The independent Affordable Housing Commission (AHC), chaired by Lord Best, comprises 14 leading players from across the housing world. Established in 2018 by the Smith Institute with the support of the Nationwide Foundation, its objectives were to: examine the causes and effects of the affordability crisis; explore and propose workable solutions (big and small); raise awareness of the concerns and solutions (among practitioners, decision-makers and the public); and engage stakeholders and build a consensus for change. The final report of the AHC, Making housing affordable again: rebalancing the nation’s housing system, was published in March 2020 and forms the basis of this submission (covering England only).
The Commission hopes its report (and interim report on redefining affordability and associated research and polling – available on its website) will help inform the Committee’s deliberations. The focus of this submission is on the AHC’s headline findings and recommendations and includes a response to some of the questions asked by the Committee. It also includes a short section concerning the relevance of the AHC’s proposals to the government’s response to the Covid-19 pandemic – which will shape the longer-term delivery of social and affordable housing, especially so if the housing market contracts or possibly collapses.
The AHC has no objection to this submission being published. The Committee should note that views expressed in this submission and in the Commission’ reports do not necessarily reflect the views of the AHC’s Commissioner organisations. This submission is made by Lord Best, chair of the AHC.
The overarching conclusion of the AHC’s report is that problems of affordability derive principally from the relative growth of the private rented sector (PRS) – which has more than doubled in size in less than twenty years – while social renting has sharply declined (as has home ownership, albeit to a lesser extent). More people, especially lower income households, have been pushed into the PRS, where there is less security and (in many areas) significantly higher rents. This has made housing less affordable and made tenants more vulnerable to arrears and housing stress. It also negatively affects people’s quality of life, health and welfare, personal savings and debt, and the housing benefit bill. Other drivers have been significant (e.g. income inequality, welfare reforms), but a major constraint on housing affordability is the presence of a large and fragmented PRS at a time of chronic undersupply of social rented housing.
The AHC’s report concluded that much of the PRS (especially the small amateur private landlords who dominate the sector) is ill-suited and ill-equipped to provide housing for low income households. The AHC endorses the value of a fully functioning, fit for purpose PRS and supports the growth of new ‘build to rent’ schemes and recognises that the vast majority of private landlords provide a decent service. However, market rents in almost every area are significantly higher than rents in the social housing sector- up to three times higher in London – while the security of tenure that families need is currently lacking in the PRS. Moreover, although the AHC did not concentrate on quality and housing standards, it also the case that conditions in the PRS as a whole are poorer.
While the PRS has doubled in size since 2000, the much-reduced social housing sector has become too small to fulfil the vital role it should be playing. The steep reduction in housing grant for new social rented housing and the reliance on market-led policies to support affordable housing (e.g. planning obligations and cross-subsidy from market sales) have kept output low. And, as the AHC report highlights, there has been a loss of 2 million social rented homes through the Right to Buy (RTB) and conversion of lower cost ‘social rent’ properties to higher market-linked ‘Affordable rent’ properties. The cost of providing new homes has also been inflated by the rise in land prices, which we address below.
The AHC’s research shows how the housing system – covering both new and existing supply – is unbalanced and creating housing stress. Using the measure of a third of net equivalised household income (and factoring in insufficient housing benefit, non-decent housing and overcrowding), one in five of all households face housing stress. Around 1.3 million are in the social housing sector, where rents are lower but so are incomes. As the AHC’s analysis explains, this is predominantly about problems with inadequate benefits (as well as overcrowding and stalled progress on bringing all homes to a decent standard), rather than the cost of rents. A further 1.6 million are in the owner-occupier sector, a large proportion being older homeowners on low incomes in unfit properties. But it is in the PRS that the greatest problems are found, with 2 million households in potential difficulty – representing 43% of all households renting privately. And the households devoting 40% or more of their incomes to rent – the group at highest risk – are predominantly in the PRS.
For those in the bottom half of the income distribution the tenure shift has been dramatic: 20 years ago social rented housing provided 36% of homes for this half of the population and the PRS housed 12%. By 2017, social rented housing was down to 28% and the PRS had grown to 22%. The AHC’s report predicted that this gap will widen. On current trends, in 25 years a further 400,000 social rented homes could be lost. This would shrink social rented housing from its peak of a third of the nation’s homes to just 11%. More people will then have to rely on private landlords. Conversely, if the Commission’s recommendations were carried forward, then social housing could increase to over a fifth of the total housing stock, with the PRS contracting over time, perhaps toward its level of a decade ago. Home ownership, meanwhile, would increase. This outcome would help to stabilise the system and allow millions more people to access affordable housing.
The AHC is of the view that market-led solutions will not rebalance the system. This can only be achieved in the long term by government intervention to reverse the tenure shift, which necessitates a substantial increase in the supply of new subsidised social and affordable homes (including shared ownership). Interventions are also needed to secure the sites and boost the capacity of social landlords to deliver the mix of affordable homes.
The AHC calls for a national affordable housing strategy predicated on meaningful definition/measures of affordability and benchmarked to an affordability target. The Commission calls on government to commit to ensuring that no child born today should face living in housing that is unaffordable for them by the time they are likely to form a household of their own. Across tenures, this would mean access to affordable housing opportunities for all by 2045.
For most households the crisis of housing affordability will not go away when the Covid-19 pandemic emergency ends. Indeed, a housing crash – mild or severe – will expose the short-comings of a housing system overly reliant on the PRS providing homes for lower income households. The likelihood is that demand will fall and the financialisaton of housing will temporarily ease, but housing need will increase – with less supply of private homes, higher arrears and increased homelessness. The market reaction will be to reduce activity, which in turn – in a system reliant on market mechanisms – could drastically impact the delivery of social and affordable homes.
There is also a strong economic case for delivering new social and affordable housing, especially at a time when Covid-19 may impact fiercely on employment and housing market demand. The supply of new social and affordable housing is counter-cyclical and delivers additional homes to that provided by the market, helping support the local workforce, businesses and productivity growth (investing in new social housing has been shown to reduce the numbers in housing need by three times as much as an increase in private housing supply). Investing in social housing reduces the housing benefit bill, generates economic activity, creates jobs, raises tax revenues from construction and later in council tax receipts, and makes more productive use of land. These benefits deliver a net economic benefit even when accounting for upfront grant funding.
The pandemic has shown up the PRS as a complex, fragmented and fragile sector that is ill-equipped to cope in emergency situations. Indeed, the AHC’s case for rebalancing the housing system – away from the PRS and towards a larger social/affordable housing sector – gains extra relevance. It is important therefore that any forthcoming housing recovery programme must not be confined to rescuing or bailing out the housing market in order to return to the status quo ante. It needs to address the root causes of housing unaffordability and pave the way for an alternative housing strategy which seeks to diminish housing stress.
The AHC’s report makes proposals to government, Homes England, the GLA, metro-mayors and local authorities which include:
What levels of central government funding will be required to support the delivery of social housing over the next 10 years to meet long-term need?
While the cost of land and development has rocketed the level of housing subsidy has fallen. Recent levels of housing grant have been woefully insufficient to meet calculated housing need, even with increased private finance, cross-subsidy, public sector borrowing and S106 funding. Furthermore, many of the Affordable Rent homes and intermediate housing (including shared ownership) that have benefited from public subsidy are unaffordable for low (and many mid-level) income households.
The recent £3 billion Affordable Homes Guarantees Scheme (Spring Statement 2019), which underwrites borrowing by housing associations, and the relaxation of the borrowing caps on councils borrowing to build are welcome. The affordable homes programme funding announced in the recent 2020 budget was also welcome. However, even with extra borrowing capacity and low interest rates, the AHC is sceptical about how many of the planned new homes will be genuinely affordable. The AHC’s analysis also shows that funding for social and affordable housing overall is still well below what it needed. The final Commission’s final report stresses that unless there is a significant increase in central government funding for social and affordable housing that is rented at ‘truly affordable rents’ (at or below a third of net equivalised household income) more people will suffer housing stress.
The Commission recommends that the government seeks a step change in affordable housing supply in line with the latest assessments of housing need. As noted above, on current best evidence this would equate to an increase to about 90,000 social rented homes a year. The Commission recommends that in order to deliver the necessary increase in the supply of social homes (bearing in mind there are other investment needs such as investment to improve safety and decarbonise the housing stock), the government should increase the level of capital investment in affordable housing to at least the level prevailing in 2010 – to at least £12 billion a year excluding additional contributions from S106.
How effective are existing government incentives and programme?
The AHC’s report – based in part on 100 submissions of evidence - provides a detailed critique of existing government incentives and programmes. It also includes reference to opinion polling and focus groups, which showed public resentment over the lack of affordable homes (to buy and rent) for local people and anger over rent levels in the PRS.
The AHC’s findings show that government policies are not achieving the effective delivery of enough social and affordable homes, especially social rented housing. A favourable tax regime from the 1990s to 2010 led to the huge growth of the PRS with no constraints on rent increases. Recent changes to the tax concessions to landlords appear to have checked the sector’s rapid expansion. However, it is not clear if this will lead to even a modest fall in the sector’s form and overall size.
Meanwhile, government support has been concentrated on helping boost the supply of owner occupied housing, particularly through the Help to Buy schemes. The AHC was keen to see more people helped into sustainable homeownership and saw the problem of raising a deposit as at least as significant for first time buyers as funding mortgage repayments. The Commission advocated revisions to the Help the Buy schemes, including better targeting on first time buyers on lower incomes but with an extension for assistance only for acquiring new homes to the purchase of properties in the existing market.
The AHC welcomed the removal of the borrowing cap for council house building. Although there may be initial concerns about capacity and capability, the Commission hopes that in due course this will lead to a significant increase in new social affordable homes. The Commission was also optimistic about the extra provision of social and affordable homes by council’s local housing companies.
Since the housing market recovery from the financial crisis, land and build costs (and the profit margins of the volume housebuilders) have risen sharply. This has affected public (and private) investment flows into social and affordable housing – higher development costs demand higher grant levels, more borrowing and intensify the competition for sites. Greater consideration in the future must be given to the inter-action between incentives and programmes which support the private housing market and how they impact on the provision of social and affordable housing.
There has been a clear and consistent bias in housing policy and funding over a decade against social rented (and to a lesser extent intermediate) housing. Although as mentioned there has recently been an increase in grant levels (albeit from a very low base) and some easing of the constraints on councils building again, the preoccupation with incentivising private sector development and helping first-time buyers remains. Use of market mechanisms - S106 planning gain, cross-subsidy from private sales by housing associations, and the switch to the Affordable Rent product – have not compensated adequately for the lack of sufficient grant to achieve genuinely affordable rents.
Other factors include:
Are reforms needed to land value and the planning system to increase delivery?
The AHC recommends that planning reforms should focus on improving the supply of social and affordable homes. The should include: returning PDRs powers to councils, support for alternative approaches to capturing “hope value”, and ensuring planning authorities are adequately resourced and that viability assessments are open and fair.
In addition, the AHC’s report concludes that:
What lessons can be learned from alternative approaches to social housing delivery in other countries and jurisdictions?
The AHC’s report mentions a number of positive examples from other countries in regard to the delivery of social and affordable homes. The over-arching lesson seems to be less about specific policy approaches and more about the culture and political commitment towards the delivery of public housing (with social and affordable housing viewed as a public investment, with municipal authorities often leading major developments). Many comparative European states (such as Netherlands, Germany, France, Austria) have a stronger affordable housing ethos than in England, which includes much greater state support for local government providing social housing and more generous help for community-led housing and housing co-operatives. Western European nations also have a much more robust and assertive approach to land value capture (for example land readjustment in Germany).
The AHC referenced different approaches in Scotland and Wales. The highlights of these include: