Soft Cities

Colm Lacey - Soft Cities

Cross-subsidy may be dead, but simply calling for more grant is not the answer – here’s what we should do

First published in Housing Today, 15/11/19 – https://www.housingtoday.co.uk/comment/cross-subsidy-may-be-dead-but-simply-calling-for-more-grant-is-not-the-answer-heres-what-we-should-do/5102745.article

So. Farewell then, the cross-subsidy model. A perfect storm of rising costs, increased regulation and slower sales has apparently killed the goose that laid the golden egg of genuinely affordable housing for all.

But did it ever exist, really?

It is certainly true that social housing delivery has fallen off a cliff in the last 10 years or so. In 2009, before the full economic effects of the credit crunch had been meted out, approximately 40,000 social rent properties were delivered in the UK. In 2018, with the market mired in uncertainty, that number fell to 5,000. By anyone’s reckoning, this has been a catastrophic failure to deliver affordable housing and those in greatest need have suffered most.

In 2009, before the full economic effects of the credit crunch had been meted out, approximately 40,000 social rent properties were delivered in the UK. In 2018, with the market mired in uncertainty, that number fell to 5,000.

But is this as much a failure of policy as a failure of the cross-subsidy model?

Back in 2009, capital grant typically paid for more than 50% of the cost of a new affordable home. By 2018 this had fallen to around 15% of the cost. Much of the affordable housing which was latterly delivered was within newer, typically less ‘affordable’ tenures which were promoted by policy from 2013 onwards – eg affordable rent and shared ownership. This tended to be at the expense of much needed social rent units.

So it seems fair to say that the government’s experiment of reducing capital funding and replacing it with a revenue-based model (fuelled by increased rents) has failed to maintain or increase genuinely affordable housing supply. Similarly it is clear that the market has not stepped into the breach by funding additional affordable units through increased cross-subsidy.

This is unlikely to be a surprise to many and, for me, it represents nothing other than business as usual for the cross-subsidy model. Simply put, we should not rely on the market to deliver affordable housing for those in greatest need. It never has, and it never will.

Simply put, we should not rely on the market to deliver affordable housing for those in greatest need. It never has, and it never will.

So what should we do instead?

It seems clear that there is a need for government intervention in the market as argued by the G15 and others. Indeed, there is perhaps a more philosophical need for government to take the problem of affordable housing supply seriously and apply themselves, both economically and intellectually, to addressing the issue. This requires continuity of investment and leadership, both of which have sorely lacking in recent years. Now is the time for stewardship, for big ideas, for a genuinely new strategy. If nothing changes, nothing changes.

For me, any new strategy needs to focus on addressing something that neither the cross-subsidy model nor previous policy models have to date: certainty.

It’s a really enlightening exercise to follow the flow of certainty through a development process, indeed to think of the development process as a kind of certainty equation, allocating risk and value between the various actors.

Obviously development can’t happen without someone to pay for it, so funding is always needed and funding costs always gets paid. Banks get certainty.

Neither can development ultimately happen without some land to build on. So land value always gets paid, often at a significant premium in fact. Land owners get certainty.

Similarly, development can’t proceed without someone to eventually build it. So a build cost always gets paid and contractors get certainty.

But then we come to the planning process, and in particular the viability test. In effect, this presents all the other ‘fixed’ costs (ie the cost of everyone else’s certainty) and compares it against the value potential of the scheme. If, and only if, there is a surplus, affordable housing gets delivered. In essence, affordable housing is the first casualty of certainty in the whole process.

In essence, affordable housing is the first casualty of certainty in the whole process.

Perhaps then the role of policy should be to seek to rebalance this, to make the delivery of affordable housing more certain? The state actually has a unique capacity to do this using its powers to compel, through regulation, and to encourage, through purchasing covenant.

So here’s my two pennies worth on a potential future strategy to replace a reliance on the cross-subsidy model, if for no other reason than to fill a void.

On the regulation side, planning policy should set a minimum affordable housing requirement according to local need. No negotiation. No viability test. Maximum certainty.

On the enabling side, I think government should establish a viable national market for affordable housing by offering a fixed purchase price for every completed affordable unit. This geographically specific price should be set with reference to build cost, not rental value. In essence it should represent the average local build cost of a unit (factoring in size of site), plus a small margin.

This price could be paid against certified milestones through the development process, offering developers some cashflow certainty, and offering government the ability to efficiently implement qualitative improvements such as the Hackitt recommendations and/or MMC integration.

Importantly, in this model the initial purchaser of new affordable homes would be the state (ie Homes England and/or the regional authorities). They could then implement a secondary market in selling these units on to registered providers and local authorities, discounted by an an amount equivalent to grant. For affordable housing providers this would represent a similar process to how they currently purchase street properties with the benefit of grant.

Right to Buy/Acquire should be removed from affordable and social rent units and applied instead to shared ownership units. So those in affordable rent homes who can afford to purchase a home could be prioritised for the purchase of a local shared ownership home, at a discount similar to that current applied under Right to Buy. This would keep the dream of home ownership alive for those who want it, but also protect hard-fought affordable/social rent properties in perpetuity.

The ultimate aim of this approach would be to provide more certainty to developers regarding their obligation to deliver affordable housing, but also make delivering affordable housing more attractive commercially. Speculative land trading would be undermined. The net cost to the state per affordable unit should not be any greater than under any other sensible model, albeit the risk profile of guaranteeing the purchase affordable units at a national scale is a distinctly different proposition than the broadly non-interventionist approach currently employed.

The economic externalities of this model, particularly in a post-Brexit scenario, could be very significant. It could encourage the return of small domestic developer-builders seeking stable, low-risk, low-margin work. In addition to creating secure local employment opportunities, this could help bridge the gulf between those who develop and those who build, a gulf that continues to swallow up bloated main contractors a la Carillion.

Certainty of value could also offer an opportunity to make affordable housing a tenure of innovation again.

Certainty of value could also offer an opportunity to make affordable housing a tenure of innovation again. Any number of architectural and construction efficiencies could be enabled by the security of a pre-agreed state purchaser, not least the MMC manufacturing and related industries.

Of course, this would only address one element of affordable housing supply and it is likely that other major changes would also be required – for example, enabling more direct delivery by traditional affordable housing providers by increasing the grant rate. But it is at least the beginnings of a plan. And my, do we need a plan.