Sunday, December 6, 2015

How subsidising housing could reduce supply

So the Housing and Planning Bill is proposing that about 400,000 'starter homes' be provided that will attract a 20% discount on the purchase price (to under 40s) up to a maximum of £450,0000 in London and £250,000 elsewhere.  These houses will not be required to contribute to 'necessary' infrastructure (eg affordable housing for rent) through s106 or CIL. The discount to be paid back from any sale within 5 years.  These proovisions will be subject to change as the Bill passes through its Parliamentary process. The 20% discount will come from the Treasury ie taxpayers, and the danger will be, as with all demand side incentives, that it goes into the pockets of landowners and or developers.

We learnt from the previous Blog that the Government has confirmed that development sites must contribute to necessary infrastructure including affordable housing and this must be reflected in the land price.1 This welcome reminder, together with the starter home provisions could have serious repercussions for housing land supply.

Land having been bought on the wrong assumption that viability arguments would trump the need to provide the necessary infrastructure might now become stranded.  In these cases sites which would otherwise have provided starter homes will not come forward and the Government would have to look for even greater incentives to developers.  Meanwhile, on those sites that do come forward the LPA will be required to substitute 'starter homes' for purchase for some or all of the housing previously destined for social or now more likely affordable rent (at 40% and 20% discounts of market rents respectively).  The greater the number of exemptions from paying for infrastructure, the greater the burden that will fall on the remaining housing to meet these costs.  Whilst Berkeley Homes published results showing an average profit of about £115,000 per dwelling might suggest  that there is plenty of cash to go towards infrastructure (inc affordable housing), this might not apply throughout the industry and will be very dependent on when land is bought, banked and delivered. It would be very interesting to know just how much of Berkeley profits are attributable  to housing being allowed by LPAs (including the London Mayor) and Inspectors/Sec of State with less affordable housing than was 'required' by the current policies? The Inspector being challenged by Islington LBC accepted that requiring more than 14% affordable housing would threaten the viability of the scheme.

The fundamental question must be where key workers will be housed. Houses at 20% of market prices would be affordable in less than 5% of the Country without other substantial support from the taxpayers (eg Funding for Lending and Help to Buy). Meanwhile the number of houses at affordable let alone social rent is being reduced. At the same time as housing (including affordable housing) is being accepted in the Housing and Planning Bill as 'infrastructure', the ability of developers to deliver houses is being reduced.  And will developers be able to sell houses in areas where necessary infrastructure and key worker housing is not being provided?

It would not be surprising if housing supply including the provision of both starter homes and affordable/social housing are all suppressed as a result of the incoherent interference with the economics of housing 'demand'.  If supply is maintained this would have to be through inflating the prices of housing not affected by these policies.  Is this what the Government really intends?

 Meanwhile it is becoming clear that the forced sale of houses by Housing Associations funded by the sale of other social housing will result in a significant reduction in social or affordable housing that will not be made good by the 'Treasury' on the one for one basis promised.

All this could be foreseen by those following the pronouncements of Policy Exchange before its Alex Morton started working for the Government and presumably wrote much of the Housing and Planning Bill .

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