Residential property: housing supply
A delicate balance
18 July 2013
Jeremy Leaf outlines why he believes that complex planning requirements, difficulties in obtaining finance, delays and costs are all contributing to the UK’s chronic housing shortage
UK government's own figures reveal that household formations are likely to grow by around 220,000 each year until 2032 whereas only 98,000 new homes were started in 2012 – the lowest figure for more than 80 years. As a result, the UK shortfall is estimated at more than 100,000 homes.
Problems in obtaining finance and planning delays, together with associated costs and taxes, are frequently cited as reasons for the lack of supply. The vicious circle of strict lending criteria forcing aspiring first-time buyers to pay record rents, which, in turn, makes saving for a deposit even harder, also needs to be broken. If lenders won’t lend and buyers cannot buy, then builders won't build.
So, what are some of the ways in which government tried to address the problem? The £130bn New Homes Bonus, launched in autumn 2010, was supposed to incentivise local authorities to build more. Then in November 2011, the Housing Strategy sought to 'Get Britain Building' by accelerating the release of publicly-owned land for up to 100,000 new homes.
This was followed last August by the government-commissioned Montague Review that recommended relaxation of section 106 planning agreements so that longer-term Build to Rent developments might count towards affordable housing quotas and attract more institutional investment. The £800m boost given to the scheme in the Budget for sites of 100 or more units with 5-year extendable loans at a 2.06% pa interest rate, should concentrate the minds of the 45 developers afforded preferred bidding status.
If lenders won’t lend and buyers cannot buy, then builders won't build
The government seems determined that planning obligations do not hinder development. For instance, the Growth and Infrastructure Act, which became law in late April, includes an opportunity for developers to renegotiate section 106 affordable housing agreements that may render a scheme economically unviable without necessarily submitting to financial scrutiny. Viability should now specifically embrace the RICS concept of market value, which represents a break with the concept of fixed margins above current or existing use value.
It is hoped up to 75,000 affordable 'shovel-ready' new homes stalled in the planning system could be released as a result. Developers will also be able to submit planning applications direct to the Planning Inspectorate if the relevant local authority consistently fails to consider the matter on time. There seems to have been broader acceptance too that 'localism' needs to be as much about encouraging as preventing development.
The net result?
A common thread running through these initiatives is a failure to appreciate that numbers will not increase sufficiently unless landowners and developers receive what is perceived to be a competitive return.
The RICS Financial viability in planning guidance recognises the importance of generating a fair price for land as part of a market value-based stance if supported by robust evidence. Indeed, last January an inspector overturned a decision by Wokingham Borough Council to refuse planning for 126 houses by quoting the need for 'competitive returns' in accordance with RICS guidance. But, paying too much for the land is not a material consideration. Accessibility to finance is, of course, paramount.
The Funding for Lending Scheme (FLS) has helped to lower interest rates and increase provision of mortgage products but not higher loan-to-value lending. Banks do not appear to be passing on lower borrowing costs to their customers as mortgage approvals have returned to levels prevailing last August when the scheme started. So FLS has been extended to include extra incentives for banks to increase slightly riskier lending – hopefully to more first-time buyers. Help to Buy was therefore targeted at those with only a 5% deposit on any home worth up to £600,000. The first part – from April – offers 5-year interest-free shared equity loans of up to 20% of a new property’s value. The second (for 3 years from January 2014) gives access to a government-backed mortgage guarantee of up to 15% of any home's value.
However, Help to Buy may have more of an inflationary impact on prices initially, unless additional new homes can be brought onto the market to meet anticipated demand and overcome the time lag involved in housebuilding. Although full details are not yet available, an All-Party Treasury Select Committee suggest the scheme will mean government is underpinning house prices, exposed to substantial losses if values fall and/or incentives are withdrawn as well as probably helping existing homeowners more than first-time buyers.
Setting a levy
Higher-than-anticipated Community Infrastructure Levy (CIL) and section 106 payments, as well as the need for very detailed supporting documentation, is certainly reducing supply. Government's timing seems less than perfect, bearing in mind its commitment to stimulate economic growth by increasing housebuilding. Another problem is the wide variation in levels of CIL. The London Borough of Wandsworth, for instance, has divided itself into 4 zones, with the levy payable ranging from zero to £575/m2, depending on the infrastructure required.
Calls for review
It was originally thought that section 106 obligations might be replaced by setting a fixed per-square-foot CIL at a competitive level as part of a less complicated, more flexible and regularly reviewed regime.
Unless implemented fairly and transparently, CIL and section 106 charges will just be regarded as extra taxes on development so will only delay decision-making and much needed homes
Planning Minister Nick Boles seems to have recognised industry concerns and advised local authorities that CIL should not be set at a rate "right up to the margin of economic viability". Councils with an approved neighbourhood plan could now benefit from the 'Boles bung', retaining 25% of their CIL to pay for approved infrastructure close to the land in question. The latest consultation proposes an end to 'double dipping' whereby local authorities cannot demand section 106 and CIL payments for the same infrastructure or for properties with consent that have remained empty for 6 of the previous 12 months. They will also be able to delay the April 2014 deadline for introduction of charging schedules by a year and accept CIL payments 'in kind' so developers have more confidence that relevant infrastructure will be provided.
Unless implemented fairly and transparently, CIL and section 106 charges will just be regarded as extra taxes on development so will only delay decision-making and much needed homes. To encourage housing delivery further, local authorities have been asked to grant 'permitted development rights' for an initial 3-year period to convert offices into homes without planning permission. Despite an overwhelming majority of them seeking to opt out 'due to adverse economic circumstances' the government has decided only key employment areas nationally will be exempt, as well as parts of some London boroughs including all of Kensington and Chelsea. It is unlikely many commercial buildings will be converted without external changes and/or the need for additional amenity space so planning gain would still be captured via CIL or section 106 provisions as part of a revised planning permission.
In my view, the policy should be aimed at reducing the number of redundant buildings and increase the supply of affordable homes to buy or rent. Lambert Smith Hampton recently reported that 27% or 11.7 million square feet of regional office space is obsolete and up to 7.4 million sq ft is suitable for change of use for up to 11.5 million new homes. Demand is likely to prove strongest within the M25, where the gap in values between office and residential markets is at its widest so residential values may stabilise or fall whereas office values could rise in those places. It seems government is determined to increase brownfield supply significantly one way or another.
Apart from the cost of complying with complicated planning requirements, capital gains and inheritance tax have also to be taken into account. And politicians wonder why owners of land suitable for development are not rushing to sell.
What happens next?
There is no single solution to increasing housing supply. A more radical, coordinated approach, including marginalising political influence in planning decision-making and better recognition by central and local government of the connection between time and money, is paramount. If planning red tape is not cut further, painstakingly arranged finance can be compromised and schemes abandoned.
Against the backdrop of the UK housing shortage, RICS has established a commission to recommend ways of delivering the right homes, in the right tenure, in the right places. It is calling on RICS members and the property sector to provide examples of initiatives that would help boost the number of homes across the country.
Commission chair Michael Newey, RICS President Elect and chief executive, Broadland Housing, will address the following issues:
The commission will use its findings to make recommendations for RICS, government and the housing sector.
To submit your responses to a series of questions from the RICS commission, follow the link.
I believe that more council accountability, better awareness of viability and bigger-than-local decision-making, as well as reducing the time to decide on 'major' applications, would definitely increase supply. Lenders clearly need more confidence in the economy and the sustainability of recovery before taking riskier, longer-term decisions. Setting and keeping to minimum targets would be one way of breaking the logjam. Is it unreasonable to expect the government to put pressure on the banks that were so heavily supported by the tax payer in their time of need?
Jeremy Leaf FRICS is a former chair of the RICS Residential Professional Group Board and sits on the RICS Residential Estate Agency and Letting Working Group