The long tail of affordable housing and how it can wag again

How fast do you have to run to stand still? And do you really have to run twice as fast as that to get somewhere else?

It’s a question we’ve been grappling with ever since the Red Queen posed it and none more so than with affordable housing.

Well, that was a question I was going to try and look at in this post. But then I found out that not only are they susceptible to a bit of genial name-calling, Shelter also have access to a time machine and have gone back to 2014 to write essentially the same post.

What’s a naptime blogger to do then? Well, it would be helpful to see what has changed since then and maybe have a think about the current trends in net affordable house building.

But first we have to draw a pretty big distinction between affordable housing and “affordable housing”. You see, in most areas when you think about affordable you consider whether someone’s income can cover the cost of the item. Not so in housing, where the government’s definition of “affordable” relates to the market price- the definition of affordable rent is 80% of the market rent in the same area.

This might not seem like a terrible thing and in some areas it just so happens that 80% of the market price is within an affordable range for a relatively low income family. But in reality that’s more of a happy accident than an outcome of wise policy making.

It didn’t used to be wholly this way. Most social housing rents were traditionally set based on the actual costs of paying for the property and its upkeep, with landlords (local authorities and housing associations, in the main) given very broad parameters to set rents. Whilst in power Labour argued that this led to wildly different rents for what was in effect the same house and, through controlled increases in rent, tried to get all social providers to roughly the same rent for the same property- called a “formula rent”. This equation looked at the price of the house and also the median earnings in the area. But it was only a proxy to allow for equalisation in the medium-run.

And it didn’t get there, because Labour slowed down the process and then the Conservatives came in and chose to increase and then reduce social rents at the same rate for everybody. Only now are they looking to allow authorities to increase rents again. This means rents are still quite divergent between providers and between areas.

So, and I can’t be clear enough about this, neither social rent on older stock nor affordable rent really have any direct connection with affordability built in. Social rents are by and large lower (in many areas far lower) than affordable rents and are therefore more affordable. But there is no real mechanism to ensure that stays the case. New social rented homes (those few that are built) often have rent set at the formula rate, but then affordability is only one consideration among others.

When the new “80% of market” definition came along most providers didn’t immediately switch all of their properties to it when a new tenant moved in. What many did was make newly built homes (usually by developers as part of s106 agreements) available for affordable rent as a way to cross subsidise other, more affordable housing. Indeed, until recently building for affordable rent was required through the government’s affordable homes programme, meaning councils who couldn’t borrow (because of central government limits) had no other choice than to build homes for “affordable rent”. Collectively, although mostly for the legacy reasons, this means that the vast majority of affordable homes available today are at a social rent. That’s the good news.

The bad news is the number of new build social rented homes has fallen year on year, from nearly 40,000 in 2010/11 to 6,800 in 2015/16 (with even fewer provisionally accounted for in 2016/17). The number of right to buy completions has been edging up since 2011/12, both when the financial crisis was bottoming out (and when low income households were more able to get mortgages) and when the government significantly increased the amount of discount a household could receive to buy their home. What’s more, as most new affordable homes won’t yet have a right to buy discount, we can safely assume these were almost all social rent homes sold.

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So in 2015/16 more than 3 homes at sold under right to buy for every social rent home that was built. Even if you add affordable rent into the mix there are only 1,358 more homes being built than lost. And what’s more, whilst there should be 1 for 1 replacement of homes sold under right to buy, that has never been the case, looks like it will be a very long time until it is the case and if it does happen it will by and large affordable homes replacing social homes, thus adding little to the mix of truly affordable homes.

Put that another way, since 1991/92 there have been 215,000 more homes sold under right to buy than new social rented homes built.  That’s more homes than there are in Bradford.

This is also the case with affordable housing in parts of new developments. Where “affordable homes” are agreed as part of s106 agreements, they often either become “affordable rent” or an intermediate option that is most likely shared ownership. More councils are starting to accept payments in cash for off site provision in lieu of affordable accommodation, which at least means councils can build what they want but does lead to worries about the ghettoisation of “rich areas” and “poor areas”.

Of course developers are hit and miss when it comes to actually providing affordable homes as part of their developments. As part of the planning process they are able to argue that they cannot make their scheme viable with the level of affordable accommodation set by the local authority. This means they are able to negotiate, often significantly or to zero, the amount of affordable housing on the site. Of course every single site can be just about viable at the same time as the heads of the developments earn £100 million bonuses.

In fact it is fair to say that there is something more than a cottage industry set-up to help developers argue their case for lowering affordable housing requirements through the viability process. Perhaps we could call it a 6 bedroom, triple garage industry?

The recent government consultation on viability (amongst other things) goes some way to address this, effectively saying that the local plan is the place to be clear about viability of individual sites and once agreed there is little reason to change it. There are however a couple of issues with this. This first is that councils will take time to update their local plans (remember it is a process that is measured in years) so the current system will remain in each area until they have (or are at least approaching) a replacement plan. The second is that there will still be flexibility in the system (for example by judicial review on the reasonableness of individual decisions) for developers to tease open a loophole or two that they can then drive a bus through. Followed inevitably by bus lane markings and an open highway. Perhaps this is the world-weary cynic in me, but I fear the approach laid out there will lead us back to the same situation in 3-5 years.

Given that developers see having lawyers on a retainer as part and parcel of the industry, I would rather something that looks more like a hard to avoid tax than an easy to evade agreement. Yes, that might mess with their business case and yes, that will meant hey might have to change their modus operandi to suit the new circumstances. Given that might have as many positives and negatives it is a risk I’m willing to pay.

So councils are at the limits of what they can build, when they and housing associations do build they often choose (when they have a choice) to go for affordable rent. When developers build they often try to limit their affordable accommodation and when they do build it what is made is usually “affordable rent” or another type of intermediate accommodation. So where does that leave those who genuinely need truly affordable accommodation?

I fear trying to create a new type of rent level will just lead to another competing layer in the market. Removing “affordable rent” from what counts as affordable rented accommodation, especially under s106, would help restore some sense. Whilst councils are free to set terms in their local plan I think it would make sense for discussion on affordable accommodation to be based on what proportion of people in the local area could afford to live in the agreed accommodation. So if “affordable rent” stays, it could be renamed “rent that X% of people locally could afford to pay”.

Local authorities and most housing associations truly do want to build genuinely affordable homes, so giving them the powers to do borrow and build will make a huge difference in building of new affordable homes. Central government continuing the move away from “affordable rent” will allow councils and housing associations to build homes at a rent they think is appropriate and needed in their local area.

Finally, without wanting to sound like a scratched record, the bath will only fill if you put the plug in. Right to buy is leeching away truly affordable housing, giving some households a cash injection (when they sell the homes) and giving a number of private landlords an unearned field day as they swoop in, buy a former council home on the cheap and move in tenants paying market price. In a way, it would be better to give the tenants the discount to buy another house, at least then the landlord wouldn’t have to go through the cost of building a new property, although it wouldn’t help take the steam out of the wider housing market.

It would take many years for the total supply of social housing to dry up, but if we don’t look to do something more about it now then it could still happen. Given the need that clearly exists for affordable accommodation, that would be a huge mistake.