Big numbers for the big players

There is never a quiet week in housing policy, but perhaps we should have known something would happen at this week’s national housing federation summit. And lo Theresa May came down from the mountain bearing many warm words and a policy intervention or two. Oh and what looks like a huge sum of money and a sensible amount of time to spend it.

Now, I’ve spoken before about politicians bearing cheques with lots of numbers on. You’ve got to be careful to understand what sort of a scale we are looking at, how it fits into the wider framework and if this is new money. To paraphrase what we know so far, it is £2 billion over 7 years, starting in 2022 and is expect to deliver around 40,000 affordable homes across this period. So £285 million a year and an average (although it will be skewed towards the end of the period) of 5,700 homes a year. That’s all very good, but it won’t set the world on fire, particularly if high land values persist.

We don’t know where the money is coming from because 2022-2029 is part of the next spending review. Essentially what the Prime Minister has done is earmarked part of government spending in the next long term period. So in one sense the money cannot be “old” in the sense of transferred from somewhere else as the entire long term budget of the government has yet to be decided. The spending review will move money all over the place and like most magician’s tricks you won’t be able to tell where the card in your pocket came from. So a slamdunk “this came from reducing x fund” won’t happen in quite the same way. Sorry.

Nothing I’ve said above hasn’t already been discussed a huge number of times already and at first I was content to take my daughter to the park rather than repeat what everyone else is saying. But one thing I’ve noticed hasn’t been discussed much is what this change might do to the housing association sector.

The funding has been announced as an extension of the “strategic partnerships” the government has already undertaken with many of the very big housing associations. I can only imagine that this will continue, perhaps with some smaller proportion going to the simply big and medium sized organisations and a small amount to the actually small ones. The big organisations will be the ones who can deliver on the scale the government are looking for, who can speak the same language as the government and articulate a large vision. They are likely to share social contacts with ministers or senior civil servants. They will often have a greater degree of financial security and an ability to speak to the markets in a language they will understand. My point is, it is the big boys (gender intentional) who will win at this game. That’s the way the funding is structured.

What does this mean for the smaller housing associations? What should they do. Their options are:

  1. Rely on other funding. Keep purchasing sites from developer’s section 106 agreements or using whatever other affordable homes funds we all expect will exist in the next spending round (even if it is smaller).
  2. Act like a bigger organisation. Get in a management team who can talk the talk (and might need paying to do so) and go to the right conferences, summits and soirees.
  3. Become a bigger organisation. Do what the big players have done and conglomerate, start acting more like a business, maybe look at poaching a manager from one of the larger organisations (perhaps one that already has a deal).

None of this means that a couple of smaller organisations may get deals, but I strongly predict that they will be the exception rather than the rule. For all of the talk about the housing associations’ Victorian beginnings, this looks like another step towards having fewer, bigger, more commercially minded and deal orientated organisations. Whether that is a good thing or not isn’t really my place to judge, but this is something boards will need to think about as they prepare for 2022.

And what does this mean for the homes that will be built? Well, that’s really left to the organisations and the government to decide between themselves, on a rolling basis. This is in part going to respond to housing needs, but let’s face it, it will also be a carve up between the associations and government. If housing associations are designing whole schemes containing market, “affordable” to buy, “affordable” to rent, shared ownership and social housing then their ability to balance these out will be the key factor on how big a difference this can make. But there will be an economic logic- it will have to depend on what they have paid for the site. The bigger, more commercial organisations may also have to balance out any losses made elsewhere.

So what I’m coming to is that there will be a pressure towards the top end of the market- either a greater proportion of market prices or the supposedly affordable homes. Social rented homes will get squeezed unless the government is forceful about demanding these in high enough proportions. Even with the much warmer words on social rent (by which I mean “tepid” compared to Cameron/Osborne’s “absolute zero”) the plethora of price points open to housing associations plus the economic logic as a site’s costs inevitably increase mean we may see fewer social rent units than anticipated.

In conclusion, if I had been an the summit I would have perhaps clapped, but I wouldn’t have got on my feet. This is a large but limited amount of money, may quicken the change of the housing association sector to an oligopoly and may mean there are fewer social rented homes than if the money had gone into the affordable homes programme. It doesn’t do anything to affect land prices and will be very limited for councils, who (to repeat myself for the umpteenth time) really only need a single accounting rule to be changed to get on with building new council houses.

What it really means in totality won’t be known until we see the spending review. That’s not for a while yet and who will be standing at the dispatch box to deliver it may make all the difference.

The first green paper of spring

Labour got there first. Their social housing green paper is out, with a not at all connected to the local elections launch at the LGA’s offices.

Anyone reading my blog over the last few months will not be surprised that much of what is in the paper is very welcome. But as a serious and relatively complete policy document there is always going to be some critique (rather than criticism, I hasten to add) to undertake in order to understand it fully. This is especially true as the paper reads like a set of policies that are, in a sense, shovel ready. So this critique is meant as a compliment- this is exactly what I would do if it was a green paper from a government.

I suspect that much of this has been due to the forensic and policy-focused approach of John Healey, who has both always been impressive in housing and has had the brief (on and off, slightly) for long enough time to really get to grips with it. There is an argument for giving ministers (and their shadow counterparts) long periods in posts in order to understand the deeper issues and John Healey is the proof that it can work. Perhaps the government should take note.

There is a huge amount of detail in the paper, so I want to pick out a few bits. Firstly I’ll look at some of the major positives (of which there are a few!) and then look at where there are gaps or opportunities to do things a little bit differently than suggested.

So, the positives. Labour have set a clear (if amazingly round) target for the delivery of new social housing. The government’s social housing green paper has mostly been framed around improving matters for existing tenants, not creating new tenants. That’s why the JRF have been so clear in trying to push for new homes alongside other changes- a battle I’m not sure they are winning with the current government.

Delivering 100,000 new affordable homes a year will be a challenge for any government and it will take a significant effort from local authorities, housing associations and other providers of social housing to achieve. I believe the will is there, even in areas not wholly committed to large scale housebuilding, but a target like this will require a herculean effort from the social and building sector to see through.

Moving on to the definition of “affordable housing”, the green paper suggests getting rid of the 80% of market rent test. Good. What replaces it is slightly more interesting. Whilst trumpeting a new average income based living rent the “core” of the affordable homes programme will be the good old formula rent. That’s not a bad starting place, but the formula only has loose ties with affordability, so it is worth considering if there are other options available.

The paper is positive about the role of housing associations, both as a not for profit service for their tenants and as one of the ways to create new social housing. There have been previously been concerns about Jeremy Corbyn’s support for housing associations, so it is good to see real inclusion of them in these plans. Yes, that comes with some additional requirements, inclusion in freedom of information legislation for one thing, but that seems to be a small price worth paying so that they can play a part in large scale social house building.

No-one will be surprised that suspending right to buy (preferably off a cliff) and scrapping the bedroom tax are welcome. Both create significant issues and cannot sensibly be justified- as the paper suggests- social housebuilding is likely to reduce the overall benefit bill.

Moving onto something the paper doesn’t do- I’m certainly relieved that it doesn’t try to reinvent the wheel when it comes to funding new social homes. The key issue is not that new homes are too expensive to be built by local authorities; they usually make a surplus over their lifespan. It is that there is an arbitrary limit on the amount councils can borrow, even though they are sat on huge assets (the very homes they currently let out!).

The current government has repeatedly, maddenly, tried to put forward different ways to fund selective council house building, usually through one off loans or grants, whilst keeping the purse strings themselves. This allows them to appear to be the ones making the decisions whilst touting a very big number (usually £X million, so not actually that big in housing terms!) and simultaneously refusing to allow local authorities to borrow off their existing assets. So it is great that the paper suggests the main way for new council homes to come about is through borrowing up to the prudential limit. That is, in a way, all that is required for stock owning local authorities with a desire to build.

Helping councils that have transferred their stock to a housing association to build a new generation of council housing is positive. Government loans will allow them to build up (literally) assets which they can then borrow against. What might be needed is provisions or guarantees that this new stock won’t itself be transferred at some point in the future, negating the whole process.

In terms of wider financing, the paper is sensible (but brief) in suggesting other sources of funding, including institutional schemes like pension funds, could be harnessed for housing associations. There is nothing wrong in any of that, but it is worth remembering that pension funds will put money where they can make money- if there is another, better opportunity for them then they will go elsewhere. Certainly funding affordable housebuilding is likely to be low risk, but will it have the returns of other investment opportunities?

Which brings us to things with (in my view) slight alternatives to the policies laid out. Firstly, the paper is looking to set targets for local authorities building social housing, almost as a subset of the objectively assessed need I’ve spoken about before. They’ve not outlined how that would take place and I worry that trying to force councils who don’t want to build affordable housing will take focus, time and money away from providing for councils who do. If they try and split the 100,000 a year based on some affordability calculation (as with the government’s proposed OAN measure) then areas who may be less able to find sites, have less recent experience of building to date and overall willing to build quickly may have a higher target.

It is unclear what the sanction would be for authorities that don’t meet their targets. The paper (rightly) talks more about incentives than threats, but if they are serious about every area delivering social housing then threats may eventually have to be issued, much as they are currently over local plan adoption. What the mechanism for this will be remains to be seen.

The best alternative for me, at least to begin with, is to work with those who want to build. Get up to scale with social house building in those areas who will relish the opportunity and hope that those remaining will be converted either by showing it can be done or by political pressure from their own residents who see it happening elsewhere.

The green paper is also a touch vague on how a Labour government would actually close the viability loophole. There’s talk about boosting support for councils to prove schemes are viable with affordable housing with independent viability experts to sweep in. I’d worry how liable those independent experts will be to regulatory capture, especially as you would expect that they will be drawn from and potentially looking for work from, existing builders.

It is worth remembering that the government has threatened (however idly) that it could go further and set affordable proportions or payments centrally. There is an opportunity for Labour to outmanoeuvre them and promise to shut the viability door once and for all. Perhaps there were concerns about appearing to knock big builders (something it is counterintuitively easier for the conservatives to do) but the outcome looks less like closing the loophole and more like bolstering one side against the other whilst keeping the rules by and large the same.

The clawback clause does do a bit of work to cover this, but balance sheets are often malleable to what the company creating them wishes to show. It would take either extremely well written rules or forensic auditing to check whether companies have made additional profits on individual sites or not.

Another way the paper is vaguer than I would like is on supported housing reform. Yes, the government’s current plans don’t have the support of the sector and yes, a period of talking to them again might be required. But we have been in this limbo for years and the can does keep being kicked down the road. I think any government has enough options laid out infront of them, it needs to make a decision and see it through. That’s going to annoy some people- potentially older people who may have to pay more either in life or in death. That’s politics.

Finally for this (short!) section on alternatives, the paper is clear that it wishes to see different households knitted together into a mixed community, but is short on a mechanism for how this is achieved. For private sites there are plenty of opportunities to achieve this, mostly around the rules governing how the affordable homes do not differ from the other homes and are not located in one cluster away from prying eyes. For new social housing sites, which will clearly be a growth industry if the society seen in the paper comes to pass, it is a little bit less clear.

Yes, having a range of the affordable tenure types mentioned in the paper will do a bit as will a supply of new council homes being available not just to those who desperately need a home, but without a mechanism to achieve mixed communities I think it is potentially over-optimistic to think they will appear organically. How this will be achieved, how large scale council or joint built sites can be attractive enough to want potential owner occupiers to move into will be a challenge and one that needs to be considered deeply before the concrete is mixed.

So, overall, lashings of positives and much for a future government to get their teeth stuck into. You can only hope the government are looking over their own draft social housing green paper and wondering if it matches this one in terms of its ambition and clarity (prediction: it won’t). Whilst deliverability is key I think there is enough substance in the paper to make many of the proposals possible and, frankly, aiming high is better than not aiming at all.

Inviolable viability

Right, are we all enthused and ready to go? Viability is dead: long live, um, something that looks a lot like it.

Before I am accused (again) of cynicism approaching apocalyptic levels, let me first say, the fact that the government are trying to do something about viability is positive. I’ll try and get into what I think it means in a bit, but given the amount of bluster about the policies I think it is worth actually trying to get down on paper what the government are proposing.

Under the current system, many local plans include a brief sketch on what requirements a site might have for affordable housing, education facilities, green space and other bits of infrastructure. Nowadays this is split between in section 106 agreement (which is negotiable) and in many areas Community Infrastructure Levy (which isn’t). But the real tooth and nail side of what is required for a site comes during the planning application, where the need for infrastructure, followed closely by the developer’s ability to pay for it out of the eventual sale of homes is bashed out.

The developer gets to use the price they paid for the land (however inflated that is by the prospect of planning permission) and lots of other bits and bobs go into their very detailed spreadsheet to prove their point. The local authority then makes a decision based on the agreement. If agreement can’t be reached within a set timescale, or if the application is refused because the developer’s won’t budge then it can go to an appeal where an inspector and, eventually, the secretary of state can decide upon the merits of the application. Parties who feel (legally) hard done by can apply for judicial review, which can and does quash decisions and demand a rehearing.

In the new system, first proposed last year and now laid out in slightly more detail, the major discussions about the viability of sites will take place during the plan making process. I’ve written before about this process; one of the positive things about centrally suggested targets is that the massively long-winded process of establishing housing need can be removed, which would have made the local plan process quicker. But reaching an assessment of infrastructure need and viability for every site included during the process and coming to an agreement of this with developers, is going to be a huge and time consuming ask. Developers will no doubt (and quite understandably, from a business point of view) use the local plan process to try and extract the best deal for themselves at this point, rather than further down the track.

Yes, in the end it is the local authority that draws up the local plan, but developers will go into the local plan examination (where a planning inspector in effect decides whether it is “thumbs up” or “thumbs down”) with all of their legal arguments, expensive lawyers and fabby dabby spreadsheets ready to prove their point. Those spreadsheets will now be public and use something approaching a set methodology, which is a huge victory for transparency campaigners. But it doesn’t necessarily mean that a small band of local campaigners doing this in their spare time will be able to outwit a company whose profit levels are at least partly based on extracting just this kind of victory. Many council planning departments, often stung by large costs if they lose judicial reviews or appeal cases, will be very cautious of pushing hard if they know they may not win.

Another good(ish) thing is that the land value being proposed for viability assessments is not the price paid for the land, but some inbetween figure. As Shelter have commented, given recent land sales have possibly been inflated by the current market, the new assessments might be higher than you might hope. It is a step in the right direction, but the wording- particularly that the land value should be set at “the minimum price at which it is considered a rational landowner would be willing to sell their land” means this could all fall down rather quickly. If that’s the case there is nothing to stop landowners working collectively to ensure prices remain high.

This all means that the local plan process becomes longer than it would have been and there is no guarantee this will lead to additional affordable accommodation. The government may be hoping land prices will fall as a result of this change, which seems hopeful and best and naive at worst.

The government are stating that once the local plan process is complete (however long that takes) that will be that. But of course, they have to (and to their credit, have) considered the other situations, for example when a site outside of the local plan comes forward. Or, indeed, the economic world changes significantly and developers are suddenly significantly more or less able to pay. In that situation local authorities will have to work with developers to assess or reassess these agreements.

There will be disagreements, claims will be lodged and eventually a set of precedents will be made about what counts as a change and what doesn’t. Unless there has been a big change in developer’s business plans this will then become the new normal. They will use the precedent to turn the drip into a flood. That’s not a criticism of developers- they are acting rationally. It is a criticism of the proposed system. It gives them an inch of wiggle room and expects they won’t take a mile. As with my previous post, I confidently predict we’ll be back in the same situation with viability and affordable housing within a few years.

BUT! The government have added a backstop- with a not very discreet threat for a system where “contributions to affordable housing and infrastructure to be set nationally, and to be non-negotiable”. Given my previous comments you’ll not be surprised that I like the second part of that. I would much prefer a system where the connection between overall viability, developer’s expectations of tidy profits and affordable housing is broken. I don’t see why it would make sense for this to be set nationally, when practically everything else in local plan making is, um, local. Neither Theresa May or Sajid Javid mentioned it in detail in their speeches, so I think this was only planned for certain eyes only. It’s a threat to developers of what could happen if the system doesn’t work and in my opinion a pretty idle one, much like the threat to end help to buy.

The proposals I sketched out in my previous post would be stronger than those being threatened by government and they should feel free to use them if they would like. But given I don’t think they have much intention to actually do this I won’t hold my breath.

So we have been promised another revolution only to see some generally positive but not exactly world-shattering reforms. Before too long we have to ask ourselves why this is? Do ministers over-sell proposals that they know are milquetoast? Are they convinced that one more set of changes will push the housebuilders over the edge to become the sort of civil minded operators the government want them to be? Are they making comments based on what they hope newspapers will report rather than what will actually make a difference?

The key issue, in a way, is that government is stuck. Changes since the late 1970s mean that the major housebuilders are the only people who can deliver at scale. The government seems willing to pay lip service to other forms of building, but know that these can only take off with either significant government investment, underwriting loans and subsidy (for small builders, community housing, housing associations, etc) or local government debt (for council housing).

Another option would be development corporations, often used for new towns but theoretically usable anywhere. This would involve local authorities, builders, landowners and trades coming together to create new homes. The corporation could be structured to prevent perverse incentives (including a risk of chummy contract-giving between the partners) and provide incentives for actual building. The builders wouldn’t like this as it threatens their ownership of large parts of the process, but it is something more akin to a revolution than some (admittedly positive) tinkering with viability.

The government are right that there is no silver bullet to ending the housing affordability crisis, but I do wish they would put away the rubber ones.

As a final note, is it worth remembering that the government has consistently said that the first report from the Letwin review will be coming with the Spring Statement next week. This wasn’t mentioned in either speech (Sajid Javid referred to the publication of the full report at the (Autumn) Budget), so I will be very interested to know whether something will be released and what it says.