Written evidence submitted by Homes for the North [FSS 040]

Overview

Homes for the North is an alliance of 18 of the largest developing housing associations in the North of England. We work with a range of organisations to make evidence-based policy recommendations to deliver more and better homes in the North.

Collectively, we add approximately £2.5bn per year to the Northern economy, provide affordable homes for 1 million people and employ 17,500 people across the region. Our members delivered 10,963 new homes from 2017-2020 and have an appetite to do more. Nine of our members are Homes England Strategic Partners with plans to deliver over 29,000 new homes under the current Affordable Homes Programme (2021-2026) and more besides.

In this response, we have identified two overarching issues presenting challenges to the financial sustainability of our members. Alongside these, we have put forward constructive policy solutions that would put our members on a surer financial footing and empower them to build the more and better homes that the North of England needs. 

The two overarching issues we wish to highlight are as follows:

• Housing associations are being asked to spend heavily to resolve lots of important issues, notably around decarbonisation, safety and quality, but without adequate public funding.
• The building of new homes risks being squeezed to a standstill as money is diverted into other areas and development programmes are reduced to allow other investment.

The risk of a significant slow down in social housing development programmes is exacerbated by red tape in the grant funding system and a range of related regulatory changes currently emerging.

Referenced throughout this response is a range of original research commissioned by Homes for the North, which we are happy to make available in full to the Committee to support its inquiry.  Research includes:

1. An analysis of the replacement of Section 106 with a local Infrastructure Levy, as proposed by the Levelling Up and Regeneration Bill, showing that the Levy will actively work against Levelling Up and must be balanced by direct grant funding from Homes England to deliver affordable homes in areas that need to Level Up the most (University of Liverpool).
2. A proposed alternative approach to how Homes England applies the concept of ‘net additionality’, which will unlock place-based regeneration and brownfield housing delivery in Levelling Up areas in the North and elsewhere (Savills).
3. The H4N submission to the Spending Review of November 2021, which proposes a ‘Levelling Up Place Index’ to hardwire Levelling Up into major funding programmes (Lichfields).

Our research supports the case for the more effective allocation of housing investment to support the Government’s levelling up objectives, ensuring that housing associations are better able to balance their own investment to meet the twin pressures of investing to ensure their existing stock is of a high quality, whilst building more homes with appropriate public support.

Current demands are stretching us beyond our capacity

Housing associations across the North are facing a range of significant financial pressures. We have specifically identified three cost pressures that collectively pose an acute challenge to the financial sustainability of our members, they are:

• Building safety costs, as we fulfil our obligations regarding the Building Safety Act;
• Decarbonisation and retrofit costs, as we contribute to building a net zero economy;
• Improvements to the quality of homes, as we work to drive up standards in social housing.

Building safety costs

Homes for the North members are committed to providing safe, warm and modern homes for tenants. The safety of our tenants will always be our first priority and we have taken a range of actions to support this, including removing unsafe cladding and implementing rigorous safety procedures.

This work is important and must be done but the significant costs associated are being born almost entirely by our members. This is because the available funding pots, such as the Building Safety Fund (totalling £3.5 billion) and Medium-Rise Scheme (totalling £4 billion) will not cover the vast majority of our housing stock. To put this in perspective, the National Housing Federation estimates that the cost of fire safety works alone will “easily exceed” £10 billion for housing associations.[1]

One of our members with a relatively high number of high-rise buildings is planning to spend up to £170m on replacing cladding alone. Although we agree that this work is essential and the safety of our customers must come first, this is £170m of capital investment diverted from other priorities and not available to be invested in new homes.

Decarbonisation and retrofit costs

We also recognise the requirement to decarbonise our housing stock in line with the UK’s net zero ambitions. But, the scale of this challenge is huge (especially in the North of England) where, according to the Northern Housing Consortium, around 3.8 million homes do not currently meet the EPC C energy efficiency rating.[2] Furthermore, for these homes to reach Band C would require retrofitting one home every two minutes or 700 homes every day.[3]

One of our members would need to spend more than £100m getting all of its homes up to EPC C standard, even though 71% of its homes already are. Another member estimates its liabilities under a zero-carbon strategy to be £1.25bn. Furthermore, this investment very often represents sunk costs, as the value of the oldest social homes is unlikely to rise significantly. As a result, it is not economic to bring many homes in the North to zero carbon standards (or even EPC C) and replacement of homes must be a part of any sustainable long-term net zero strategy.[4]

The costs of retrofitting current stock present a major risk to the long-term financial and cannot rest squarely on the shoulders of our members. Whilst welcome, the £2.5 billion made available thus far as part of the Social Housing Decarbonisation Fund is a drop in the ocean when considered alongside a total estimated cost of over £36 billion, according to the National Housing Federation.[5]  

Housing quality

Our sector was shocked and saddened by the tragic death of Awaab Ishak in a social home in Rochdale. We recognise that keeping our residents safe must be our priority. The Government, Regulator of Social Housing and Housing Ombudsman have each taken action to place the spotlight on examples of poor-quality social homes. The Better Social Housing Review’s recently published Action Plan sets out a route-map to ensuring a tragedy of the sort seen in Rochdale never happens again. It covers areas including the quality of data about homes and customers held by housing associations and a range of actions to tackle inequalities in housing.

Where social homes are of a poor quality, this is often driven by the age of social housing stock. This drives a huge amount of cyclical investment by housing associations. One of our members is planning to spend £500m on planned maintenance and stock improvement in the next three years alone. It is not unusual for our members to spend £30m, £50m, £100m or more per year on maintaining homes and improving them. Again, we are pleased to make this investment and recognise that providing good homes must be a priority, but it is also important to note that this represents capital investment that is not available to our development programmes.

A particular challenge in Northern England is that low land values often mean that it would cost more to improve a home than the property is worth. Getting older homes up to a decent standard is expensive and acts as another source of financial demand on housing associations, in addition to the need to ensure fire safety and reduce carbon.

The impact on development

Across the North there is an acute need for more, better homes and this is an area in which we are determined to deliver. As stated, nine of our members are Homes England strategic partners and are expected to deliver 29,000 new homes under the Affordable Homes Programme (2021-2026). However, our ability to do so is under threat as a consequence of the aforementioned costs forcing many of our members to scale-back their development plans drastically. In addition, sustained high-level inflation is eroding the capacity of our business plans and is a particular challenge to development programmes, as build cost inflation is running higher than headline inflation. Meanwhile, the decision by the Government to cap most rent increases at 7% in 2023/24 further reduces our capacity to invest, with the single year rent cap reducing our collective capacity by more than an estimated £200m.[6]

Building new homes requires certainty around planning policy. However, due to disjointed government policy and a lack of certainty culminating in the recent NPPF consultation, a slowdown in delivery is inevitable. The pivot towards advisory housebuilding targets announced by the Secretary of State in December has already seen 44 local authorities pause plan-making as of April, with many more at risk of pausing or delaying.[7]

We believe that in its current form, the new Infrastructure Levy could lead to the diversion of developer contributions away from affordable housing and other forms of essential infrastructure towards other, unspecified forms of expenditure. This risk is particularly acute, given unprecedented pressures on local authority funding.

The Government recently published detailed proposals setting out the operation of the levy, and these confirm the scale of the threat to the provision of affordable housing through developer contributions. The proposals set out the range of competing priorities for proceeds generated by the levy: on-site and off-site infrastructure provision; administration fees; local priorities identified through the ‘neighbourhood share’ proposal; and the funding of practically any other Council facility or service. Even if the Levy is prioritised for affordable housing, our research demonstrates that basing the Infrastructure Levy on historic levels of provision through developer contributions will not deliver levelling up but will replicate spatial inequalities[8].

Potential solutions and recommendations

In conclusion, at a time of deepening housing crisis, the development plans of housing associations are being slowed down and scaled back for two reasons; investment being withdrawn from building programmes to deliver competing priorities; and government policies on rents, planning and grant funding. The result will be a significant drop in affordable housing delivery across the North as housing associations respond by reducing and delaying development programmes.

Homes for the North members are faced with the combined challenges of investing to drive safety, improve quality and reduce the carbon emissions of their stock. These challenges are stretching us beyond our capacity and ultimately risk putting our finances on an unsustainable financial footing.

With financial pressure on our business plans on several fronts, inevitably it is investment in new homes that will suffer as safety, quality and decarbonisation are understandably prioritised. This has long term implications for our sustainability. Fewer new homes means less income across the years of our business plans, threatening to shrink the sector long-term and reduce social housing supply as the oldest homes are disposed of and fewer new homes are built.

Below we have set out some recommendations for solutions that would go some way in helping to alleviate the challenges we face.

1. Greater government investment in social housing

Homes for the North believe that greater central government investment in social housing and a firm commitment to a new Affordable Homes Programme beyond 2026 is critical to long-term financial viability of the sector. The current AHP has represented a step forward for housing associations, both in the amount of grant per unit, and in providing clarity over a longer timeframe. This is enabling housing associations to build up their development pipelines and should be continued beyond 2026.

Additionally, rent setting decisions that do not cover the impact of rising inflation on costs will mean reduced resources available to organisations across their activity, including the building of new affordable homes and other core costs. We believe that post-2025, the sector would have much greater certainty by having a ten-year deal linking rents to inflation.

2. Greater flexibility in how housing associations can use grant funding

Solving the ‘net additionality’ problem

Homes for the North commissioned original research by Savills to consider an alternative approach to net additionality and the following solution is proposed[9].

An exception to the net additionality requirement is currently made for ‘moribund property’, but this is poorly defined and only available to homes supported through the relatively small Continuous Market Engagement (CME) stream of the AHP, which deals with one development site at a time.

The exception should be extended to the Strategic Partnerships that cover the majority of the AHP programme. This would provide consistency by allowing the major development programmes of the big developing housing associations the same freedom to replace moribund homes a part of brownfield regeneration schemes.

The exception should also be expanded to enable grant funding to replace homes that have already been cleared or are reaching the end of their useful life. This would end the perverse status quo where funding is not available to build homes on empty brownfield sites, and where homes cannot be replaced even when they are worth less than the cost of bringing them up to a decent standard.

Delivering this solution is straightforward and can be done by amending existing Homes England guidance, rather than requiring legislation.

3. Incorporating protections for affordable housing into the Infrastructure Levy

It is imperative that the introduction of the Infrastructure Levy do not ultimately worsen the housing crisis. To guard against this risk, we recommend that local authorities be required to establish affordable housing need in accordance with a consistent and rigorous methodology and then set this out in their Infrastructure Delivery Strategies. This would establish the extent to which the Levy would meet local need and what shortfall would require bridging by national grant funding.

Homes for the North believes that the Government can demonstrate its commitment to affordable housing delivery by guaranteeing that a clear minimum amount of the Infrastructure Levy is spent on affordable housing. An amendment has been proposed to the Levelling Up & Regeneration Bill (350) that would reserve 75% of Levy proceeds in any Local Planning Authority to be reserved for delivery of affordable housing. This compares to the roughly 78% of Section 106 contributions nationally that in recent years have been used to support affordable housing delivery.

Recognising that Infrastructure Levy proceeds will not always cover the costs of new affordable housing, it is vital that local authorities demonstrate clear plans to secure additional funds to deliver the local affordable housing needs identified in their local plans. In lower value areas which require levelling up, this could involve working with Government agencies such as Homes England, to set out a clear strategy to generate sufficient proceeds.

4. Targeting resources to reduce regional inequalities

The North has an above average proportion of older homes which are energy inefficient, too expensive to retrofit, exacerbate health inequality, and drive fuel poverty. Land values and house prices are often lower than elsewhere, and in some places, homes need to be replaced because they are no longer fit for purpose. Our research shows that to accommodate Transformational growth, the North needs to increase net housing additions from approximately 45,000 to approximately 65,000 per year between 2020 and 2050, with increases needed in all but the most rural sub-regions.[10]

To address this, we recommend that the next iteration of the Affordable Housing Programme be used to create a new subsidy specifically designed for the purpose of driving home building and reduce regional inequalities in the areas of the country such as the North where there are lower land values.

This would not need to be new money, rather it would be a change in the approach to how the next grant settlement is distributed – with a focus placed on reducing regional equality.  Based on current trends and recent patterns of house building in England under existing structures, we would expect that this new settlement would need to provide at least £750m to £1.3bn[11] per annum to account for the reduced level of funding housing associations will be able to put into development.

In addition, Homes for the North developed a Regeneration Place Index[12] to provide a strategic guide for where to focus Government funding to deliver more homes; more home owners; economic growth; renewal of brownfield land, and; reductions in inequality. By incorporating a total of 17 indicators across five themes, covering growth, inequality and housing delivery, such a framework would ensure spending has the greatest social, environmental and economic impact.[13]

Applying this model to the major funding streams deployed by Homes England would hardwire the alleviation of regional housing inequality into English Housing policy – driving the building of new, genuinely affordable homes in the parts of the country that need them most in accordance with a consistent and rigorous methodology.

5. Overhauling the definition of the term ‘affordable housing’

The definition of the term ‘affordable housing’ is the foundation of affordable housing policy. If the government is to drive the building of more social housing and ensure greater investment in genuinely affordable homes, it must undertake a radical overhaul of national planning policy to redefine what ‘affordable housing’ means. Without this there is a danger that local authorities will dangerously underestimate the requirement for truly affordable homes in their areas, with knock on implications for planning policies and Homes England investment. It is vital that national policy ensures that the definition of affordable housing also factors-in increased food and energy costs to ensure that it is genuinely affordable to those who need it. Homes for the North recommends[14] that the definition of Affordable Housing in Annex 2 of the NPPF is therefore revised to reference affordability based on local affordability criteria, which we recommend is a proportion of a household income in the context of local house prices and rents.

May 2023