Debate: Delivering new housing supply, June 2023

  • By Amy Leppänen

London has an acute housing shortage. The 2021 London Plan set a target to achieve 52,000 new housing completions a year, while analysis by Savills suggests the actual need may be nearer 100,000 new homes per year, including 42,500 affordable homes. For London, this amounts to an annual need for additional affordable housing that is almost three times greater than the rest of England. The latest government data shows that 37,200 net additional new dwellings were created in London in 2021/22.

London’s housing affordability challenge is also the worst in the country, facing almost double the house price to earnings ratio compared to the rest of England, and a significantly more unaffordable private rented sector. London boroughs have been working hard to meet this challenge by increasing supply through the delivery of new council and affordable homes.

London boroughs’ role in delivering new housing supply

Affordable Homes Programme

The 2016-21 Affordable Homes Programme (AHP) (extended to 2023) secured £4.82 billion for investment in affordable housing in London, with a total of 109,593 affordable housing starts reported by the Greater London Authority (GLA) to the end of 2022/23. A further £4 billion was allocated to London for the 2021-26 AHP, with a target to achieve 60,000 affordable housing starts by March 2026.

London boroughs are now a vital strategic partner for government in the delivery of affordable housing, following a decades-long absence of council-led development. 25 London local authorities received funding from the 2021-26 Affordable Homes Programme (AHP), with councils representing 40% of all allocations made under the 2021-2026 AHP in London, and 50% of all allocations for social rented housing.

Recent modelling by the GLA found that the total subsidy gap for the 2021-26 AHP is around £19 billion over the 5-year period, assuming a requirement to deliver 26,000 affordable homes annually. The average subsidy requirement across the 5-year period was estimated to be around £220,000 per home, although this modelling did not account for recent inflationary pressures.

Boroughs as developers

  • London boroughs are also delivering new homes without government grant funding; for example, through the use of Right to Buy receipts to subsidise new development.
  • Boroughs have set up a Housing Development Academy (HDA) with support from the GLA to build in-house capacity and skills for borough development teams.
  • Investigating local authorities’ enabling role and support for the private sector in its contribution to affordable housing stock.
  • Ensuring infrastructure planning meets the appropriate need for affordable housing delivery.
  • Collaborating with the health and other public estates to better identify opportunities to release more land for affordable housing delivery.

Challenges facing London boroughs

Ongoing macroeconomic challenges have severely impacted borough capacity to deliver new affordable housing. High inflation (particularly in the construction sector), rising interest rates for borrowing from the Public Works Loan Board, and a uncertainty around the housing market’s longer-term ability to support cross-subsidy in affordable housing delivery have combined to make large sections of development programmes currently less viable, and in some instances unviable.

These economic factors have added to existing financial pressures already facing boroughs’ Housing Revenue Accounts. Multiple competing demands all draw from the same financial pot – including affordable housing delivery as well as improving the condition of existing housing stock, building safety, and energy efficiency measures. Borough funding for these important areas have been severely hampered by a number of government policy decisions. In particular, the 7 per cent social rent ceiling in 2022/23 is expected to reduce investible income available to London local authority landlords by nearly £600 million over the next five years, and £8 billion over a 40-year period (double the value of London’s 2021-26 AHP allocations).

Government intervention is needed to avoid the potential long-term impact on housebuilding. New housing delivery is likely to stagnate and decline if the current context doesn’t change. Previous housebuilding downturns have led to a permanent decline in sector capacity, resulting in less housebuilding year on year. But government support for councils can enable interventions which would keep private firms in business and jobs in the economy, while improving the rate of housebuilding which London desperately needs.

In the face of heightened viability challenges for new development across the social housing sector, the GLA is expected to shortly announce reallocations of grant funding to ensure development can be maintained on existing sites. London boroughs have also been revising existing development programmes for funding by the GLA and prioritising schemes that are most likely to deliver the highest number of homes possible.

Key asks of the government

London Councils welcomes the government’s recent changes to Public Works Loan Board (PWLB) borrowing rates and rules around use of Right to Buy (RtB) receipts. However, given the severity of ongoing challenges, we believe further intervention is needed if affordable housebuilding is to continue.

  • Increase grant rates to cover a higher proportion of development costs and increase the delivery of affordable homes. Given current high housebuilding costs and restrictions on raising revenue through rent increases, councils primarily need additional grant funding to meet London’s housing need. The government should also introduce longer-term grant funding agreement arrangements to support more complex development projects.
  • Introduce additional RtB receipts spending flexibilities. The recent changes to RtB, although welcome, will continue to restrict councils’ ability to spend this money without further changes to improve the proportion of receipts that can be spent on individual sites. The cap on expenditure for development costs should be raised from 40 per cent to 50 per cent, and local authorities should be allowed to match RtB receipts with other forms of grant, including AHP grant funding. The change to allow councils to retain 100% of RtB receipts should be made permanent, rather than being put in place for two years. Councils should also be given greater flexibility to use receipts for acquiring properties from the open market in order to tackle homelessness and overcrowding by growing the supply of social housing and temporary accommodation.
  • Relax Affordable Homes Programme grant funding rules to better support estate regeneration and raise property standards. Restrictions on funding replacement homes is a barrier to raising property standards within London and enabling regeneration that could grow overall housing supply through making better use of land. Councils should be provided with greater flexibility on the use of AHP grant funding to regenerate existing homes where there is insufficient funding to bring properties to a decent condition or where this is simply not possible.
  • Directly support boroughs to mitigate the impact of the recent rent ceiling on Housing Revenue Accounts. The government should provide short-term HRA revenue relief to support local authorities in keeping rents below the CPI+1% formula. The social housing sector should also be enabled to implement a catch-up period following the rent ceiling period so that rents can gradually rise to the position they would have been under CPI+1% position. This would enable housing providers to recover some of the funding needed for investment in essential services while protecting tenants from significant short-term annual increases in rent.
  • Support greater investment in infrastructure that unlocks new development sites. Targeted investment can be guided towards areas with significant potential for value uplift that would provide new cross-subsidy opportunities for affordable housing development.
Amy Leppänen, Parliamentary Officer