Written evidence submitted by the Mayor of London [FSS 076]

1. Introduction

1.1        Social housing providers in London play a crucial role in meeting Londoners’ housing needs; in 2021-22, London social housing providers contributed to just over two thirds of the additional affordable homes started in the capital[1]. However, the impact of Brexit, Covid and the war in Ukraine has led to sustained high inflation[2], exacerbated longstanding construction skills shortages[3], gradual increases to interest rates[4] and a worsened outlook for economic growth[5]. Combined with the cost pressures of important new building safety and net zero requirements, these challenges are putting financial pressure on social housing providers. Without adequate financial support – that is currently not forthcoming – providers have indicated they will not be able to sustain delivery of genuinely affordable homes at the level that London, and the rest of the county, needs.

1.2        City Hall’s latest Strategic Housing Market Assessment shows that London needs c.43,000 affordable homes each year, for at least the next 15 years, the majority of which should be for low-cost rent[6]. These affordable homes are currently delivered through two main routes: first, by developers through the planning system (via affordable housing contributions in Section 106 agreements); and second, by social housing providers with support of government affordable housing grant, which in London is administered by the Greater London Authority (GLA). Social housing providers include private registered providers and local authorities. In recent years local authorities in London have significantly increased their development pipelines, in part because of City Hall interventions to revitalise council housebuilding in the capital, but also as a result of the 2012 self-financing settlement and 2018 lifting of the HRA borrowing cap.

1.3        In 2022, the GLA commissioned Savills to assess the amount of capital grant funding required by social housing providers in London to deliver homes to meet identified levels of housing need[7]. The analysis found that London’s social housing sector needs £4.9bn of capital investment annually – over six times the average annual amount that the GLA currently receives from government through the Affordable Homes Programme 2023-26 (which provides £4bn over five years)[8]. This evidence demonstrates the level of underinvestment in London, which will severely limit the sector’s ability to act counter-cyclically – a particularly important contribution in current market conditions. The CPA has recently forecasted a 17 per cent fall in private housing construction output; if this materialises, London should expect to see a significant drop in the level of affordable housing generated[9]. The economic challenges, coupled with insufficient level of grant, will further reduce social housing providers’ ability to deliver additional homes. Any future funding settlement from government will need to significantly increase the overall amount of grant available and focus delivery on social rent homes, where there is the greatest level of need.

1.4         ONS data shows that London has the highest proportion of older stock in the country, with almost 40 per cent of all residential buildings constructed before 1930[10]. Internal GLA analysis from 2022 shows that around 43 per cent of London’s social housing needs improvements to meet the current Decent Homes Standard and reach the Energy Performance Certificate Band C target set by the Clean Growth Strategy[11]. In addition, the cost of addressing non-decent homes and improving energy efficiency to keep social housing warm across the capital is approximately £4 billion [12]. Without adequate funding, social housing providers are having to make tough choices between funding the delivery of much-needed new affordable homes vs. refurbishing existing stock to ensure it meets safety, sustainability and quality standards for residents.

Response to inquiry’s call for evidence questions

2. The current state of financial resilience of social housing providers

How would you assess the financial resilience of the social housing sector currently? Are increasing pressures and requirements putting financial viability at risk?

2.1        The Mayor does not financially regulate social housing providers and is therefore not in a position to assess the financial resilience of the sector – this is a core requirement of the Regulator of Social Housing. However, City Hall supports the delivery of affordable housing in London by working in partnership with all 33 London local authorities and, through the AHP 2023-26, 27 private registered providers[13]. Through this partnership working, the Mayor is able to provide comment on key pressures raised by partners that are putting financial viability at risk.

2.2        The Deputy Mayor for Housing and Residential Development convened a London Housing Delivery Taskforce in December 2022 to discuss the impact of, and solutions to, current market pressures impacting on housing delivery in London. It brought together key leaders and experts from across London’s social housing sector. City Hall presented analysis about macro-economic trends to the group, to better understand how these forces were impacting delivery programmes and to discuss ideas to sustain affordable housing delivery in the face of significant economic headwinds.

2.3        There was general consensus that the current economic downturn, whose characteristics have been highlighted in the introductory section, differs significantly from the 2008 financial crisis – in that London is not experiencing a ‘credit crunch’, and challenges can be attributed to supply side (rather than demand side) deficits. In addition, while major shocks experienced in October 2022 have since eased, it is unlikely that London will return to the more favourable housing delivery conditions experienced over the past decade. For example, while historically high levels of inflation are dropping, it is unlikely that interest rates will return to prior levels (that is, below one percent) making it difficult for recent delivery levels to be sustained without greater government investment

2.4        In November 2022, government capped social rent increases below inflation at seven per cent. The decision – while motivated by a laudable aim to protect residents from more significant rental increases – is also expected to have a significant negative financial impact on social housing providers[14]. The Mayor was supportive of this measure, although at the time called on government to introduce a rent freeze for social housing tenants via a rebate to compensate households for any social rent increases.[15]

What pressure has high inflation, increased energy costs and any other additional costs placed on the finances of social housing providers?

2.5        Recently published GLA research carried out by Savills shows that an increase in build costs has a direct impact on the subsidy gap – that is, the amount of grant required to deliver the affordable homes.

2.6        Savills tested what would happen to the subsidy gap if build costs increased by ten per cent while delivery profiles remained consistent, against a baseline build cost of £3,000 per square metre (this was the estimated average build cost in London in February 2022). The exercise showed that the subsidy gap would increase by just over 13 per cent, or at least £0.5billion a year[16]. Data shared with the GLA by Beacon Partnership shows that in the last quarter of the last financial year the average build cost in London was close to £3,500 per square metre, meaning that the subsidy gap is already considerably higher than what it would have been roughly at this time last year. This demonstrates that an increase in build costs has a direct impact on the subsidy gap required to deliver affordable homes. It also demonstrates that, if the amount of grant funding provided to deliver affordable homes does not account for increases in build costs, the number of affordable homes delivered will likely reduce.

Does the cross-subsidy model, by which market housing helps pay for social and affordable housing, have any continuing viability?

2.7        The Mayor believes that cross-subsidy plays an important role in helping to deliver affordable homes, particularly in areas where market values are higher. However, to contribute to the delivery of the affordable homes that London and the country need, the cross-subsidy model needs to be supported by higher grant levels that reflect the costs of affordable housing delivery and the gap between market and affordable homes values in more buoyant areas.

2.8        GLA research shows that in current market circumstances a much higher level of subsidy is needed for a delivery programme of the size required to meet London’s needs. This is due to a current combination of higher initial development costs and greater inflation when compared to the uplift in market values, lower house price inflation and the cost of marketing and conveyancing[17].

3. New challenges to the social housing sector

What issues does the requirement on Housing Associations to carrying out building safety remediation works present?

3.1        Much needed new grant programmes have been made available in recent years, such as the Social Sector ACM Cladding Remediation Fund and the Building Safety Fund (which focussed on other types of cladding such as high-pressure laminate). These have been a positive step forward in the response to housing safety issues which have become more prominent since the fire at Grenfell Tower in 2017. The overall funding landscape for improving the built environment sector does, however, remain inadequate, resulting in many housing associations needing to prioritise scarce internal resources for funding the resolution of building safety issues in their portfolios. Specifically, there remains no government-led solution to non-cladding defects – such as inadequate fire breaks between homes in residential blocks, or balconies constructed using combustible materials. Nor is funding available for homes in lower-rise buildings, below 11m in height.

3.2        This reflects the government’s prioritisation of height as a key determinant of risk, particularly around the prospects of residents being able to safely evacuate in the event of a fire. The Mayor has long been clear in his view that building height is not the only fire safety risk factor and, for example, the type of accommodation and whether it is occupied by residents with particular vulnerabilities should also be taken into consideration. Finally housing associations are not able to access the Building Safety Fund to remediate social rented homes affected by non-ACM unsafe cladding, and may only apply for support for leasehold properties where they are the freeholder, which creates specific cost barriers to housing associations.

3.3        Where government funding for building safety remediation is not available, housing associations typically must make use of internal reserves to fund the necessary works, and may secure finance to do so. Internal reserves have played a role in supporting the development of new homes, by funding subsidy gaps and plugging the shortfall of what isn’t covered by Affordable Homes Programme grants. This has likely increased over the last decade, as the overall percentage of development costs funded by capital grant has declined. Similarly, borrowing capacity also has an important role to play in supporting new development, by ensuring housing associations can secure appropriate finance from lenders.
 

3.4        Fundamentally, in the absence of adequate funding, meeting building safety requirements reduces housing associations’ ability to invest in much needed new supply.

Has the emergence of partnership working between councils and housing associations in local areas made the sector more resilient? What encouragement has the Department given to such partnerships? To what extent do local authorities and Housing Associations collaborate when considering development plans for housing locally?

3.5        The Mayor is actively encouraging more collaboration between local authorities and housing associations in London, including as a way to foster skills-sharing between development teams. The Mayor’s London Affordable Homes Programme 2023-2026 explicitly encourages housing associations to partner with local authority development teams, including by engaging in two-way secondments or staff-swaps between teams[18]. The inclusion of these terms in the funding guidance follows recommendations set out in ‘Building London’s future: The next generation of council homes’ report, which is a piece of City Hall research published in 2020 setting out ideas to stimulate local authority housing delivery in London[19]. Such an approach also aligns with the 2018 G15 ‘Offer to London’, which committed its housing association members to working with London boroughs through a variety of partnership models[20].

The Affordable Homes Programme includes a high proportion of shared ownership properties. To what extent is this form of tenure desirable for potential purchasers and for social housing providers?

3.6        Despite the value of Shared Ownership, bids for the 2023-2026 Affordable Homes Programme did reveal a preference among providers for delivery of homes at social rent. Moreover, the Mayor’s Affordable Homes Programme 2016-2023 was subject to reprofiling by government due to partners not being able to provide the levels of Shared Ownership originally requested by government. For the Mayor’s Affordable Homes Programme 2016-2023, Shared Ownership comprised 31 per cent of overall programme starts.

3.7        Whilst shared ownership is a valuable product, it is important to highlight that, as the Mayor has repeatedly stressed, the overwhelming need for affordable housing, in London, is for social rent homes[21]. For this reason, the London Affordable Homes Programme 2023-26 will deliver a majority of social rent homes[22].

3.8        It is also important to note that high property values in London mean that Shared Ownership is often still a stretch for many households who are unlikely to secure social housing but struggle to secure a home that meets their needs on the open market. Given this, the Mayor believes that there is value in other forms of intermediate housing, in particular for London Living Rent[23], which the government agrees can be funded through the London AHP 2016-23 and AHP 2023-26. The product, which sets rents set with reference to local incomes (and significantly below market levels), gives renters a chance to save towards a deposit to buy the home they are renting on an Shared Ownership basis, or another home on the open market.

What contribution have council owned housing companies made to increasing social housing supply? Is the collapse of Brick by Brick – wholly owned by the London Borough of Croydon – a one off or the tip of the iceberg?

3.9        Council-owned housing companies have made significant increases to social housing supply in London. For example, since 2018, Barking and Dagenham’s housing company Be First has started delivery of over 1,400 City Hall funded affordable homes in London[24]. Populo Living, Newham’s wholly owned housing company, is also delivering a significant number of new homes on behalf of the borough. Research undertaken by Janice Morphet and Ben Clifford in 2021 highlighted that over half (55 per cent) of England’s local authorities reported to having their own housing company, and this figure had increased in recent years[25].
 

3.10   In November 2022, the London Borough of Lambeth published the independent Kerslake Review into Strategic Affordable Housing Delivery in London. This research was led by Lord Kerslake, with support from City Hall officers. The review examined the experience of wholly owned housing companies in London. The review did not suggest that wholly owned housing companies are fundamentally flawed and recognised the success of such delivery models where these are supported by effective central governance and tight financial controls. The Mayor supports this assessment, recognising that Brick by Brick is one of many hundreds of housing companies operating across England. Brick by Brick suffered specific issues pertaining to financial governance that do not necessarily apply to the vast majority of council-owned housing companies[26].

Will the introduction of the Infrastructure Levy and changes to section 106 significantly affect the capacity to develop affordable housing?

3.11   Yes. The Infrastructure Levy (IL) proposed in the Levelling Up and Regeneration Bill (LURB) would result in more complex and less effective arrangements than the current system which, thanks to the Mayor’s threshold approach[27], in London is increasing the percentage of affordable homes delivered through the planning system[28]. The Mayor has been actively campaigning for changes to the IL provisions in the LURB so that there is discretion for London to provide a bespoke model. There are cross sector concerns that the proposed IL would result in less affordable housing and infrastructure (including transport and social infrastructure), whilst putting less viable developments at risk[29].

3.12   Including affordable housing within the scope of the IL means that the rates charged would need to be many times higher than the Community Infrastructure Levy (CIL). Setting rates at the level needed to maintain current levels of affordable housing would make less viable developments undeliverable. Conversely, setting lower rates will reduce contributions and therefore reduce the benefits to the community.

3.13   Instead of receiving payments when development starts, payment will be delayed until a later stage and based on development value. This approach means infrastructure will not be in place when needed, resulting in more opposition to planning proposals; there will be greater uncertainty for councils, developers and communities about the final value of payments; and there will be greater risk for councils who may have to repay Levy receipts if a scheme’s value is lower than expected. This issue would be exacerbated if councils have borrowed against expected future payments to deliver the infrastructure alongside the development.

4. What are the policy and regulatory challenges to the Department and the Regulator?

Is the current Departmental policy on social housing and affordable homes appropriately focused?

4.1 There are positive signs that DLUHC recognises the importance of social rented homes in meeting housing need. The GLA was successful in negotiating that a majority of homes built through the 2023-26 Affordable Homes Programme should be for social rent. Recent additional flexibilities for councils spending Right to Buy receipts and the decision to reduce the PWLB borrowing rate for housing – both of which the Mayor called for – recognise the need to safeguard supply of social rent homes. DLUHC could go further in supporting councils to build social rent homes. Policy initiatives in London have been successful in enabling councils to scale up delivery and this should be replicated on a national level, including through a dedicated council homes capital funding programme and capacity building. More fundamentally, the Mayor believes that the overall grant level provided DLUHC to London via the AHP is wholly inadequate to meet the scale of need. As well as inadequate levels of grant to deliver new affordable homes, the Mayor believes that additional funding should be made available to improve existing stock and meet the challenges of the future, such as net zero.

Is Homes England being directed appropriately by the Department, and is it achieving its objectives?

4.2 In London, key Homes England responsibilities – namely the administration of affordable housing funding – are devolved to the GLA. The Mayor believes that this arrangement works because it allows City Hall to respond to Londoners’ needs with more tailored interventions and remains a core tenet of devolution in London.

4.3 In demonstrating the effectiveness of devolved delivery, London has been able to meet delivery targets agreed as part of the Affordable Homes Programme 2016-2023, such as delivering 116,000 affordable homes starts by March 2023. Outside of the Affordable Homes Programme 2016-2023, the Mayor’s has exceeded the target to deliver 1,000 rough sleepers’ homes and identifying a pipeline of 1,000 community-led homes.

4.4 The Mayor’s  £1bnBuilding Council Homes for Londoners (BCHFL) programme has also been a key example of how devolution of housing powers and funding has been successful. The programme was launched in 2018, utilising Affordable Homes Programme addendum funding. The offer included a tailored grant funding programme for local authority housebuilders (which was distinct from the grant funding offer available to housing associations) and was launched alongside complementary programmes aimed to stimulate council housebuilding. These complementary programmes including the Mayor’s £10m Homebuilding Capacity Fund (revenue funding), the Mayor’s Council-Led Housing Forum (a capacity building forum) and the Mayor’s Right to Buy Ringfence programme. The Mayor’s Building Council Homes for Londoners programme has contributed to a major resurgence in local authority housebuilding in London, with more than 23,000 City Hall funded council homes started since 2018[30]. More than 10,000 council homes were started in London in 2022/23 alone, which is more than double the number of council homes started in the whole of the rest of England in the previous year.

4.5 The Mayor has also been able to use his capital funding programmes, including the AHP 2023-26, to set higher building safety, environmental sustainability and design standards compared to the rest of the country.

4.6 Similarly, the Mayor has recently launched the Refugee Housing Programme (RHP), which uses the London share of the Local Authority Housing Fund. Contrary to the rest of country, the RHP is open to private registered providers as well as local authorities, invites bids instead of directly allocating funding to local authorities using a formula and sets London-specific requirements in equality diversity and inclusion, sustainability and building safety.

June 2023