How many sub-market homes should we be building to meet demand?
Our previous Housing Paper looked at the need for affordable housing against a backdrop of a rapid rise in house prices, rents and mortgage costs following the Covid-19 pandemic. We found there was need for around half of delivery in England to be provided as some form of sub-market housing (which includes low-cost home ownership, affordable and social rented tenures). Demand was greatest in London, where steep housing costs meant most sub-market homes needed to be social rented homes. In more affordable markets such as in parts of the North and Midlands a broader range of tenures was able to meet the need for sub-market housing, including affordable home ownership products.
Much has changed since then: declining interest and mortgage rates, wage growth, falling inflation, and a sluggish (in historical terms) housing market have all contributed to improve the relative affordability for some buyers and renters, while limiting growth in house prices and rents. As a result of all of these factors, housing affordability has improved by 8% across England within just 12 months, according to the ONS.
Nevertheless, there is still a substantial unmet need for sub-market housing. Our latest analysis, updated to take into account the latest data on house prices and incomes, found there was need for 40% of new homes to be of a sub-market tenure at the end of 2024 – equivalent to around 147,000 homes per annum - as a share of overall housing need. At the same time, the tenure profile of sub-market need has developed in subtle but important ways as the effects of the current housing market cycle have not been equally felt everywhere in the country.
How does this compare to current levels of affordable housing delivery?
Overall, over half of English local authorities are delivering less than 50% of what we currently estimate is needed to meet the demand for sub-market homes. This is despite an uptick in affordable housing delivery over the past year, as developers and social housing providers seek to use the last of the current Affordable Homes Programme’s (AHP) grant funding, consistent with the experience of when previous programmes have come to an end. Although a failure to meet requirements is common across England, the targets that need to be met vary significantly between local authorities.
The Midlands and the North require relatively little additional overall delivery above current levels, with some areas within 5% or less of meeting our estimate for total sub-market housing need. In 38 local authorities, delivery actually surpassed 100% of this definition of need over the past year.
Across London and much of the South, however, sub-market housing delivery is as low as 20% of the required levels. With higher build costs in these areas, it can be difficult to make affordable housing financially viable – a critical issue when in recent years around half of affordable housing in England has been delivered by private housebuilders through Section 106 agreements.
Other articles in this publication:
- Delivering across the market cycle: building for the long term
- Matching tenures to local needs: varying market conditions across the North and South of England means that the delivery of new homes needs to be well-targeted.
How does our model work?
To calculate the scale of need for sub-market housing, we estimate the ability of households to afford rent or house prices at current market levels, as well as the number of households currently in affordable housing. We define affordability as spending less than 30% of gross household income on rent, or 20% on mortgage payments, in line with affordable housing policy and long-term trends in owner-occupation costs in England.
Those unable to afford market housing at this level but are not currently in affordable housing are considered to be the “affordability gap” – priced out of the market but unable to access affordable housing at present. In reality, many of these households are able to access market housing, but only by paying significantly more than our affordability thresholds and entering into substantial financial burden.
These households, combined with existing households in affordable housing, produce our estimate of the need for sub-market housing.
We then translate this total need into a proportion of annual housing delivery. For our central estimate, we have assumed delivery at c.370,000 homes per year, in line with the Government’s assessment of overall housing need in England. Based on this, we estimate that, at the end of 2024, c. 145,000 to 150,000 homes need to be offered at a sub-market tenure, equivalent to around 40% of overall housing need.
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