The gap between affordable housing supply and need in England is widening. It is especially acute for low-income households, who in more and more areas no longer have access to low-cost social housing.
Because of the shortage of social housing and the rising cost of homeownership, increasing numbers of young households have had no option but to rent privately, often on short-term tenancies in relatively poor-quality housing. Private tenants spend more of their income on housing costs, and rents in the private rented sector (PRS) have increased over the past five years at a much faster rate than average earnings.
An assessment by the independent Affordable Housing Commission (AHC) last year showed that around 60% of households in the PRS can afford a market rent, while the other 40% require support from the welfare system to do so. This has significantly contributed to the ballooning housing benefit bill – officially estimated to be more than £30bn a year.
The AHC defines affordable housing as costing no more than 33% of household income, and also takes account of related issues such as quality, overcrowding, adequacy of housing benefit, household size and regional variations. By these metrics, one in five of all households in England are in unaffordable homes, and almost 40% of those are in the lower half of the income distribution.
Furthermore, households devoting 40% or more of their incomes to rent – the group at highest risk – are predominantly in the PRS. The pandemic has emphasised the need for urgent measures to improve housing conditions and make homes more secure and affordable.
Recent house price rises in regional markets have also affected affordability. Across the country outside London, there has been strong rental demand amid constrained supply, with rents rising to ten-year highs in the North East and South West of England and the East Midlands.
However, according to Nationwide, the past decade has also seen a significant widening in the gap between the least affordable and most affordable regions. House price growth in London in the 2010s, for example, was 66%, compared with 11% in the North East, 17% in Yorkshire and Humber, 33% in the North West, and 36% in the West Midlands.
Building more new homes across the country is therefore critical to meeting housing need – but will not by itself be enough. The AHC argues that to make housing genuinely affordable again, the supply of stock at below-market rents must increase dramatically. And that should include making more existing homes affordable.
The biggest shortfall is for social rented homes, that is low-cost housing let at between 40% and 60% of market rents. According to the AHC, demolitions, conversions to so-called affordable rent – which is typically 80% of the market rate – and right-to-buy sales together exceed the number of newly built social rented homes by 17,000 a year. If this decline continues, the number of social rented homes would fall from 16% of the total housing stock today to just 11% by 2045.
The commission therefore proposes – alongside a substantial rise in new-build social housing – a national housing conversion fund (NHCF) for England. This would help social landlords and community-led housing organisations buy rented properties from overstretched buy-to-let landlords as well as down-at-heel PRS properties, which would be improved and re-let at social rent levels. The fund could also support the acquisition of empty and new-build properties, depending on local market conditions.
The precise bidding criteria would, nevertheless, need to be carefully considered following a consultation with social landlords and other stakeholders. However, the focus could initially be on regional markets outside London, where housing conditions are poor and house prices are lower.
In the 1960s and 1970s, acquisitions were a popular means for housing associations to increase their portfolios. Support was cut back for a decade, but activity increased again in the 1990s, and then in the 2000s under the Housing Market Renewal Pathfinder programme.
For more than half a century, acquisitions and conversions of dilapidated homes and those in need of renovation have been used to increase the stock of social and affordable housing, improve quality and stimulate development.
In the aftermath of the 2008 global financial crisis, the focus switched to acquisition of new-build homes, with housing associations buying up unsold private stock under the National Clearing House Scheme. This £350m initiative enabled associations to acquire homes that had fallen in value to increase the supply of affordable and social housing, and supported developers that were in a financially perilous position.
It led to private developers selling 9,600 units of previously unsold stock in 2008/09, of which 30% were family homes with three or more bedrooms. The properties were transferred to social landlords, which in turn offered them at social rent or for shared ownership. There has been no bulk buying since, although social landlords have continued to purchase long-term empty homes under mortgage rescue schemes.
More recently, social landlords have been purchasing properties for temporary accommodation; some of this has been under the Next Steps Accommodation Programme, which funds the acquisition or renovation of homes for rough sleepers. Local authorities, particularly those in London, have also been buying up former council homes for use both as temporary accommodation and for social rent. However, the overall level of acquisitions is well below what it was in the past, as Figure 1 shows.
In addition, most of the market conversion of commercial to residential use has been under recently extended permitted development rights, which research by the Local Government Association suggests has led to a loss of affordable homes, given that such conversions are not now subject to affordable housing contributions. There has also been a trend for converting social rented homes into more expensive rental properties, which nevertheless fall under the definition of affordable homes.
Source: Ministry of Housing, Communities & Local Government; live table 1,009 on housing supply
The primary case for an England-wide NHCF is to support economic recovery from the pandemic and provide an immediate and cost-effective increase in social housing provision. Analysis by the AHC has shown that social rented housing – whether acquisition or new build – is considerably more effective at addressing affordability problems than simply increasing overall housing supply.
For this reason, the fund would complement rather than replace existing local initiatives and add to the government's Affordable Homes Programme 2021 to 2026 and other funds.
A separate conversion fund could be developed for London. This could augment the £1.33bn proposed for tenure conversion in a report by the capital's COVID-19 Housing Taskforce as well as mayor Sadiq Khan's manifesto pledge to explore funding options for boroughs to buy back houses purchased under the right to buy.
The initial focus of the NHCF would be on the existing market in lower-value areas, with grants for affordable housing providers contingent on improving conditions and supporting local economies. Some funding could be reserved for acquisitions by community-based organisations with experience of buying empty properties. Other initiatives could be added to the fund, such as grants for converting office and retail space into affordable housing.
An NHCF would help reduce the housing benefit bill as well, which has increased in part because of the larger number of claimants in the PRS where rents are significantly higher. It could also ensure a better balance of affordable and suitable property types, including much-needed family housing for households on lower incomes.
The PRS has recently picked up, particularly outside London, and buy-to-let investors have been encouraged by rising demand. However, this is after a three-year contraction across the sector prompted by changes to tax and regulations, such as the reform of licensing for houses in multiple occupation (HMOs).
Nationwide Building Society subsidiary the Mortgage Works reports that there has been a 12% reduction in the number of rental properties owned without a mortgage between 2017 and 2020, and, while the number owned with a mortgage continued to increase, the rate of growth slowed to 2% a year over the same period from 8% in 2014/15. According to Nationwide chief economist Robert Gardner, the outlook for the PRS is 'unusually uncertain in the wake of COVID-19'.
In fact, think-tank the Resolution Foundation estimates that 6% of private renters are currently in arrears – double the pre-pandemic norm. The prospect of significant and ongoing arrears, benefit freezes, clogged-up courts and legislation such as the Renters' Reform Bill to protect tenants may encourage some landlords to cash out.
An illustrative cost–benefit analysis for an NHCF, based on official data and the Treasury's Green Book guidance, suggests it would offer value for money.
Of the total fund, £805m would be spent on conversions in areas of low-value housing and £450m on stalled sites, covering a mix of shared ownership and social housing. The split could of course be different, although higher-value homes would command more grant.
To provide 42,500 converted units – 35,000 of existing stock at a subsidy of £23,000 each, and 7,500 at £60,000 apiece on sites intended for development that has not progressed for financial reasons – suggests overall funding of around £1.26bn would be necessary. These grants would require varying levels of cross-subsidy from the social landlord depending on local market conditions, with social rents requiring the most subsidy per home as future rent levels and income for such homes are lower.
With housing welfare savings and wider benefits, the net cost to government would be £623m. However, the net economic benefits of increased housing, economic activity and distributional benefits over 30 years would total £1.37bn.
Using Homes England's methodology on costs per job, the investment in maintenance and major works suggests that buying existing properties would create 25 jobs per £1.2m. This would mean that the government would receive additional revenue from income tax and National Insurance as well as saving on Jobseeker's Allowance. For new-build properties, there would also be revenue from additional council tax.
As part of the social landlord's contract to obtain funding, they would own the converted housing in perpetuity, with savings for the public purse mounting up over time. The lower cost of social renting offers long-term benefits to tenants and local economies, as those on lower incomes gain greater utility from an additional pound invested than those receiving higher incomes. The improvement in societal well-being should also be factored into the economic assessment of investing in affordable housing.
The headline cost–benefit analysis forecasts that the fund would create around 5,200 jobs in areas with low demand for market housing, with a gross value added of £246m.
The AHC put forward the case for an NHCF because there is an urgent need to increase the supply of affordable, secure, better-quality housing for low-income households – many of whom are living in the PRS.
According to the commission, acquisitions by social landlords for tenure conversion would – if targeted in the right way – also have immediate, wider socio-economic benefits, including helping people into work and reducing the welfare bill.
The proposal is relatively modest compared with the cost of other interventions, such as the help-to-buy initiative, which the Chartered Institute of Housing estimates will have cost £30bn by 2023. A bigger fund – to convert low-cost homes currently planned for sale or to buy up unsold private housing – is nevertheless feasible, depending on the condition of the market and the appetite of social landlords.
The NHCF could also be topped up by conversion and improvement grants that are already available under existing programmes. Transfers of property ownership from the PRS to social landlords could be accelerated by concessions such as exemption from capital gains tax for private landlords who sell.
It would also be possible for social landlords to form real-estate investment trusts with private companies to buy homes that have sitting tenants while the landlord retains a share option. Measures would of course be necessary to protect tenants and ensure they benefited from such transfer.
Conversion funds have worked in the past and could be made to work again, complementing existing schemes to create affordable housing from empty homes and acquisitions for temporary accommodation. As the AHC concluded, an NHCF could form a key part of a housing-led recovery plan that not only helps to boost jobs and growth but at the same time improves housing conditions and affordability alike.
Related competencies include: Housing strategy and provision