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Varying market conditions across the North and South of England means that the delivery of new homes needs to be well-targeted.
Alongside broader market trends, the difference in wages, rents and house prices between regions is also a key factor determining which tenures are most effective at meeting local housing needs. Our forecasts, for example, project that house prices will rise almost twice as much in the North West as in London.
The same variation can be seen with income projections. Taking London as an example, nearly 60% of households in need have incomes above £30,000 (excluding housing benefit); by contrast, in the North the same proportion of households in need have incomes below £30,000.
Yet due to much greater existing affordability challenges, London also has the greatest need for social rented homes, which attract the steepest discount to market rent. Our modelling suggests that from c. 50% to 60% of sub-market homes in the capital need to be offered as social rent, higher than any other region. Assuming total housing delivery met Government targets, this would imply building around 21,000 new social rented homes per annum in London.
Affordable home ownership on the other hand, works better in markets with lower capital values, such as in the North. Across all factors influencing market conditions, around 42% of households in need in the North are typically able to access affordable housing using such a scheme; in the South, that number is 32%.
By way of example: our previous paper found substantial need for affordable home ownership schemes, with many buyers priced out of the market for owner-occupation by very high mortgage costs and a lack of income growth. As there is less regional variation in wages than in house prices, a period of strong wage growth, as seen over the past few years, has a greater effect on affordability in cheaper markets (such as the North and Midlands) than more expensive ones. With falling mortgage rates and rising wages, many of these households are now priced into wholly home ownership again, reducing their need for support.
Higher prices in the South also mean buyers are more sensitive to changes in mortgage rates as households are tend to need to borrow a higher proportion of the property value. The share of homes that should be delivered as affordable home ownership in the South varies from 23% to 42% depending on market conditions. By contrast, in the North, the range is smaller (35% - 49%) as the lower capital values mean monthly repayment costs vary less in different rate environments.
The price tag?
We have estimated that, assuming 370,000 new home completions each year, around 143,000 to 168,000 of those homes would need to be offered in a sub-market tenure between 2025 and 2029. If that projection held across the 10 years of the Social and Affordable Homes Programme, how much would it cost to deliver in the ideal mixture of tenures?
Over the ten year window for the SAHP, we estimate that this would cost £91 to £119 billion in grant funding depending on which level of delivery is achieved, with a mid-scenario of £103 billion based on our modelling. This is over 2.5 times greater than the £39 billion of funding recently announced by the Government for the programme.
Furthermore, this assumes that just under half (48%) of sub-market housing delivery comes via Section 106 agreements with private housebuilders, in line with the trend of the last three years. This is likely optimistic, as private completions (of which Section 106 delivery are a by-product) are likely to fall to around 200,000 per year in the near-term. Given historic trends, this would leave Section 106 completions somewhere around 27,000 homes – well below c. 70,000 needed to ensure delivery meets need without extra grant.
We have also not considered how viability (and thus grant rates required) may change over time. It is unlikely that the tenure balance suggested by our modelling will actually be deliverable in every local area at every point in the housing market cycle. It is important is to highlight the scale of the overall need for affordable housing, and how that need can be met by a variety of tenures in many areas; as highlighted in our previous paper, a “one size fits all” approach is unlikely to deliver on either overall affordable housing delivery or on sub-market tenure needs locally.
The SAHP is of course a very welcome boost to the sector, but is still less than 40% of what would be required to achieve the affordable homes needs set out in this paper over the next 10 years.
The SAHP has re-focused affordable delivery towards social rented homes – aiming to provide 60% for this tenure, long called-for by the social housing sector. Our research has repeatedly shown the need for social rented homes in all areas, including in this paper. Nevertheless, delivery of social rented homes should be targeted at those areas where the need is greatest. In turn this implies that policy and funding should remain flexible and adaptable, able to respond both to current variations in local housing needs as well as how those needs change over time.
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