Affordability and the Need for Affordable Housing

SG ‘ Firm Analytical Foundations’ Conference

22 April 2008Prof Glen Bramley

School of the Built Environment

Outline of Session

• Policy context – Firm Foundations, supply & affordability

• Local affordability & need model• Update & projections• Baseline scenario• Alternative assumptions & impacts• The Geography Question• Different measures are different• Some policy issues

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Supply and Affordability

• Scottish Housing Market Review and Firm Foundations identify inadequate/unresponsive housing supply and affordability as key problems

• Parallel with Barker Review in England• Belief that increasing supply will lead to

moderation in market prices – developing economic model

• Setting national target to raise output to 35,000 pa• Established Housing Supply Task Force to focus on

unblocking supply• Main focus on planning – SPP3 - regional targets -

identification of strategic growth opportunities• But must be environmentally & socially sustainable

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School of the Built Environment

Local Affordability & Need Model

• What model is & does- models local income distributions in detail- estimates affordability to buy or rent in market for <35 hhd- combines with est gross household formation etc -> need- compares with supply of social relets -> net need- traces backlog need for given supply, tenure, vacancies, etc.

• Not a full-scale econometric model of market- but some behavioural models (hhd formation, relets)- some market feedbacks imposed based on judgements- key trends in incomes, prices imposed

• Snapshots (2005 & 2006) +forward projections to 2021- base data updated to 2005-06- 5 year steps - tied to hhd projections – LA level

• Results last time – see CS Report 72

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Differences this time

• Affordability based on cheaper of purchase or private rent• Updated prices (higher) and incomes (bit higher)• 16 forward scenarios to 2021 based on different assumptions

- A prices trend with incomes, vs B 15% price correction to 2011- Lending multipliers 3.5 (single) vs 4.0 - Price threshold lower quartile vs lowest decile- PR affordy 25% of net income vs 30%

• Comments, in light of recent events- Price correction now likely, following credit crunch- Scottish data, & prudence, support 3.5; English data 4.0- LQ is recommended practice; LD raises issues about quality- PR 30% more realistic & consistent with guidance (25% of gross)- but what will happen to PR rent levels?- should we also be modelling access to deposits? (model does allow for large deposits through ‘wealth adjustment’)

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Re-run of Affordability Model

Table 2: Key Needs Measures by Year under Baseline Scenario A5

Key Measure 2005 2006 2011 2016 2021 % able to buy or rent 51 46 48 50 53 Positive Need 5890 10940 13830 9885 11900 Surplus 7660 4785 5450 7270 6440 New Affordable Need 26450 28995 31410 24650 26570 Relets 52380 45290 41245 38745 36510 Backlog allowance 16340 15175 11405 9905 8645 Homestake Need 635 1420 1900 1405 1700 Open Market H’stake 1935 3715 4970 3720 4955

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Comments on Baseline

• Affordability improves gradually • Net need a bit lower than previous study, but rising

and plateau-ing (until price correction introduced)• Still some sizeable surpluses in places• New hhd formation fluctuating• Relets declining due to falling stock• With provision of 7000 pa, backlog would fall

gradually• Vacancies appear to grow, possibly -> more

demoln• Owner occupation levelling off around 71%• PRS continues to grow (? BTL bubble?)

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Affordable Needs Depend on Assumptions

Table 4: Net Need for Affordable/Social Housing by Year under Different Assumptions (number per year)

Scenario Price Price Lend PR Need Label Corr'n Thresh Mult Affordy 2005 2006 2011 2016 2021 A1 No LD 3.5 25% 4565 6460 8130 4590 5320 A2 No LD 3.5 30% 4165 5890 6955 3220 3825 A3 No LD 4.0 25% 3775 5235 6450 2935 3495 A4 No LD 4.0 30% 3765 5180 6190 2580 3045 A5 No LQ 3.5 25% 5890 10940 13830 9885 11900 A6 No LQ 3.5 30% 4670 8735 10470 6250 7105 A7 No LQ 4.0 25% 5130 9385 12095 8120 9730 A8 No LQ 4.0 30% 4500 8445 10275 6100 6950 B1 Yes LD 3.5 25% 4565 6460 3415 1335 1375 B2 Yes LD 3.5 30% 4165 4165 3130 1105 1105 B3 Yes LD 4.0 25% 3775 5235 2430 710 610 B4 Yes LD 4.0 30% 3765 5180 2405 700 585 B5 Yes LQ 3.5 25% 5890 10940 7440 4500 5290 B6 Yes LQ 3.5 30% 4670 8735 6050 2985 3280 B7 Yes LQ 4.0 25% 5130 9385 6160 3250 3695 B8 Yes LQ 4.0 30% 4500 8445 5590 2670 2895

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Impact of Different Assumptions

• Most of variant assumptions imply better affordability and lower need in future

• Effects are not linear & additive• 15% price correction halves net need (- 5-6,000)• LM 4.0 reduces need by similar amount (5-6,000)• LD price threshold reduces need by 3-5,000• Higher aff ratio for PR reduces need by 3-8,000• Combinations reduce need by 4-9,000, leaving

residual need of <1000 in later years• So it all depends on the assumptions….• ….but does credit crunch mean we need to change

more?

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There is also the Geography Question

• Main modelling done on unitary LA basis• CS Report 72 compares HMA’s and former

DCs• Larger HMAs submerge some need• Smaller units make some difference in

larger rural and mixed LA’s (Highland, Fife, Borders, etc)

• No easy right answer, given data constraints• Current policy thinking emphasizes

subregional analysis and cooperation

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School of the Built Environment

School of the Built Environment

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Affordability Measures

• Proliferation of studies, indices, targets, etc.e.g. Wilcox, CLG/NHPAU, SG (FF), various Banks

• Simple ratios of house price to income/earnings popular, and feature in govt targets

• However, these neglect variations in interest rates, household structure, economic activity and income composition

• E.g. in England correlation between GB measures and LQHPER are quite low

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Comparison of Measures

England Correlations 2006Bramley LQHPER Wilcox

Buy Income -0.62 0.81Buy Wlth-adj -0.42 0.70Rent Income -0.37Buy Working 0.70

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Some Policy Issues

• Setting normative affordability standards• Addressing LTV & deposits issue (savings scheme?)• Balance between overall supply-> market affordability

and affordable housing provision• Providing more affordable housing without much money• Making more effective use of planning powers & s.75• Role of intermediate (LCHO) provision, esp OMHS• Building a lot more housing than prospective household

growth - rising vacancies, demolition, low demand• Acceptability of PRS as solution for different groups e.g.

families, homeless, esp given lack of security

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Why Involve Planning?

• Critics have argued inappropriate use of planning - lack of ‘rational nexus’ between AH and specific site

- stealth tax – should be overt- not job of hb industry to subsidise social housing

• Counter view (inc Barker) that planning constraint responsible for affordability problem & should compensate- plan area level nexus- betterment taxation efficient and equitable- there will never be enough public subsidy for soc hsg

• In practice policy has 3 drivers- land to put social/afford housing on- getting subsidy from land value - promoting mixed communities

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All New Affordable Housing Provision England 2002-06

0

10000

20000

30000

40000

50000

2002 2003 2004 2005 2006

Financial Year

Ho

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ng

Un

its

Total Other Aff

Tot Shared Own

Tot Soc Rent

Affordable Housing Provided through Planning System (s106 Agreements) 2002-2005

0

10000

20000

30000

40000

50000

2002 2003 2004 2005

Financial Year

Ho

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its

s106 Other Aff

s106 Shared Own

s106 Soc Rent

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Contribution of Grant & s.106

New Affordable Housing in England by Whether Grant and/or s106

0

10000

20000

30000

40000

50000

2002 2003 2004 2005

Financial Year

Ho

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Un

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No Grant s106

Grant + s106

Grant not s106

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Main Conclusions on PAH

• Not a substitute for general land release and market housing supply (inc assoc infrastructure)- but in pressured scenic areas it may be

• It can be made to work, but it takes a long time• Land value & subsidy issues critical • Ideal from Social Justice viewpoint

- paid for by tax on landowner windfalls- promotes mixed communities (inc demographic mix?)- increases affordable supply in pressured areas