Posted by: Adam Roake | February 28, 2011

New Homes Bonus: Don’t Be Deluded

NHB will not reward councils who grant new planning permission for new homes. It will reward councils, in whose areas developers build new homes.

There is no question that we are facing a serious housing shortage that needs to be addressed urgently if we are to have any prospect of growth. Housing production in England is at a post-war low of roughly 102,000 completions per annum. CLG anticipate 230,000 new households will be formed in England per annum each year for the next 22 years. Production is therefore currently only meeting 44% of need and hasn’t once topped 200,000 within the last twenty years.

New Homes Bonus (NHB) is the government’s flagship housing policy, aiming to start “… a local housebuilding revolution where communities who go for growth by building new homes reap the benefits and at the same time deliver a much needed economic boost to their local area“. Fine words but it seems to me unlikely NHB can deliver.

Firstly, NHB does not provide an incentive to communities to grant permission for new homes in their area, implied but never actually stated in any of the documentation from CLG. Most of the homes that will be built in the next five years have already been granted permission or are currently allocated for housing in Local Plans. The government requires councils to maintain a five year land supply and these are two key tests for determining whether the identified supply is deliverable in respect of PPS3 paragraph 54 (i.e. permission granted or site allocated for housing). In consequence, over the next five, years councils have virtually no control over the level of NHB they might receive; this is entirely in the hands of developers, who will only bring forward the housing that they feel they can sell at a profit in any given area.

Any permission granted now might yield NHB in the future (i.e. in five years time after the next general election), if the permission is implemented. On average between 2003 and 2009, only 48% of permissions in London were implemented as an indication.

Source GLA Annual Monitoring Report Feb 2010 – Tables 15 and 16

London has the strongest housing market and it can be assumed that permission granted in areas where housing values are low or the market is weak for some other reason are much less likely to be implemented that those in high value areas with strong markets. As a matter of fact, in the lifetime of this government, the number of planning permissions granted by a council will make little difference to the amount of NHB they receive. What might make a real difference would be if housebuilders could be persuaded to build in the district. So if councils don’t want to be penalised by the coalition, they need to make it as easy and profitable as possible for housebuilders to build homes in their district rather than the district next door. Quite apart from the dubious supposition that housebuilders can or will build us out of the housing crisis, which I will come to later, this is what NHB truly incentivises. Don’t embrace growth; rather embrace housebuilders.

Secondly, as incentives go, NHB is poorly funded and within three years will become a penalty rather than an incentive. In the Consultation Response document (p.26, last paragraph), the government has promised to fully fund NHB for the next two years but, in three years time, NHB will be funded predominantly from top-slicing Formula Grant. The NHB rules use the additions to the Council Taxbase as a measure of new housing. The table below shows how this measure lags behind actual housing completions by about two years.

Source DCLG House Build Stats Dec 2010: table 244 and Local Authority Council Taxbase Statistics for England 2005-2010

On this basis for the next two years and then assuming that output picks up by 13% per annum cumulatively over 2012 and 2014, the likely cost of NHB will be as follows:

Rather than an incentive it will quickly become a penalty with top sliced Formula Grant rising from £335m to £874m for councils who have not or cannot attract housebuilders. The effect will be that attractive areas, which include high value housing markets, will receive a greater proportion of Formula Grant than areas, which include low value housing markets or which are unattractive to housebuilders for other reasons. Worse still, areas which do not need any new housing will be penalised simply because they do not need new housing, no matter what they do! So overall most likely, richer areas will get more funding than poorer areas and none of this has anything to do with promoting growth!

Thirdly, NHB has the hallmarks of a scheme to allow planning permission to be bought. The CPRE are arguing this route strongly and have Counsels opinion to the effect that NHB may be unlawful. Far from dealing with this complaint, the government have made some incredibly stupid suggestions about what NHB might be used to pay for. The Consultation Response document (p.28) states;

Until now, increased housing in communities has meant increased strain on public services and reduced amenities. The New Homes Bonus will remove this disincentive by providing local authorities with the means to mitigate the strain the increased population causes.” Paragraph 2

However, this is not to say that the New Homes Bonus will always be irrelevant to decisions on planning applications. In some cases it could lawfully be taken into account as a material consideration where there is a direct connection between the intended use of the Bonus and the proposed development – but this will vary according to the circumstances of the case. An example of this could be paying for the widening of a road to allow for the extra traffic the new development would bring or to provide for substitute open space that is lost as a result of a housing development.” Paragraph 4

Paragraph B9 of Circular 05/2005 makes for an interesting comparison:

Within these categories of acceptable obligations, what is sought must also be fairly and reasonably related in scale and kind to the proposed development and reasonable in all other respects. For example, developers may reasonably be expected to pay for or contribute to the cost of all, or that part of, additional infrastructure provision which would not have been necessary but for their development. The effect of the infrastructure investment may be to confer some wider benefit on the community but payments should be directly related in scale to the impact which the proposed development will make.” (my emboldening)

It seems to me that “the widening of a road to allow for the extra traffic the new development would bring or to provide for substitute open space that is lost as a result of a housing development” might both be described as “additional infrastructure provision which would not have been necessary but for their development“. So in the new world of NHB, it seems that developers can expect councils to pay for such infrastructure. Indeed, were I negotiating a section 106 agreement, I might start from the position that the council should be jolly grateful that I want to build homes in their district. If they want to avoid the risk of CPRE commencing JR proceedings, they had better use all of the anticipated NHB towards the section 106 contribution to infrastructure that I might otherwise have been asked to pay. Of course if that were unacceptable, I would be happy not to build any homes in their borough and simply do so in the next door borough, where they seem somewhat more amenable to “financial incentive”. In the current climate, where viability arguments are already allowing housebuilders to re-negotiate section 106 terms, NHB provides another powerful tool for housebuilders to use against the council.

And finally, can we really expect that housebuilders will build us out of the housing supply crisis? It is easier for housebuilders if there is rampant house price inflation. Their business model generally will assume no inflation when they buy land, so that when they sell homes two, three or more years later, high house price inflation yields flattering results. In contrast low or no house price inflation requires much greater discipline simply to achieve forecast results. Historically, Local Authorities stopped building council housing in the 1980s and thereafter housebuilders became the dominant suppliers of new housing (housing associations managed to deliver only 14% on average of total supply over the period). Over the last twenty years housing completions have run at between 130,000 to 160,000, better years correlating roughly with higher house price inflation. It is clear that housebuilders are well aware that there is no incentive to fully meet demand so that prices remain stable or fall. On the contrary, it is in their interest to undersupply. In the current housing market, housing transaction numbers are running at 64% of long term average and are not expected to increase significantly over the next two years due to the poor economic outlook. Unsurprisingly house price growth is negligible. In the light of the low demand, it is obvious that housebuilders will maintain housing production at low levels well below the forecast demographic need. There is no possibility that they will build us out of the current housing supply crisis.

In Grant Shapps’ Ministerial Statement, he describes NHB as follows:

These radical reforms, demonstrate our commitment to seeing a major upswing in housing to meet Britain’s housing need and seeing more homes that people want in the places that people want them.

I chose 13% year on year as the rate of housing market growth in my NHB calculation above, because that is the maximum impact CLG expects NHB to have on housing supply (see page 52). When one considers the need in England is to house 232,000 new households every year from now, a response which is forecast to see supply decrease to 102,000 over the next two years and then increase to 115,000, 130,000 and so on seems a little pathetic. To describe it as “… demonstrat{ing} our commitment to seeing a major upswing in housing” is delusional.

NHB provides no real incentive to grant more planning permissions; will quickly become a penalty to those councils which fail to attract housebuilders; is possibly illegal and certainly an incredibly useful tool for housebuilders to reduce section 106 contributions and avoid paying for the adverse impacts on infrastructure caused by their development. It seems to me perfectly in line with this government’s lip-service approach toward Localism; a serious but deeply disguised blow for local authorities and an exciting opportunity for housebuilders.

Any housebuilders or developers out there, who need some help, please do not hesitate to call.

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Responses

  1. Good technical dismantling of the NHB scheme, Adam. Councils’ receipts from it are not ring-fenced, so the pressure will be to use it to maintain other services, or keep down CTax. It will force councils effectively to sell planning permissions, further discrediting the process. Essential hard infrastructure will take second place to shroud waiving care services and education.

  2. Adam, some very interesting points made here. It does seem that the Government is getting itself into a right old pickle, as well as in real danger of disapointing people who have taken the retoric at face value. Your point about using NHB monies to fund infrastructure in place of S106/CIL is interesting.

    Your points about developers not having any incentive to meet demand echos what I said to a senior civil servant some years ago when I was working on one of the Sustainable Communities Growth Areas (I wasn’t believed). This isn’t helped by the barriers to entry for new developers being so high, due to the high costs of getting through the planning system.

  3. […] this country so desperately needs“. I think I’ve said enough about the New Homes Bonus to demonstrate how little new housing that will lead to (even DCLG are only expecting a maximum of 13% increase in housing completions) but to claim that […]


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