New homes alone won’t solve the housing crisis

The government's appetite for construction will not be enough to fix this problem in our cities post-pandemic.

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The Covid-19 pandemic has forced us all to question our relationship with our homes and private spaces. For many, the long hours spent indoors have reinforced the value of all those places that are not home: parks, trains and schools. As the pandemic hopefully comes under control while we progress through 2021, we will begin to hear more about the government’s programme for economic recovery post-Covid.

The Prime Minister’s commitment to “build, build, build” in August 2020 when launching the Planning for the Future white paper should probably be taken literally, and construction will almost certainly play a significant role within the government’s economic plans.

Early evidence of this emphasis can be seen in the £4bn Levelling Up Fund, scheduled to run from 2021 to 2024, to support the “infrastructure of everyday life” in England, and the £7bn commitment for the National Home Building Fund to support self-builds, SME housebuilder loans, and brownfield regeneration, which will be spatially and sectorally distributed over four years.

These two funds are in addition to an extra £2bn per annum for the Affordable Homes Programme, something the government claims is the largest cash investment in affordable housing for a decade.

In combination, these announcements represent a commitment of around £5bn per annum to “build, build, build” the affordable housing, infrastructure and physical regeneration that England needs. Although this is a significant sum it is still below the pre-pandemic annual contributions made by private development delivered through the planning system.

So, where does the money come from to pay for all those parks, trains and school premises that have been delivered over the past 30 years that we value so highly?

A reliance on developer contributions

While central government has previously funded some of these public goods directly, since the 1990s there has been an increasing reliance on using new private developments to fund affordable housing and infrastructure needs. England has a system of nationalised development rights, so when private developments are proposed, a local authority is able to set conditions for the granting of planning permission.

This could involve a developer building a new road junction or a school extension to reflect the fact that a growth in households creates extra demand on public goods of this type. These “developer contributions” are paid through the planning system through two specific policy instruments: “Section 106” agreements, which are negotiated between the local planning authority and the developer on a case-by-case basis, and the Community Infrastructure Levy, a proportionate charge on development (usually £X per m² of development) that all local authorities have the right to employ (although it has only been adopted by around half).

Understanding the value of developer contributions can be aided through data. Our research at the University of Liverpool has shown that in 2018/19, developer contributions were worth £7bn in England, up from £6bn in 2016/17.

This was used to fund £294m of transport infrastructure, £439m for education (mostly school premises) and £157m for open spaces and the environment. Developer contributions also provided £4.7bn in the shape of affordable housing contributions, resulting in the partial funding of around 44,000 new affordable dwellings.

These headline figures would suggest a significant and lucrative approach that is growing and securing some of the infrastructure the country needs. But it is an approach not without problems.

Creating uneven outcomes

The main issue with the current system is that it generates developer contributions very unevenly. In 2018/19, 28 per cent of all contributions were raised (and spent) in London, with an additional 25 per cent raised in the south-east region surrounding the capital. Yet compared to this cumulative 53 per cent, or £3.6bn, only 3 per cent (£189m) was raised and invested in the north-east. The system goes with the grain of the market and, therefore, reinforces those market tendencies.

High values in growing markets result in demand for new real estate that correspondingly translates into planning applications and developer contributions that fund infrastructure and public goods, which, in turn, stimulates the market further. In low-demand areas the opposite is true. If these cycles persist over a sufficiently long period, the cumulative year-on-year effects could be significant.

Build back better

Last summer’s Planning for the Future white paper set out an intention to legislate for root-and-branch reform of the English planning system; an interesting viewpoint given the size and scale of existing contributions being made annually through the planning system when compared to new government funding.

Among the measures proposed was the replacement of the system by which developer contributions are determined in favour of a nationally set Infrastructure Levy that would collect a proportion of the development value in every building site. Given that private development has resulted in funding that exceeds the government’s recent announcements, it is vital that the changes to planning do not hinder the collection of developer contributions.

If this proposal is implemented, it raises two key questions. First, at what rate should the Infrastructure Levy should be set? This is equivalent to asking the following: what fraction of the uplift in land values resulting from planning consent should the government seek to recover? If the rate is nationally prescribed it is likely to continue to raise more in the high-value markets of London and the south-east than anywhere else.

Second, how will cash contributions raised through the levy readily result in the public goods that have been typically provided by the development industry when physically developing a site? Developers are well equipped to build an access road and a doctors’ surgery alongside the housing development for which they have received consent. There are conceivably a great many more barriers for a local authority to overcome to realise this same end, even if they have received a sum nominally for this purpose. It will be important to avoid the prospect of completed housing developments that then wait years for the necessary attendant infrastructure to be delivered.

To answer these questions, more research will be required by both central and local government so they can better understand how the levelling-up agenda can work effectively alongside planning reform, so that we can all benefit from the desire to “build back better”.

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