Ongoing political turbulence has been causing short-term disruption to the housing market, but it is longer-term ideological shifts that will shape housebuilding over the next five to 10 years. We anticipate that pressure to build more quickly and meet a growing range of needs will shape government policy towards the development industry.

Housing has become increasingly politically important in recent years. The 2018 Kantar Public Opinion Monitor ranked provision of affordable housing as the second-highest priority for voters, with only investment in healthcare scoring higher. Within housing policy, the survey revealed three key areas the public think the government should prioritise: increasing the overall supply of affordable housing, tackling homelessness, and increasing the amount of social housing. This shift in attitudes is now inevitably feeding into new policy debates.

Political differences

While they approach the issue from different perspectives, both of the traditional main political parties believe there needs to be a greater diversity of homes built to increase absorption levels, and have mooted changes to the planning system to ensure delivery.

The Conservatives remain focused on supporting home ownership, an attitude reinforced by Esther McVey, the latest Housing Minster, but acknowledge the need for a more diverse product. The final recommendations of the 2018 Letwin Review included proposals requiring sites of more than 1,500 units to offer a range of tenures, including private rental stock and more affordable tenures. It also included incentives to diversify such sites by making future government support conditional upon developers accepting a Section 106 agreement, which conformed with the new planning policy for those sites.

In contrast, Labour’s Housing for the Many policy document tackled the provision of affordable housing, particularly homes for social rent. Their proposals include greater transparency in viability assessments and increasing the existing powers of local government to include clawback mechanisms in Section 106 agreements.

Reduced profits and values

Either way, it appears likely that if housing supply does not continue to rise beyond the current annual level of 222,000 homes per year, government may need to intervene further in the planning system to force a greater diversity of product, which should result in higher market absorption.

This would have two main consequences for the development industry. First, it would accelerate the trend outlined in the finance article (see Financial disruption) of the end customer shifting from individual homeowners buying open market sale homes to institutional investors and registered providers seeking bulk purchases of rental homes.

The second impact would be a reduction in scheme gross development value, as increased levels of either rental or affordable homes would generate lower values than open market sale properties. This would feed through into either squeezed developer margins, or lower residual land values.

This could be offset by shorter building programmes, as build out would not be limited by sales rates. Shortening the time on site, and earlier cash receipts for developers, could result in access to cheaper finance.

Fair shares

Linked to the debate on increasing delivery has been the emergence of land-value capture as a prominent issue around solving the housing crisis. There have been calls across the political spectrum for more attention to be paid to increasing land-value capture within the development process.

The Letwin Review called for local authorities to use developer contributions via Section 106 agreements to effectively cap residual land value at 10 times existing use value on greenfield land. Proposals in the June 2019 Land for the Many report commissioned by Labour included a Land Value Tax as ‘a means for recovering the unearned windfalls from collective development for the state and wider community’, and reforms to compulsory purchase to enable the state to purchase land at existing use value, enabling more of the uplift generated by development to be captured by the public purse.

At the end of 2018, the House of Commons Housing, Communities and Local Government Select Committee called for a significant proportion of the uplift in land values after planning permission to be available to the state to invest in new infrastructure and public services. Transport for London has gone a step further, commissioning research in 2017 into the effectiveness of a variety of mechanisms to capture land value uplift generated by public investment in infrastructure. We could see the public sector adopting a masterplanning and developer role, anticipating a proportional share in the eventual profits.

Although none of these proposals have become mainstream policy, it is likely that the question of how land value uplift should be captured and shared will continue to be a contentious topic, with repercussions for the development industry should mechanisms for more land value capture be introduced.

Social awareness

Alongside the desire for increased delivery of new homes, is growing demand for homes that meet specific social needs. With increasingly stretched housing affordability, the need for more affordable housing, particularly social rent, is chronic. MHCLG’s 2018 figures showed more than 1.1m households on local authority waiting lists and 83,700 in temporary accommodation. With 47,000 new affordable homes built in 2017/18, meeting this need would require a disruptive step change in the delivery of social housing.

Demographic shifts will likely result in further policy intervention to deliver more varied housing. For example, the All-Party Parliamentary Group on Housing and Care for Older People recently published a report predicting there will be an additional 1.5 million people over 65 in the private rented sector in 20 years’ time. On average, pensioner households have a median net income before housing costs of £344 per week. This means that the median private rented property would cost almost 46% of the median pensioner’s income nationally: well above the widely used affordability benchmarks of 30 to 40%. For low-income pensioners, private renting would be simply unaffordable in areas with higher rents. As recognition of these issues increases, we can expect policy responses to become more urgent and disruptive.

_{Read the articles within Spotlight: Disruption in development below.}