Numbers game

It is now 15 years since the government decided it would use the promise of planning permission to get private developers to build more affordable housing. The process of “planning gain” – or section 106 – caused controversy when it was first introduced in the Town and Country Planning Act 1990, but it has now become accepted industry practice. So much so that deputy prime minister John Prescott has placed it at the heart of plans to build an extra 10,000 units of affordable housing each year by 2008.

But is the government gambling too heavily on the ability of section 106 to deliver these increased levels of affordable housing?

Research we have done for the Joseph Rowntree Foundation suggests the government may well be putting all its money on section 106 at ever-lengthening odds (HT 24 March, page 8).

On many fronts, section 106 is doing a good job. The amount of section 106 housing getting the go-ahead is rising rapidly; completions are also rising, though nothing like as fast – from 9297 for 2000/1 to 16,380 for 2003/4. And the vast majority of section 106 homes are being built in London and the South-east where the major housing shortages – particularly for affordable housing – are to be found. By producing more mixed-tenure estates, section 106 is also helping achieve the mixed communities that are fast rising up the government’s agenda.

But while section 106 may be on the rise – accounting for about 30% of affordable homes built in 2000/1 and nearly 50% in 2002/3 – overall the amount of affordable housing is actually shrinking, from 45,000 in 2000/1 to 29,000 in 2002/3. A decline in levels of non-section 106 affordable housing is the main reason for this – it fell from 21,500 homes for 2000/1 to just 14,000 for 2002/3.

Developers, it seems, are increasingly relying on the section 106 process to deliver the less expensive homes on their schemes and building a smaller amount of affordable housing as a result. At the same time, non-section 106 sites developed by housing associations tend to be small brownfield sites, which are time-consuming to develop, hence reducing the number of completions of affordable housing built by this more traditional route.

In addition to this, the cost to the public purse of section 106 affordable housing is now very similar to that for more traditional affordable housing sites. It has always been the case that social housing grant has made up some of the cost of building most section 106 homes, but the benefit of this money was that it ensured developers invested their own funds too – usually much more than the amount of social housing grant.

Sharply rising land prices in recent years have changed all that. Most of the funds made available by developers for section 106 housing are being eaten up by land costs, meaning that more social housing grant per home is needed than in the past. Non-section 106 sites for affordable housing have also been less affected by the rise in land values as many of these sites are on publicly owned land with relatively low market values.

But perhaps the most striking development is that affordable housing provision is now tied to the whims of the market. In a recession, land values fall as demand for housing slackens, so from a developer’s point of view it becomes harder to make schemes stack up. As a result, if market output drops – as some developers have recently hinted it might, so will the amount of affordable housing.

Policy-tinkering by the ODPM is having the side-effect of slowing down housebuilding 

The only way to avoid this is for the government to intervene and further increase its own funding for social housebuilding – as it has been doing – and for section 106 contracts to be revised accordingly.

The government’s most notable response to the issue of the housing market’s volatility has been to make a series of concessions on planning policy aimed at keeping developers on side. These have included allowing developers direct access to bid for social housing grant; scrapping plans to give councils greater powers to decide local housing targets; and hinting that plans for developers to pay a tariff, rather than ploughing through section 106 negotiations, could be resurrected (HT 4 March, page 18).

The system also looks set to be shaken up once more next year with the introduction of the “planning gain supplement”, as recommended by economist Kate Barker in her report last March on housing supply.

And our research highlights a very concerning side-effect of this constant policy-tinkering by the ODPM – the market is subjected to much greater uncertainty, slowing down housebuilding as players on all sides try to work out where they stand.

The rapidly emerging position is that developers have benefited most. As a result they now have much more leverage in section 106 negotiating processes. This means associations will have to be prepared for partnerships to build affordable housing where the developer may be much more firmly in the driving seat. Equally, councils must raise their game to achieve their own affordable housing targets.

Like so much of government policy on public services, success is almost entirely dependent on cooperation from the private sector. In the case of affordable housing,

the relationship through the section 106 process has paid off to date. But there is little evidence to suggest that section 106 will be able to produce the surge in numbers of affordable housing Prescott desires. He will need to hedge his bets a little more before that can happen.