At the Conservative Party Conference yesterday, Shadow Chancellor Andrew Griffith promised to pare back regulation in a bid to cut the cost of building a new home by £50,000. Pledges include: scrapping changes to improve the energy efficiency of new homes; abolishing Natural England and the Environment Agency; and introducing a new ‘one stop levy’ on developers to replace the much-maligned system for delivering social homes and infrastructure through the planning system.
This blog will focus on the last of these, and why it is a tried and tested dead end for building social homes.
How do planning obligations work?
Currently, Section 106 (S106) agreements and the Community Infrastructure Levy (CIL) secure a share of social and affordable homes as part of private housing schemes, as well as investment in roads, public transport, schools and doctors’ surgeries. Councils effectively cream off some of the profits from private development to ensure local people see and feel the benefits of new housing.
This system of planning obligations has the significant advantage of delivering social homes and infrastructure alongside private homes, but it also results in lengthy negotiations between councils, landowners and developers about exactly what will be provided, when and where.
These problems are aggravated by site-level viability assessments, which allow planning obligations to be negotiated down if a planned development won’t make enough profit to incentivise landowners to sell and developers to build. Because there is no standardised approach, viability appraisal is often described as a ‘dark art’. In some cases viability appraisals have been submitted showing a site is loss-making to reduce or eliminate social housing before it is sold on for a profit. The mistrust and uncertainty this has created adds time and cost to development.
The Infrastructure Levy: a cautionary tale
There have long been calls from academics, think tanks and others to replace S106 and CIL with a ‘one stop’ cash payment of the kind Griffith has just advocated. In fact, the last Conservative Government had a good go at doing so through its Infrastructure Levy, under which developers would pay a non-negotiable cash tax on the final value of private homes. But they ultimately ditched the deeply unpopular plans, widely seen as unworkable and likely to deliver worse outcomes than S106. 30 organisations – including private developers, councils, Housing Associations, planners and construction industry leaders – wrote to the then Secretary of State Michael Gove in favour or ‘retaining and continuing to improve’ the existing system of planning obligations. The current Shadow Cabinet should take note.
Below are four of the major drawbacks of switching from in-kind delivery to cash payments for the supply of social homes through the planning system.
1. Fewer social homes in the places where they are needed most
If developers pay a financial levy instead of delivering social homes as part of private schemes, there is no guarantee that replacement homes will ultimately be delivered in the same area. Councils or Housing Associations would have to compete in the open land market for sites. In some places, suitable sites will not be available. Social landlords often struggle to compete with private developers’ land teams, which have greater resources, skills and experience.
S106 secures social homes in precisely the places grant has struggled to reach – places where higher demand for market homes pushes up land prices. Replacing it with cash risks fewer social homes in the least affordable places; more people in housing need moving away from communities, jobs, schools and care networks; more economically and socially segregated communities; and fewer direct benefits from new development for local people.
2. Lower, slower social housing supply
An S106 home is a completed home ready for someone to move into. Before money raised from a ‘one stop levy’ can become a social home, the council or HA must assemble all the other ingredients needed to turn cash into homes: land with planning permission, a viable package of funding and finance, labour and materials. This is likely to take at least two years from start to finish. The result is fewer homes delivered later.
3. Inflation and market changes erode the value of cash
Unlike a completed social home, the value of a levy transferred to a council is exposed to changing market conditions. By the time a council has assembled the other ingredients needed to turn cash into homes, construction costs will have increased, land values may have risen, borrowing costs may be higher, grant and other funding may have changed. Tax that would have funded a given number of homes when received will fund fewer homes several years later – a point backed up by research from University College London.
4. Missed opportunities to rehouse those in need
Most importantly, every year of lost social housing supply is another year in which households remain in Temporary Accommodation, unsafe homes or on the streets. Councils would continue paying high costs for TA or other temporary solutions, and the taxpayer would continue paying high levels of housing benefit into private TA or to private landlords, rather than using the money for permanently affordable homes.
Taking on high build costs
The problem of rising build costs is real and pressing. The Home Builders’ Federation estimates they have risen by £76,000 per home since 2020. Surveys of social landlords likewise flag rising build costs as a key barrier to increasing supply.
Much of this reflects rising material and labour costs as geopolitical shocks have collided with a construction sector held back by stagnant productivity. But it is also true that builders of all types of homes are facing a sharp increase in the costs of policy compliance as many new requirements come into effect over a relatively short period of time: the Future Homes Standard, the Building Safety Levy and Biodiversity Net Gain, to name a few. These policies are needed to clear up the Conservatives’ mess on building safety while improving England’s resilience to the climate emergency. Nonetheless, they contribute to a genuine challenge.
The question is, would binning the Section 106 system help or hinder housebuilding? The recent experience of the Infrastructure Levy suggests the Conservatives’ proposal for a ‘one step levy’ would be wasteful distraction from the real work needed to drive down build costs, absorbing time and resources from industry and all levels of government – and it would, of course, produce fewer social and affordable homes, reducing overall housing supply and curtailing opportunities for innovation in the construction sector.
The Government has undertaken sweeping planning reforms to start controlling costs, with more planned – but planning reforms from central government are unlikely to be enough. Fortunately, there are many other opportunities to bring down build costs, such as smarter procurement, finally catching up with the rest of the developed world in the use of Modern Methods of Construction, and addressing the unusually low productivity of our construction sector.
While there is a role for central government, mayors will be best placed to seize many of these opportunities. As devolution progresses, I’d like to see mayors take on the build costs challenge. Could better organisation of funding and powers across housing, transport, planning and skills at the regional level strip out cost more effectively than any central government initiative? And could mayors do so by working with social housing, rather than against it?
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