Grant funding of affordable housing could be considered an investment where it can deliver long term savings on the housing benefit bill. But in practice, affordable housing grant also fulfils many other roles, including bringing viability to development in lower value areas and improving housing quality.

A more flexible and holistic funding regime – directing funding at issues like stock renewal, infrastructure and unlocking difficult sites – could be a more effective way of solving local problems in the housing market.

Priced out

Our analysis in 'Doing more with less' identifies a large and growing problem: more and more emerging households priced out of the housing market due to low incomes and rising costs. If we assume that all these households will form, how would you go about housing them all, and what would it cost?

Two scenarios are shown below. The first assumes that all of the 100,000 households are housed in hypothetical market rented housing, supported by housing benefit. The second assumes that we build enough social rented housing to accommodate all 100,000 households.

^{Source: EHS, CACI, Land Registry, Rightmove, HCA SDR, 2011 Census, CIH (note that totals may not sum due to rounding)}

New generation of social housing

In her party conference speech the Prime Minister announced an extra £2bn of funding over four years, some of which would be available for social rent. But to house 100,000 emerging households in this tenure would need funds of a different magnitude: £7bn each year.

Adopting this scenario would reduce the hypothetical housing benefit for the 100,000 households by £430m per year, with rents more aligned to the low incomes of those excluded from the market. And you get something tangible for your upfront subsidy in the form of new housing assets.

The housing benefit savings generated are much greater in London and the South, where the difference between prevailing levels of social and market rents is largest.

Local solutions for local problems

Grant from affordable housing programmes also helps make development viable in markets where the balance between build costs and sales values would otherwise preclude it. Clearly there are benefits to using grant in this way too.

Major development programmes can often be a good way of boosting the local economy in deprived areas, providing jobs and training, and supporting local supply chains. But it’s hard to make the case for an affordable homes programme where market, Affordable, and social rents overlap.

The Homes and Communities Agency (HCA) is in the process of consolidating its various pots of funding and taking a more active role in delivery. In future, housing associations should have the opportunity to bid for a wider range of funding packages and move away from the current restrictions of grant funding. This could help the sector to address local housing issues more effectively.

Political will

More flexibility would allow funding to be targeted at specific housing problems, with less of a focus on delivering maximum numbers of affordable homes. The political will to move to a more targeted approach seems to be growing.

The Prime Minister’s party conference speech alluded to a shift in government thinking, saying: “In those parts of the country where the need is greatest [the government will] allow homes to be built for social rent”.

A flexible approach would complement wider economic rebalancing policies, helping to remove the perception of poor quality housing options that is often cited as a barrier to relocating workers outside the south east. Treating housing as infrastructure, alongside transport improvements and investment in employment space would mean measuring the overall economic impact of funding or policy interventions against a range of indicators.

Building more homes should be a priority, but so should improving the quality of existing homes. Money spent should be judged on whether it's delivering the right housing solutions in the right places.

^{Footnote on assumptions: To assess the scale of sub-market need we’ve looked at local incomes, local prices, and DCLG’s new need figures following the standardised approach. We’ve assumed that households are in need of sub-market housing if there is no market provision accessible when they spend 25% of their gross income on housing costs. The potential housing benefit bill is estimated based on current two bed LHA rates. The varying amount of rent covered by housing benefit by different income groups in different regions has been accounted for. The value of the saving in perpetuity has been calculated using current 30-year gilt rate of 1.8%.}