Low levels of grant, by historical standards, have led housing associations to develop a cross-subsidy model, building more homes for market sales to fund new affordable homes. This leaves the sector more exposed than ever to a cyclical housing market slowdown.
At the same time, Section 106, a vital source of affordable housing delivery, has limited capacity for expansion, Savills says in Affordable Housing: Building through Cycles, a new report published today. A market downturn could cut Section 106 affordable housing delivery in half, the firm says.
Savills estimates that a third of the Government’s 300,000 new homes a year target – some 100,000 homes – need to be priced at sub-market levels, whether for rent or for sale, but despite a year on year increase delivery totalled just 43,000 in 2017/18.
“An increasingly favourable policy environment will create opportunities for housing associations and local authorities to play a greater role in helping meet the Government’s target.” says Chris Buckle, Director in Research at Savills. “But plugging the gap is getting tougher and we need to futureproof affordable housing delivery against cyclical market risks”
“The housing association cross-sector model has the potential to boost the number of affordable homes being built, and grant funding could have a greater role in minimising the sales risk, particularly as the housing market slows.”
Theresa May’s party conference announcement of an extra £2 billion of grant funding from 2021 could allow housing associations to take greater control of land pipeline for affordable housing and, therefore, their future affordable housing delivery.
And the recent announcement of the lifting of the debt cap means local authorities can plan to build more social rented homes. Savills estimates that at least 15,000 more council homes could ultimately be built each year in England as a result of this change.
Housing associations increased the number of homes they built for market sale by around a quarter (24%) between 2016/17 and 2017/18. This has allowed them to expand their output, but leaves them more reliant than ever on the proceeds of market sales to fund affordable homes.
In the fiscal year 2017/18, a record 22,000 new affordable homes were delivered through nil grant Section 106, equivalent to 10 per cent of all new homes built compared to just 4 per cent five years ago. This has been achieved via big increases in affordable rent and shared ownership, rather than social rented homes, because less capital subsidy is required. Even if housing delivery were to reach 300,000 in England, the current system may only deliver 30,000 affordable homes a year.
High house price growth, particularly in London and the South, has generated a high level of cross-subsidy from market sales. Stronger rates of sale, following the introduction of Help to Buy, rising house prices and land values have all contributed, but slowing house price growth and a low turnover market will make future cross-subsidy harder to generate from market sales activity.
The issues are particularly acute in London and the South. An estimated 42,500 new households a year need homes priced below market rates, but an average of only 5,600 were built on average over the last three years – an annual shortfall of 36,900. In the South, some 34,100 sub-market homes are needed against delivery of 14,700 – an annual shortfall of 19,400.
Falling residential land values in the capital are also a concern in London: if they fall below land values for other uses then less land will come forward for housing.
Researchers at Savills have modelled the ability of a sector-wide cross tenure delivery programme based on £5 billion of working capital (see chart below). It shows that the greater the amount of grant, the more new homes can be built, and the balance can be shifted away from market sale to more counter-cyclical sub-market rented homes.
The risks in the housing market mean that housing associations and local authorities need to be more in control of affordable housing delivery if development aspirations are to be met. A crucial part of this is control of a land pipeline for affordable housing, but the traditional short-term nature of government funding programmes and policy initiatives has not allowed the sector to take a long term strategic approach towards land as major housebuilders do.
New Savills analysis of seven of the top 10 housebuilders shows that plots converted from their strategic pipelines account for 36% of their immediate land pipeline, providing a buffer against the housing market rollercoaster.
The £2 billion of additional grant funding available from 2021 will enable housing associations to plan further ahead too. By building up a pipeline of land the sector will be able to take more control of future affordable housing supply.
“Housing associations need to move to a more land-led approach to delivering affordable housing if the sector’s development aspirations are to be met,” says Robert Grundy, Head of Housing at Savills. “They’ve got to think more long term.
“Lifting the borrowing cap for councils should also provide a boost to affordable housing supply. Many local authorities have land and now they have access to finance. But collaboration will be needed to link up with the development expertise in housing associations and the private sector.”
Further reading:
Read the full Savills report: Affordable Housing: Building through Cycles
Also, the Regulator of Social Housing quarterly survey has been published today, reporting on the sector’s operational financial performance.