by Piers Williamson

Since August 2007 the investment world has been hit by the perfect storm, unparalleled since the 1930s and in some ways exceeding even that. In the period up to the end of the current Comprehensive Spending Round, affordable housing had received a significant settlement of £8.4Bn for the period 2008-2011. We await the outcome of the proposed CSR on October 20, but it is likely that both capital and revenue spend on affordable housing are to be cut by 25-30% across the next review period. The profiling of cuts is likely to mean that there will be pressure to maintain even the existing committed investment programme, let alone grow output of affordable homes in the next 12 to 18 months.

In its analysis of the June 2010 Emergency Budget the Institute for Fiscal Studies highlights that real cuts across the period to 2015/16 will need to be on a scale unseen since at least World War II. The unprecedented difference of this economic cycle is that in parallel to Government cuts, the Banking industry is undertaking unprecedented deleverage at the same time.

The Mayor’s London Plan (“The Plan”) was formulated in sunnier times (October 2009) and targets for delivery of affordable housing are based on (then) established funding mechanisms.

London will have some advantages in the brave new world of ‘more with less’. While localism is (and was) a strong theme in the formulation of borough targets, there is a central investment coordination role for the Mayor and he is likely to have the largest single part of future public investment. However, the validity of the traditional planning gain (S106) provision of Social and Affordable housing is being actively questioned.

On the one hand a large proportion of the volume house-building industry is still recovering from over-extension at the top of the cycle. Their strategy in the short term is defensive, to develop higher margin edge-of-town sites. This is not necessarily consistent with the direction of the Plan for the promotion of balanced communities.

Grant rates in S106 sites reached 50-60% at the tail end of the cycle to compensate for the lack of sales receipts from shared ownership sales (itself due to the unavailability of mortgage finance). At the peak of the market, the lowest grant rates seen were in the order of 33-35%. These rates typically assumed heavy shared-ownership sales receipts.

There is currently a debate about whether there will be any capital grants at all in the brave new post CSR world. This is complicated by widespread changes (and consequent confusion) on local planning and potential wholesale changes in the benefits regime. The affordable homes market has never had to operate in this environment before.

The likely short term impact is for severe falls in output. CLG and HCA data show the heavy dependence on public investment in the construction industry apparent in the first two quarters of 2010. The combination of Homebuy-Direct, Kickstart and the NAHP have underpinned the majority of national housing starts. Current residential construction orders are already tailing off, anticipating the fall off in investment. Decent housing is not just about new build quality – there is still significant work to be done on existing stock to bring it to decent standards in some parts of the capital. This too is already under pressure. There has been one high profile failure of a contractor (Connaught) in recent weeks.

Consequences

So what are the consequences in sustainability terms of potential lower output of affordable housing?
Standards of Development

The Plan sets out high standards, both on space, distribution and eco-standards. There will be inevitable pressure to compromise on all of these. Housing is a long term investment and arguably we are still learning the lessons of sub-standard building in the 1960s/70s, both in London and elsewhere where demolition becomes the only option. In the short term there is little evidence of joined up thinking in Government. Departments are vying with each other for scarce resource. There are new cross subsidy models (eg renewable energy photo voltaic schemes) where cross subsidy can help finance further retro-fit energy saving features in stock. But successful implementation requires DECC to coordinate with CLG in a world of 25-30% cuts.

Price/Affordability

The Plan contemplates mixed communities and London is a global city. One of the consequences of the City’s success and the managed 20% devaluation of Sterling in recent years is that residential property is a valuable investment particularly for Far Eastern investors. Hence properties in Central London (not just Notting Hill) are subject to global price influences, driving affordability out of the hands of traditional first time buyers (who typically have to find 20-25% deposits equivalent to in excess of 1 year’s total salary).

Over-Crowding

The cost of family housing in Central London is already of concern, particularly in Boroughs with large BME Communities, such as Tower Hamlets. The Chancellor has recently flagged an intended cap on benefits at £26,000. The practical impact on any family on Job Seekers Allowance (JSA) with children, living in Central London and renting in the private sector, will be to push them to smaller sized accommodation and/or leave London altogether. In the Social sector there is growing recognition of the extent of under-occupation (tenants continuing to ‘house-block’ larger properties). It is thought that as a stop-gap measure, incentives to encourage tenants to down-size would alleviate some pressure at the top end of the HA sector.

Commuting Distance

Affordability already drives many London workers, including lower paid key worker groups such as teachers, firemen, police to commute significant distances. To the extent that significantly less affordable housing is developed, commuting miles will continue to rise and Central London will become more polarised – dominated at one end of the spectrum by those that can afford to live there and at the other end by those that are prepared to put up with over-crowding.

Was this the world Aldus Huxley had in mind?

Photo: thanks to Cookiemouse on flickr.com (CCL)

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