Councils want more affordable housing; developers want more profit. Can the housing deadlock ever be broken.
A one-acre derelict eyesore in Stockport serves as a stark warning against forcing tough edicts for affordable housing upon developers.

The wasteland in the Heaton Moor area of the city, formerly occupied by a petrol station, has laid empty for three years. That's not because developers aren't interested in it – they've been lining up for a slice of the action. But they have all been put off by the local authority's demands for social housing on any development.

Three years ago, housebuilder McCarthy & Stone applied to Stockport council to build 50 sheltered homes on the site. Planning law (see box, page 17) allowed Stockport to insist that 25% of the scheme be affordable before it would grant planning permission. McCarthy & Stone refused, so Stockport threw out the scheme. A planning inquiry was launched and the High Court backed Stockport's decision. "We're not opposed to affordable housing because we've included it on other sites," insists a McCarthy & Stone spokeswoman, "but 25% on a site that small was unsuitable."

In April, Stockport rejected a second plan for 22 private flats by surveyor Gerrish Price Kay. This time it was agreed that there were too few flats to insist on a percentage being affordable, but the developers balked at Stockport's alternative demands for improvements to the environment and infrastructure.

Planning in stalemate
Stockport council says negotiations are continuing but the lack of activity on the disused site is proof that the stalemate has yet to be broken.

The fiasco illustrates how affordable housing is becoming unaffordable – or uneconomic – for developers to produce. In order to include housing at below-market rates, developers must buy land below market price. The risk is that landowners will refuse to sell land for housing and sell it for more profitable commercial use instead. Although this mainly affects the expensive South-east, the Stockport case indicates that no part of the country is immune.

It is a catch-22 situation. Cash-strapped councils have little option but to pass the affordable housing buck to developers, but private developers concerned with profit regard onerous social housing targets as a disincentive to housebuilding.

Schemes are in danger of either being put on hold or collapsing altogether while planners and developers argue over planning gain.

Setting higher targets on developers for affordable housing is killing the goose that lays the golden eggs

Pierre Williams, House Builders Federation

The number of new home completions is, as reported in last week's Housing Today (page 18), dwindling. The government predicts around 220,000 homes are needed each year but only 150,000-170,000 are built.

"Setting higher targets on developers for affordable housing is killing the goose that lays the golden eggs," argues Pierre Williams, spokesman for the House Builders Federation. "It's unrealistic to expect a private industry to bail out this country's under-investment in housing over the last 30 years."

There are other cases as well as the one in Stockport. Housebuilder St George, for example, abandoned proposals for a housing and retail scheme in London a few years ago after escalating demands from planners rendered the scheme unaffordable. "We would have created up to 600 units, maybe 20% of them affordable," recalls St George managing director Tony Carey, "but the local authority wanted 35%. There just wasn't enough social housing grant. The planners' wish list wasn't economically viable. We needed more carrot and less stick." St George pulled out and London lost a potential 120 affordable homes. The site was sold for commercial use and is now a supermarket.

In May, the Manhattan Loft Corporation and St George withdrew from bidding for a development in Lambeth, south London. No reason for this was given, but it is thought that the project was deemed unfeasible because of the obligation to provide social housing. Developer Fairview Homes, meanwhile, estimates that protracted negotiations with planners mean that projects that usually take between six and nine months to agree are now taking between 12 and 18 months.

Delivering Affordable Housing Through Planning Policy, a DTLR report published in February, acknowledges that councils often demand the impossible. "There is very often a lack of understanding by local authorities of the development economics involved in the delivery of affordable housing," the report said. "It is essential that the number of affordable housing units required on a particular scheme should be capable of being delivered without making the scheme uneconomic."

The competing ideologies of developers and the public sector have driven the issue into deadlock. Many believe that the housing shortage is now so severe that developers have to act more charitably. As Dino Patel, policy officer at the London Housing Federation, says: "The battle is one between meeting a need and securing a profit."

Tim Holden, chairman of the South East England Regional Assembly's affordability group, agrees. "Affordable housing is not just about the public sector anymore – the debate about what constitutes a key worker proved that," he says. "So it's very much about a joint approach between councils and developers to the problem."

There’s no doubt that public subsidy must increase significantly if housing supply is to meet demand

Ken Livingstone

No help from government
London mayor Ken Livingstone, who wants between 35% and 50% of new developments to be affordable, doesn't seem to recognise that developers have problems with his demands. "In most parts of London, land values support substantial profits on residential and commercial schemes, and my policies promoting higher densities will increase these profits," he says. "It's therefore reasonable to expect that a higher level of affordable housing can also be supported without jeopardising housing supply."

However, Livingstone concedes that developers cannot be expected to foot the social housing bill alone. "The financial burden for providing homes for people on low or moderate incomes can't fall exclusively on property developers – they're not charitable organisations. There's no doubt that public subsidy must increase significantly if housing supply is to meet demand."

This is a view shared by independent experts such as Sue Regan, housing researcher at the Institute for Public Policy and Research, who believes in the basic premise that developers cannot be expected to produce something at below the market rate.

Unfortunately for developers, the government disagrees. In a speech to the Association of London Government in February, the then housing and planning minister, Lord Falconer, stressed that "the solutions to the shortage of affordable housing must be sought in much wider ways than simply looking for greater public subsidy".

The stalemate will only be broken when the two sides stop sulking and start talking. "If the government wants to provide affordable housing then local authorities need to work in partnership with housing providers," explains Stewart Davenport of social housing provider Lovell. "This is far better than insisting on set levels of social housing borough-wide which, given the current expectations of land values, might prove hard to provide."

This sentiment is admirable enough but, in light of the mounting tension between planners and developers, largely unworkable.

The government's answer to the impasse lies in its planning green paper, published last December. Instead of negotiating on social housing targets, the paper suggests councils set tariffs for affordable housing, which will be paid by developers in exchange for planning permission. But developers fear high tariffs will lead to even more schemes collapsing or, as Stockport has found, languishing in limbo.

Tough targets

Under section 106 of the Town and Country Planning Act 1980 – planning gain – local authorities can negotiate with developers for up to 25% affordable housing in new developments in exchange for planning permission. Housebuilders have accepted that quota, albeit begrudgingly, as fairly reasonable. But as councils feel the pinch due to plummeting grants from central government, their demands have increased to fill the gap. London mayor Ken Livingstone has recommended that 50% of new developments are affordable in two-thirds of London’s boroughs and 35% in the rest. Developers are waiting for Livingstone’s affordable housing targets, which will be published for consultation this month as part of his draft Spatial Development Strategy. The DTLR’s planning green paper, published last December, aims to replace the current system of negotiated planning obligations. Under the new system, councils would set a tariff for affordable housing. Developers would have advance knowledge of this and pay in return for planning permission. Although this might not entirely do away with section 106, it would cut down the protracted negotiations that are the hallmark of most planning gain deals. The danger, however, is that an excessively high tariff would lead to the abandonment of even more projects, which would mean fewer homes of any sort being built, and there is no guarantee that the money raised would go back into housing.

How developers decide on social housing schemes

Developers argue they are not against providing social housing on new sites as a rule – just that including it on certain developments is not cost-effective and at times would mean operating at a loss. As well as calculating profit margins, a land valuation exercise is carried out to find out how the inclusion of social housing affects the value of the land. Creating sub-market housing means buying land at sub-market rates, and if the creation of low-cost homes drives down the land value, landowners are reluctant to sell at a lower price – so the developer drops the bid. Other criteria used to weigh up whether or not to proceed with a scheme include the feasibility of the extras that planners often demand as a condition of granting planning permission. Extras can range from local landscaping and environmental improvements to building a neighbourhood community centre. Developers point out that the reason some schemes go ahead and others do not is that land values vary enormously from area to area – especially in cities – as do the demands of local authority planning officers. What might be cost-effective in Wandsworth, which asks that 25% of new developments be affordable, might not be in neighbouring Hammersmith and Fulham where planners demand 50%. For this reason, sites which include social housing are often where you least expect them to be. For example, Chelsea Bridge Wharf, Berkeley Homes’ flagship scheme next to Battersea Power Station, is deemed feasible because Wandsworth council has asked for a reasonable 25% of the new homes to be affordable. Of the 600 homes in the scheme, 152 will be available for shared ownership and profits will be easily made through the sale of riverside apartments and penthouses, 8500 m2 of office space, shops, bars, restaurants, a health and fitness club and a hotel. On developments such as these, it is unlikely that the affordable homes will offer the river views and health club benefits included with the private flats.