Affordable Housing: Building through Cycles

Further reading: Building through cycles – Savills UK

Introduction

The UK faces persistent challenges in providing adequate affordable housing amidst fluctuating market cycles. While various models and strategies have emerged to address the shortfall, the sector remains vulnerable to economic shifts. This document explores the impact of market cycles on affordable housing, highlighting the risks, opportunities, and strategies that can help ensure sustainable delivery.

Market Impacts on Affordable Housing Supply

Historically low grant funding has driven housing associations to adopt cross-subsidy models, relying on proceeds from market-rate home sales to fund affordable housing. Between 2016 and 2018, the number of homes built for market sale by housing associations increased by 24%. This dependence, however, leaves associations exposed to market downturns. In London and the South, areas with acute affordable housing needs, declining house price growth and transaction volumes pose significant challenges to generating the necessary cross-subsidies. The slowdown also presents opportunities for associations to acquire market-sale homes for shared ownership, potentially offsetting some risks.

Risks and Opportunities

Risks:

1. Increased Exposure: The reliance on market-rate sales makes housing associations susceptible to market slowdowns.
2. Section 106 Constraints: Affordable housing delivery via Section 106 agreements reached a peak of 18,000 homes in 2016/17 but could halve in a downturn.
3. Regional Variations: Areas like London and the South face reduced house price growth, limiting cross-subsidy potential.

Opportunities:

1. Enhanced Grant Funding: Increased grants can reduce sales risks and enable the delivery of more sub-market rented homes.
2. Strategic Land Acquisition: Long-term grant funding allows housing associations to build a pipeline of affordable housing land, ensuring a more proactive approach to supply.
3. Local Authority Collaboration: With removing the Housing Revenue Account (HRA) debt cap, local authorities can expand their role in affordable housing delivery through partnerships and leveraging their land holdings.

The Role of Grant Funding

Grant funding is critical for mitigating risks associated with market dependency. By reducing reliance on market sales, grants enable a shift towards more counter-cyclical tenures, such as sub-market rented homes. Figure 2 in the original analysis underscores that increased grants lead to higher delivery rates while balancing the tenure mix. As Help to Buy phases out post-2021, grants and diverse tenure models, including shared ownership, will be vital for sustaining housing delivery to meet government targets.

Section 106 Agreements and Their Limitations

Section 106 agreements, which have provided up to 8% of total housing delivery since 2013, remain a critical but limited resource. The volatility of this mechanism is evident, as completions fell by 50% during the 2006–2009 market downturn. Current delivery is constrained by factors such as high land costs in areas like London, where affordable housing demand is most acute. To ensure continuity, housing associations must supplement Section 106 contributions with grant funding and innovative development approaches.

Strategic Land Control

Access to land remains a significant barrier for housing associations. Traditionally, associations have entered the development process at later stages, limiting their influence on project outcomes. However, the additional £2 billion allocated for affordable housing between 2021 and 2029 provides an opportunity for a more strategic, land-led approach. Building long-term land pipelines will strengthen the sector’s resilience against market fluctuations and enhance delivery capacity.

In contrast, private housebuilders maintain extensive land pipelines, enabling them to weather market cycles effectively. Housing associations must adopt similar strategies, focusing on early-stage land acquisition and planning to secure an affordable housing supply.

The Role of Local Authorities

The abolition of the HRA debt cap marks a turning point for local authority-led housing initiatives. This change empowers councils to borrow more for large-scale developments, with the potential to deliver at least 15,000 homes annually. Over 150 local housing companies have been established, signaling a growing trend towards local authority involvement in addressing the affordable housing crisis.

To maximize this potential, councils need to address gaps in development and construction expertise. Collaboration with housing associations and private developers will be essential to scale up delivery. Additionally, local authorities significant land holdings present an opportunity for innovative projects, such as estate regeneration, that align housing delivery with broader economic goals.

Conclusion

Addressing the UK’s affordable housing shortfall requires a multifaceted approach that balances market reliance with strategic planning and funding. By leveraging grants, fostering local authority partnerships, and adopting proactive land strategies, the sector can mitigate risks associated with market cycles. With sustained innovation and collaboration, housing associations and local authorities can play pivotal roles in meeting the government’s ambitious target of 300,000 homes annually, ensuring that affordable housing remains a priority even in challenging economic climates.

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