AHP0006

Written evidence submitted by London Councils

London Councils represents London’s thirty-two boroughs and the City of London; making the case to government, the Mayor of London and other stakeholders for the necessary resources and powers to deliver on the needs of residents and local businesses. 

We are pleased to be able to respond to this inquiry. This is a topic of considerable importance to London local authorities given our role as developers of new affordable housing and as the authorities responding to the implications of London’s housing shortage, most notably the high levels of homelessness and use of temporary accommodation. 

London’s shortfall of affordable housing and delivery forecasts

London faces a major shortfall in affordable accommodation, and the Affordable Homes Programme is a vital source of funding for addressing this. Although completion rates for new affordable homes in London have been on an upwards trend, the shortfall is still acute. Analysis produced by Savills for the London Housing Directors’ Group estimated that 42,500 sub-market homes are required each year in London compared to the 6,590 homes that have been completed on average per year over the six years since 2015/16.[1] 

The forecasts produced by Savills also estimate that housing development in London, across all housing tenures, will have peaked in 2022 and fall for the following three years, reflecting the lower levels of permissions and starts in 2018-2020. This means that the future delivery of new homes – including affordable housing – is unlikely to reach the overall levels required.

The growing strategic importance of local authorities in delivering new affordable housing

A major change over recent years in London is the growing strategic importance of local authorities in the delivery of new affordable housing. In October 2018 councils were awarded £1 billion of funding from the Mayor of London to deliver new council homes[2] and have to

date started more than 11,000 affordable homes.[3] Under the 2021/26 Affordable Homes Programme, London local authorities now account for 40 per cent of all allocations, and 50 per cent of social housing allocations.[4]

The Affordable Homes Programme has been a vital tool in enabling local government to reestablish itself as a developer of new homes and over recent years it has become a key strategic partner for government in relation to affordable housing delivery. This has involved rebuilding capacity within councils following a three-decade absence of council house building. Support for councils is therefore important if we are to achieve our ambitions to grow affordable housing delivery, including through grant funding, as well as support that helps borough development teams build capacity to meet the scale of the housebuilding challenge. 

The need for higher grant rates

Despite this commitment, and the Greater London Authority’s (GLA) support through grant funding, serious challenges remain for local authorities that, if addressed, could support delivery. 

In London, grant rates for affordable rented homes increased under the 2021/26 Affordable Homes Programme to a maximum of £100,000 for local authorities. However, by 2020, total scheme costs in the capital had risen to nearly £400,000 per unit on average, meaning grants constituted around 25 per cent of total scheme costs at most (the cost of development has risen dramatically since 2020, including because of the inflationary pressures currently being experienced within the development sector, explored further below). This compares to an average of around half of all development costs being covered by grant funding during the 2008/11 Affordable Homes Programme. 

Under the current 2021/26 programme, grant rates are negotiated on a scheme-by-scheme basis, which has resulted in variability in the average grant rates across borough programmes. It is important that grant funding is flexible to support more complex and long-term sites, and to this end we would recommend that a longer-term grant funding arrangement is also made available that could support these types of schemes and provide certainty. The government should also be considering increasing grant rates per unit in order to address the current market pressures being faced by the sector that are undermining project viability.

Over the long-term, as grant rates for new social sector housing have reduced as a proportion of development costs in London the sector has been encouraged to develop a greater reliance on the cross-subsidy model to fund affordable housing delivery; utilising funds raised through open market sales to fund the gap in grant funding. The cross-subsidy model has greatly increased market exposure for social housing providers and is inherently riskier for developers, particularly at a time of high inflation and economic volatility. Without grant rates that take account of the increasing financial burdens that have reduced viability for affordable housing development, council-led housing delivery will be severely impacted. 

Recent inflationary pressures

Cost pressures on delivery have risen even higher in the past few years, making it more difficult to deliver viable affordable housing schemes, even with funding from the Affordable Homes Programme. From its 2015 baseline to 2019, the Construction Material Price Index for new housing shows an average annual increase of 3.1 points. But in the last 18 months, costs have soared, with the latest index for June 2022 reaching 153.3.[5] 

The availability of materials was cited as a major development constraint by 59 per cent of respondents in the Q1 2021 Home Builders Federation survey, up from 26 per cent the previous quarter. Global demand for raw materials has outstripped supply resulting in disrupted supply chains and inflated prices. Material prices have increased by 26.6 per cent in the year to Q2 2022, according to the Building Costs Information Service Materials Cost Index, with materials such as timber, steel and concrete witnessing the greatest price increases. 

Labour shortages could also prove another fundamental obstacle for the construction industry. While wage inflation within the sector was suppressed by the pandemic, there is evidence that they have risen heavily since, with reported wage inflation of 4.8 per cent on London construction sites between May and June 2021,[6] and a rise of 8 per cent across the year to Q4 2021 in the UK as a whole.7 Overall, analysis by JLL has forecast that the compounded inflation rate over the period Q2 2022 though to Q4 2025 for tender prices will be around 17 per cent.

Ultimately, these price pressures pose a strong challenge for schemes partly funded by the Affordable Homes Programme and local authorities are reporting that the viability of development programmes will be damaged without a commensurate increase in grant rate. Even in the short-term, boroughs are experiencing significant inflation on pre-tender estimates leading to operational and governance challenges, as well as a more challenging contractual position with contractors as they seek to take forward projects within budget.

Development capacity within local authorities

In addition to funding challenges and inflationary pressures, many London boroughs face obstacles to the delivery of affordable housing in scaling up council direct delivery, particularly around a skills and experience gap. Often local authority-owned development sites are extremely complex and sensitive. Against this backdrop, being able to recruit housing development professionals with the right blend of skills is challenging for local authorities. This is due to both a skills shortage and the difficulties of attracting permanent staff on council pay bands when housing association and private sector developers may be able to provide a better pay offer. 

GLA support with capacity building and skills development (for example, through the Homebuilding Capacity Fund) has been a welcome source of revenue grant funding for local authorities. London’s local authorities are also working to build capacity via a new development Skills Academy, providing a focussed set of courses that are specifically aimed at the skills gaps they face and their unique context. Through such collaborative efforts London local authorities are seeking to address our shared challenge in this area, with support from the GLA which is financially supporting this programme. We would also highlight the training opportunities provided by Homes England for local authority development staff and recommend that the government consider supporting the expansion of this provision to help build capacity within this increasingly important part of the sector.

September 2022