Build rates for new homes are now running at less than half the levels required. This may be good news for homeowners, lenders and investors as it supports existing house prices, but in economic and social terms it is potentially disastrous.

New young working households, expanding families and older households looking for living space are not finding the homes they need.

The Government has acknowledged this much in the draft National Planning Policy Framework and, undoubtedly, we will be reading more on this subject in the Government’s Housing Strategy when it is published later this year.

Financial viability

The draft-planning framework emphasises how the planning system should respond to signs of unmet demand with the sustainable development of new places. Furthermore, for meeting housing requirements, it strengthens the need for local planning authorities to identify and maintain a supply of deliverable sites to meet locally identified housing requirements.

The limited financial viability of development has prevented significant volumes of land coming forward for new housing. Since 2007, new planning consents have been granted for 487,000 new homes in England, yet development has started on only 333,000 new dwellings during the same period (see Graph 'Residential permissions and starts in England').

The principal constraint on the financial viability of land is a reduced market capacity brought about by the limited availability of mortgage finance. New homes registrations have fallen by 41% since 2007, in line with the fall in market transactions.

Public sector support

Volumes of new housing would have fallen much further, except for public sector funding of affordable housing. Spending by both the Labour and Coalition governments supported shared equity loans to first time buyers of new homes via Homebuy Direct and FirstBuy, while Kickstart unlocked the development of 18,500 homes on stalled schemes.

The public purse does not have the capacity to be the sole provider of the funds needed for a substantial increase in development volumes, particularly since Government spending on housing has been cut by more than 70% since the Comprehensive Spending Review.

Future funding could come from a number of sources, which include the following.

1. A review of planning obligations

A rising proportion of affordable housing was delivered as part of developers’ planning obligations (conditions of the planning consent) during the 2002-06 period, reaching more than half of all affordable housing in 2005-06.

Their contribution has barely changed. This worked during a time of rising house prices and land values by creating a ‘viability cushion’ for developers. Since the market downturn, and until recently, central government grants have supported viability, but at much reduced development volumes.

In the new age of public sector austerity, Government spending on housing is insufficient to expand development volumes. Today the ‘viability cushion’ is thin and often non-existent, particularly on larger sites with high costs of development and long cash flow.

Given our forecasts of slower and delayed recovery in house prices and rates of sale, the return of a significant supply from this sort of planning obligation provision is unlikely.

For development volumes to rise significantly, policy should allow for land to come forward from willing landowners for development by willing developers.

It is important this is a guiding principle of the viability testing of charging schedules for Community Infrastructure Levy and other planning obligations, which once fixed is non-negotiable at a site level.

2. The use of surplus public sector land

Surplus public sector land offers a significant way of breaking out of the viability deadlock, because of the opportunity to release land at a value that allows wider policy objectives to be met. The Government has recently announced its intention to release sufficient public land to deliver 100,000 new homes by 2015.

The success of this strategy depends on whether the ‘Government department landowner’ is more interested in the delivery of new places than the realisation of cash receipts.

If it is the former, then value can be realised over a longer timeframe and is therefore more likely to be immediately viable. If landowners remain wedded to the latter it is unlikely that land can be brought forward at scale in any but the highest value markets.

Taken from
Residential Property Focus, Q4 2011