Annual housing need in England is for nearly 250,000 new homes and the Government has recently adopted a ‘target’ of 200,000 new homes per annum over the course of this parliament. Even if we were building this number of homes, current pricing means that 70,000 of these households would not be able to access the market unassisted every year. That’s 350,000 over the term of a parliament.

^{Source: Savills using CACI, HM Land Registry, Rightmove, 2011 Census and Holmans for TCPA}

In 2013 (Bridging the Gap in Housing), we showed that reduced market turnover and the low levels of new housing supply were preventing 500,000 households per annum from moving onto and up the housing ladder. Transaction levels remain suppressed and housing supply continues to fall short of need, so this problem has not gone away.

The erosion of Government support for sub-market rented housing focusses attention on development at the lower end of the market. Is there a need for additional sub-market housing and, if so, what are the incomes of those households excluded from the market?

Our analysis looks at the ongoing cost of buying or renting a home in the current market and, assuming 30% of gross household income is spent on these costs, assesses which households can afford to live in market housing.

This leaves a gap comprising low-middle income households who cannot afford the ongoing costs of living in market housing. The analysis shows that there is clearly a continuing need for the development of sub-market housing.

^{Source: Savills using CACI, HM Land Registry, Rightmove, 2011 Census and Holmans for TCPA}

Sub-market need

No new development of sub-market rental housing could leave a gap of at least 70,000 potential new households each year being unable to access the housing market without other forms of assistance or severe compromise on living standards.

This number excludes any backlog of unmet need and the effect of falling stock levels due to Right to Buy and the sale of high value council homes.

The gap is 26% of all housing need in England, but this ranges from 17% in the north to 46% in London. In reality, many of these households will pay much more of their income on housing costs or plug the gap with benefit payments, some will live in shared households and the remainder will become ‘concealed’ households: adult children continuing to live with parents, for example.

The greatest problem is in London, where housing demand is greatest, housing costs are highest and supply consistently fails to meet need. Here we estimate that there are 26,000 excluded households per annum, compared to just 1,500 in the North East.

Excluded households

The nature of households in need of sub-market housing varies around the country and therefore different solutions are needed in different places to fill the gap left by the market. In London, their household incomes reach up to £60,000 per annum, although the median is £20,000 per annum.

In contrast, the median income of these households in the north is only £8,000 per annum. There are also substantial variations in the income of these households within regions, at local authority level (see Figure 5).

The advent of the National Living Wage (£9 per hour by 2020) will not solve a large part of the problem in London and parts of the south of the country, where many households beyond this level of pay are excluded from the market. Failure to provide additional sub-market housing will increase reliance on a shrinking pot of benefits and tax credits.

Development of affordable housing in 2013-14 filled 68% of the gap across England, but this national figure includes a range of outcomes. In the North East, the gap was filled 1.8 times and much of this new housing provides a better quality alternative to the unregulated private rented sector.

In London, only 36% of the gap was filled, suppressing household formation and exacerbating the supply-demand imbalance.

This analysis (and the details on ‘Capacity For Cross-Subsidy’) provides a framework within which affordable housing providers can work out how best to fulfil their charitable objectives in the new policy environment. New sub-market products for rent as well as sale, that make best use of cross-subsidy funding, will be needed to fill the gap.

^{Source: Savills using CACI, HM Land Registry, Rightmove, 2011 Census and Holmans for TCPA}