300,000 homes per annum goal…despite lower population growth

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OAN Consultation Paper

Government has launched another consultation on the Objectively Assessed Need calculation.

“The Government’s main proposal – to reverse the decision to use the latest ONS household projections for its housing targets – is welcome.  But the standard formula remains despite its flaws.

Use of the ONS figures has proved troublesome in two ways.  Firstly they don’t support the 300,000 dwellings per annum housing target. Secondly they don’t make sense at district level, a point not mentioned in the consultation:  they extrapolate 2001-11 trends forward without taking into account local differences which are highly sensitive at district level where Councils are facing legal challenges from developers.  In North Essex we see big increases for Colchester and Tendring and reductions for Braintree and Chelmsford none of which are justified by supporting figures.

The new ONS figures are now to be abandoned and the 2014 DCLG figures used instead so that the 300,000dpa target is maintained.  This is justified by the need to supply pent up demand which is arguably understated by the ONS.  Politicians, sensitive to the concerns of “generation rent”, are now trying to supply housing demand rather than need.  This is a political judgement which Government is entitled to make:  but politicians need to recognise that i) it will be expensive to implement sustainably ii) unpopular with many local authorities and iii) there is a good chance of over-shooting which will result in a messy house price crash that will further alienate government from young families.

The paper skims over two inconvenient truths:

 

A. The 10 year population forecasts are significantly down post Brexit. This is not just a technical matter: the UK’s stance on immigration has changed and Government shouldn’t be using figures that don’t take this into account.  Putting household size aside a 20% reduction in 10 year population growth (from 3.8m to 3.0m) should lead to a 20% reduction in housing need to 237,000 a figure not far from the 217,000 being delivered now.

B. The underlying assumption that high house prices can be cured by increasing supply may be ill founded. There is increasing recognition that high house prices are driven by low interest rates which disproportionately benefit buy to let landlords over owner occupiers with limited borrowing capacity. There is little indication of a  physical shortage of housing from private rent inflation figures, a better indicator over a period when interest rates have shifted materially.   The spike in house prices is at least partly a financial phenomenon rather than a physical one – an unintended consequence of quantitive easing.  To react by enforcing more housebuilding than the market wants could be politically and economically disastrous.

The standard formula:

The new standard method for calculating housing need will continue.  CAUSE has argued that it is flawed for four reasons:

  1. Affordability is measured by house prices / income, and is therefore (unlike the private rental market) distorted by financial considerations such as low interest rates
  2. The resulting uplift is a percentage of the growth figure, not the absolute number of houses in the area. This magnifies any distortions more than is necessary
  3. The formula encourages building in unsustainable commuter locations. Instead of comparing house prices to the incomes of those who live locally, it compares them with those who work locally.
  4. There is a flywheel effect which works against districts that have performed well in the past. The more housing they have delivered the more they have to deliver.

The standard method was intended to simplify examinations, reduce challenge and save the cost of each council needing professional demographic advice on its housing need.  But the consultation paper emphasises that, like the previous projections, it is only a starting point.  There is a good chance that it will increase complexity and cost rather than reducing it.  Government would be well advised to drop this too, and revert to the previous system of demographic growth + various adjustments.”

Consultation available here:  https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/751810/LHN_Consultation.pdf

William Sunnucks