What is driving the affordable housing rebound?

This week, Sadiq Khan announced a further funding boost for London’s affordable housing market, with nearly £500m in line for housing associations to build nearly 10,000 homes. This coincides with new government figures, published last month, that show completions have risen by 12% in the 2017-18 financial year in England to more than 47,000. It is a far cry from 2015-16, when affordable housing completions plummeted to just 33,000. This came as the government’s Affordable Homes Programme ended, leading market supply to dwindle as it awaited a new injection of capital. But as developers have ramped up activity, the past two years have seen annual completions increase by 45%. It’s not back to the 50,000-plus levels seen 10 years ago, but it’s a positive rebound – and the highest level for the past five years. This has been largely driven through an increase in the number of homes delivered for affordable rent (up by 10,000 in the two-year period) and shared ownership (up by 7,000). Over the past few years there has been more political incentive to support affordable housing, with an increase in grants available. Previously, the amount of funding available was much more sporadic, argues residential analyst Neal Hudson. “Part of it is the programme cycle, but part of it was also the politics of it and the fact that they had cut back on the available funding,” he says. “Rather than having a continuous programme that enables delivery at a continuous rate, you have these peaks and troughs built into the system, which is less than ideal. “It was an embarrassment; politically they realised they had gone too far with it, which is why, since then, you have seen a bit more political action in terms of promising money for affordable housing.” However, despite the increase in grants, the level of funding is still a fraction of the amount seen 10 years ago. It means the market is reliant on private developers to fuel affordable home financing. Private sector boosts affordable delivery “Much more of the housing is delivered through other mechanisms, be that through section 106 grants or through housing associations cross-subsidising with market rent or sales,” says Hudson. Section 106 is a planning clause that requires developers to include a portion of affordable housing in their developments, which is decided by the local authority planning department. This is then frequently sold on to housing associations to own and manage. Some 44% of the affordable housing completions in 2017-18 were delivered by section 106 agreements, which are increasingly forming a larger share. These homes contributed 53% of all new-build completions. In London’s City Plan, Sadiq Khan has set the target of affordable homes at 35%, but the actual delivery varies for local authorities, depending on scheme size, housing type and viability. “The housing associations buying this housing are effectively outsourcing their development to the private sector,” says Hudson. But section 106 isn’t the only policy driving increased affordable delivery from the private sector. “The commencement of private development has been driven by a number of things: a stabilisation of planning policy, and – more importantly – government funding through Help to Buy,” says Andrew Murphy, Barton Willmore’s development economics director. “A lot of the volume housebuilders have positioned themselves to work within those price point funding thresholds.” Different housebuilders and developers are trialling other strategies. Pocket Living makes smaller apartments, using space and design in a creative way and has received GLA grant funding to support this; Countryside uses at-scale public-private partnerships. Future expectations Affordable housing starts have increased dramatically between 2015-16 and 2017-18, up 85% to 54,000. Again, the bulk of this is focused on affordable rent and shared-ownership homes. Section 106 contributed 47% of the starts in 2017-18, with 25,000 new affordable home builds beginning this year. While housing association and local authority starts have dropped year-on-year, section 106 appears to be soaring. Housing associations receiving less in grants have moved to cross-subsidy models, focusing on market sales to drive surpluses they plough back into affordable housing. This has effectively driven down their affordable housing contributions, making section 106 all the more important. But Savills says Section 106 has limited capacity for expansion and a market downturn could cut delivery in half. “Affordable housing supply is vulnerable because it is reliant on that pool of land value capture to provide capital subsidy,” says Savills residential research director Chris Buckle. He points to a potential “considerable slowdown” in house prices over the next five years, creating a squeeze on land value capture. This is across a backdrop of continuing build cost inflation and Brexit effects hitting the labour market and investment volumes. “Looking ahead, there is only one way for that potential pool of land value capture to go, and that is for it to shrink, which means there is less capital for funding affordable housing,” says Buckle. Hudson has a more optimistic outlook. “Although it’s a risk if it’s currently section 106 dominated, that leaves it more exposed to the market cycle, but there is always the potential for the government to come in and use it as a mechanism to bail out the private sector,” he says, as it did post-recession. The recent uptick in grants for local authorities and housing associations could also help drive this, and new strategic partnerships with the private sector could further bolster the supply. Buckle adds: “With more grant funding there is more scope for housing associations to deliver more affordable housing and fewer sales. They should be thinking about how to use that grant to flex development programmes towards affordable rented products and away from sales.” To send feedback, e-mail emma.rosser@egi.co.uk or tweet @EmmaARosser or @estatesgazette