle or not, the extent to which the private-public balance shifts under a prospective Labour government would depend on how quickly the public sector can become better and more efficient at building homes within the financial constraints determined by central government capital grant levels and public sector borrowing rates.

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