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The UK is in a housing crisis with a particular acute lack of affordable housing. Demand and need for affordable housing is far outstripping supply. Failing to provide affordable housing leads to far reaching implications for individuals, communities and society as a whole with issues including, homelessness, social inequality, and health (both mental and physical) to name but a few. But tackling the issues is complex and there is no silver bullet to solve the crisis. Below Matthew Woodhead explores the issues facing the sector.

 

In the last few years we have seen a real issue in the south east in finding Registered Providers (RP’s) to deliver small site Section 106 affordable housing.  This is primarily due to the limited capacity of most RPs, who need to concentrate on delivering sites larger numbers of affordable (in order to hit internal targets), coupled with the difficulty of managing smaller numbers in remote locations. Most RPs have a minimum threshold of 20 homes, with the larger RPs not interested in delivering less than 100 homes.  

 

However, the problem of finding a housing association to deliver the affordable homes has now moved to the larger sites too.   Below we look into some of the issues facing the affordable housing sector and RP’s in particular.

 

  • Funding constraints – One of the key constraints facing RP’s is the lack of funding available for development and the maintenance of social housing homes. This has been further exacerbated by public funding spending cuts and the lack of government subsidies in recent times.  Many of the UK’s social landlords are struggling to meet the loan covenants on their debt, they are required to maintain interest cover on their loans and this has become more difficult with inflation and interest rates remaining high.  Affordable housing providers therefore have been hit with build cost inflation, rising labour costs, material availability, building remediation issues and the duty to support tenants through a cost-of-living crisis all at a time of reduced funding.  This hinders investment in new homes, and has meant stalled or stopped schemes.
  • Stock Refurbishment – The last financial year has seen housing associations’ interest cover hit an all-time low amid higher spending on existing housing stock. Recent higher spending (averaging 87% in the last financial year) has been because of damp and mould repairs, investment in energy efficiency to meet government targets, building safety works (following Grenfell) and inflationary costs. 
  • Rent Caps – This has impacted both Housing Associations and Local Authority landlords. Local Authority Housing Revenue Accounts (HRA) self-financing was introduced by government in 2012, since then local authorities have been expected to balance HRA budgets according to rules set out by central government. Despite self-financing, in five of the past seven years government has intervened to set policies well below inflation. In 2023/24 the government imposed a 7% ceiling on rent increases. With Cost Price Index (CPI) reaching 10-11% for much of the previous year, this cap has meant that costs have risen heavily above income. With inflation still relatively high, rent setting policy remains a vitally important issue in maintaining the long-term financial health for HRAs. Even if rents rise at the maximum permitted level, deep cuts in expenditure are forecast to be necessary and annual spending deficits are expected.
  • First Homes - The policy was introduced in 2021 and requires that a minimum of 25% of all affordable homes secured through developer contributions should be First Homes. Developers offer these homes directly to first-time buyers with at least 30% of the market value taken off the price. New build First Homes cannot cost more than £250,000 (or more than £420,000 if the property is in London) after the discount has been applied. The local council can lower this maximum price. The social housing sector has expressed concern that First Homes has displaced other affordable housing tenures, in particular shared ownership which is often required to cross subsidise the social and affordable rented homes to make sites viable to deliver. It also means that S106 allocations are 25% smaller on most sites, which makes them less attractive to RPs to pursue.
  • Grant Funding – This is the subject of great discussion in the industry at present and is an issue very often debated at DHA’s Affordable Housing Roundtable sessions with Homes England. The government grant funding is not available in the southeast for Section 106 affordable housing. It is only intended for additionality.  However, with many sites experiencing no offers at all, despite hundreds of affordable homes secured under Section 106’s in planning permissions, the grant funding is becoming ever more important to make it viable for RP’s to offer.  We are certainly aware of some LPA’s now being open to no reference being made to affordable housing in the planning permissions (despite it being required by policy) so that the RP can deploy grant on all of the homes.
  • CIL/Section 106 – In Authorities where the Community Infrastructure Levy (CIL) is in place it replaces the Section 106 contributions route for developers. CIL is mandatory for most new build schemes and the developer cannot reduce payments if the site is experiencing viability issues.  However, affordable housing is not secured via CIL and is therefore one of the only areas that can be reduced if a developer is experiencing viability issues in a CIL Authority area.   

 

The issues around delivery of affordable housing, whilst often interrelated, are not easily fixed. Funding is key, be it grant or subsidies from central government, with interest rates, inflation and rent caps at the heart of a great amount of the difficulties. 

 

We asked Brian Horton the Strategic Housing Advisor to the South East Housing and Development Group (SE HDG) and prominent Housing Enthusiast (self titled) his ask of Government to respond to this threat to affordable housing delivery:

“The long-term solution is to fix the RP’s broken balance sheets and invest in Local Authority capacity, but in the short term the SE HDG wants DLUHC to permit the use of Homes England grant on S106 affordable housing homes, to respond to the current Market Failure.

 

We propose that grant should be made available on the affordable housing provision required by S106 requirements on all schemes <75 homes, this will give confidence to SMEs working with Registered Providers to build out early, thereby accelerating site delivery and responding to developer concerns on absorption rates.

 

The grant could be time-limited to the current programme and available to both Strategic Partners and bids via continuous market engagement and funded through the existing Affordable Housing Programme. Without such support, a significant proportion of potential affordable housing supply will be delayed or simply not built.

 

We also propose that on larger sites if developers are overperforming by >30% on the S106 affordable housing requirement that Homes England grant should be available on all the affordable homes including the S106 requirements and additionality. This we believe will improve the viability and again provide the impetus for the accelerated delivery of otherwise stalled or viability-constrained developments, negating the all-to-regular reduction or removal of affordable housing or other essential local infrastructure from these developments.”

 

At DHA we host an Affordable Housing Roundtable (currently organising RT11) to discuss and find solutions to delivery.  This is attended by over 90 cross industry experts in housing, including Homes England, DLUHC, RP’s, Housing Officers, planners, housebuilders and SME developers, and chaired by Brian.

 

Please contact Matthew Woodhead for any queries in this regard. 

 

DHA also has an extensive network of contacts and buying requirements in the RP sector and can assist developers in designing and placing affordable homes, where required.  Please get in touch with Mark Presland should you have any enquiries in this regard.

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