Building more affordable homes: Improving the delivery of affordable housing in areas of high demand

Executive Summary

National Audit Office Value for Money Report

1. Sustained inflation in the housing sector in recent years has made it increasingly hard for many people to obtain a home that they can afford either to own or to rent. The number of households living in temporary accommodation has more than doubled since 1996 from 43,000 to 94,000, [Footnote 1] while in 2003 construction of new houses in the United Kingdom fell to its lowest level since the Second World War.
    
2. This shortage of housing has a number of important economic and social consequences, creating difficulties and hardship for many people who may find themselves living in inappropriate accommodation. There is also a problem for key workers, such as nurses and teachers, who are being priced out of the market in the South of England, resulting in staff shortages, risking poorer public and private services.
   
   Affordable housing
   There are two main types of affordable housing; social rented housing (housing that is provided by either local authorities or housing associations to those in most need at a subsidised rent) and intermediate housing (housing designed to help people enter home ownership through intermediate schemes such as shared ownership or right to buy).
   
   
3. In other regions of the country such as in the North and the Midlands there are, however, areas that have suffered a collapse in their housing markets. Such market failure can result in a cycle of decline, with people trapped in poor housing in areas associated with high crime and unemployment. To tackle these issues of both excessive high and low demand, in 2002 the Office of the Deputy Prime Minister (ODPM) introduced a new Public Service Agreement target target 5 on housing markets. In the 2004 Spending Review, the scope of the target was extended to include improving the affordability of housing:

   Achieve a better balance between housing availability and the demand for housing, including improving affordability, in all English regions while protecting valuable countryside around our towns, cities and in the green belt and the sustainability of towns and cities.

    

   Delivery chain
    Business concept, used increasingly in the public sector, which refers to the systems, processes and organisations through which government seeks to achieve its strategic and policy objectives.
   
4. The Public Service Agreement target covers a wide scope of activity aimed at improving housing in areas of both high and low demand. Our study focuses on one strand of the target improving the availability of affordable housing in high demand areas where the pressure for housing is outstripping supply. Growth Areas, such as the Thames Gateway, have not been included in the study because they are subject to separate additional funding and are the subject of forthcoming work by the National Audit Office. Focussing on three regions across southern England where there is high demand for affordable housing the South East, London and the South West the study investigates the efficiency and effectiveness of the delivery chain for affordable housing, considering ways in which it can be strengthened, and tracks activity across the delivery chain at the national, regional and local level.
    
5. Unlike many other delivery chains, direct Government funding for new affordable housing is relatively straightforward, with the majority of the money being allocated from the ODPM to the Housing Corporation, which in turn makes payments to housing associations and other bodies on the strength of business plan proposals and a range of performance criteria. They, in turn, translate the funding into new housing through a system of grants and subsidies. Against the background of needing to deliver the right housing in the right areas, a complex delivery chain has developed around this funding flow, involving Government Offices for the Regions, Regional Housing Boards and Regional Planning Bodies, local authorities, housing associations and property developers (Figure 1).
   
   Figure 1 ("How funding for affordable housing flows from national to local levels of the delivery chain") is unavailable in this version of the executive summary.
    
6. Resources allocated to the delivery chain to provide more affordable housing are significant, amounting in 2004-06 to some 3.3 billion from the Housing Corporations Approved Development Programme.
    
7. In addition to direct funding for affordable housing, there are four other mechanisms that have an influence over the supply of affordable housing. Firstly, by ensuring sufficient land is allocated for housing through the planning system (with priority given to building on previously developed land and in urban areas). Secondly, using Section 106 agreements to secure commitments from private developers to include affordable housing on otherwise market-price developments. Thirdly, by releasing surplus public sector land for affordable housing, often through English Partnerships (the Governments regeneration agency). Finally, by developing new affordable housing products to drive down construction costs so that housing can be sold for less.
   
   Section 106
   The Town and Country Planning Act 1990 (as substituted by the 1991 Planning and Compensation Act): Gave local authorities powers to negotiate community benefits as part of the planning process (Section 106 agreements). In the last five years this provision has been increasingly used to provide affordable housing as part of private sector housing developments.
8. The affordable housing delivery chain, like other delivery chains for the delivery of national Public Service Agreement targets, is under pressure to become more efficient as part of the Governments wider programme to secure 21.5 billion of annual efficiency savings in the three years 2005-06 to 2007-08 across all public expenditure. For the Office of the Deputy Prime Minister, this target translates into an efficiency gain for social housing of 835 million by 2007-08 of which 355 million will come from housing associations.
   
   What we did
   
9. We interviewed and conducted workshops with over 200 directors, managers and front-line staff involved in the main delivery chain for affordable housing; from ODPM, HM Treasury, the Prime Ministers Delivery Unit, English Partnerships, the Housing Corporation, the Home Builders Federation, the Local Government Association, the National Housing Federation, Regional Government Offices, Regional Housing Boards, sub regional groups of housing strategy and enabling officers in Hampshire and Devon, 50 local authorities in the South East, South West and London, a further six local authorities in London, the South West and the South East chosen as case studies (Hammersmith and Fulham, Merton, Arun, Chichester, Plymouth and South Hams) developers, consultants and voluntary and community housing advice bodies.
    
10. The joint approach by the National Audit Office and Audit Commission, through their different perspectives and by combining knowledge and expertise, has allowed a unique look at the delivery chain throughout its length; from the challenges faced by the ODPM through to the actions being taken by or now required at regional and local level by those organisations that have to deliver the large numbers of new affordable homes required.
    
    Findings
    The Department has introduced significant changes to the delivery chain in recent years, but there has been a lack of certainty at regional and local levels about roles and relationships under the new arrangements
    
11. While the flow of funding from ODPM to the Housing Corporation and then to housing associations is relatively straightforward, the inter-relationships between organisations and processes at a local and regional level results in a complicated delivery chain. This complexity means that in practice there are many influences on how it is spent. In part this is due to the need to involve regions in local funding decisions. In addition, ODPM has changed the delivery chain substantially over the past two years, focussing more decision making at a regional rather than at a local level. This has included the establishment of Regional Housing Boards, to determine housing priorities and advise Ministers on the overall allocation of funding across the region, the removal of Local Authority Social Housing Grant from local authorities, changes to planning guidance, and a new way of funding housing associations, including two year funding cycles.
     
12. ODPM has not always followed through on these changes by giving clear practical advice to those affected about how they should now act and operate. The production of guidance has often lagged behind the announcement of policy changes and changes to market conditions. This means that parts of the delivery chain have not been clear about their new roles and responsibilities. The delay in updating Planning Policy Guidance note 3 has caused confusion and meant that agencies were operating within an outdated planning framework. For example significant inconsistencies in approach have developed between authorities with regards to the scale of housing developments that can trigger the inclusion of an affordable element through a Section 106 agreement. Some authorities have been working to lower thresholds to secure more affordable housing. Where this has happened, the practice has often been supported by the Audit Commission, but has sometimes been challenged by developers who have on occasion had their challenges upheld by the Planning Inspectorate. This lack of joined-up Government has led to challenges and appeals by developers and costly delays which undermine progress on PSA 5.
    
    Despite large amounts of funding, a national target, and affordable housing becoming a key corporate priority for local authorities in recent years, few believe that they can yet meet the challenge to deliver large increases in affordable housing
    
13. All tiers of the delivery chain share the view that the shortage of affordable housing is a serious problem. Alongside the national Public Service Agreement Target, 92 per cent of the 50 local authorities we surveyed for this study now have affordable housing as one of their key corporate priorities. Recent statistics from ODPM [Footnote 2] ODPM Quarterly statistical release on homelessness. executive summary Building more afordable homes : Impro ving the delivery of afordable housing in areas of high 12 demand indicate that for England as a whole, the number of new cases of homelessness has been falling since the beginning of 2004, with the number of new households in temporary accommodation remaining steady since September that year. The Department attribute this to additional measures in recent years to tackle homelessness. In areas of high housing demand in the south of England, however, the number of households living in temporary accommodation has risen steadily over recent years. This has resulted in a backlog for local authorities and very few, (only 2 per cent of those surveyed for this study) [Footnote 3], consider that they will be able to meet the need for social rented housing over the next three years due largely to insufficient funding and a shortage of land available for development. In response to such circumstances ODPM plans to increase the supply of new social rented housing by 50 per cent by 2007-08 compared with 2004-05. It is also increasing its investment in homelessness prevention (from 60 million in 2005-06 to 74 million in 2007-08). This, combined with an increased supply of social rented housing will, in ODPMs view, contribute to the Governments aim to halve the number of households in temporary accommodation by 2010. A target was set by ODPM for the Housing Corporation to provide and additional 27, 000 additional homes for rent or low-cost home ownership, including those for key workers. The Housing Corporation achieved 28,756 completions in 2004-05.
    
    Initiatives by the Housing Corporation have started to focus development funding into the hands of those best able to spend it effectively
14. Over the period 2004-06, large amounts of public money amounting to around £3.3 billion is being spent by the Housing Corporation on delivering affordable housing. This funding is allocated to housing associations on the strength of business cases for developing and delivering affordable housing and, in recent years, the Corporation has introduced a number of initiatives designed to improve the efficiency of performance of the sector. These have included:
    
    • two year funding cycles giving more certainty to housing associations, encouraging developers to plan better and to invest in capacity for the future;
       
    • focussing resources on fewer housing associations over 80 per cent of the 2004 2006 programme was allocated to 70 partner housing associations through the Corporations pilot Investment Partnering programme; and
       
    • the implementation of a framework for assessing the performance of housing associations in receipt of development grants.
       
15. These changes have brought efficiency savings, with the funding programme in 2004-05 being on average 9 per cent cheaper than the programme in 2003-04. [Footnote 4] This has resulted in an average of 28 additional homes for every 10 million of public funding. Evidence from our fieldwork indicates that an extension to three to five year funding cycles could benefit developers and housing associations further, although this would require committing to investment and could reduce flexibility to changing priorities.
     
16. The Investment Partnering programme is encouraging more housing associations to consider merging or to form group structures creating potential for improving cost-effectiveness through the availability of cheaper loan finance or the opportunity to improve procurement. Recent research by AT Kearney on back office functions generally [Footnote 5] indicates that potential savings averaging about 14 per cent, can be achievable. There is scope for housing associations to realise potential savings in sharing back office functions. [Footnote 6]
     
17. A further measure introduced by the Housing Corporation to encourage efficiency in the housing association sector is the Operating Cost Index. This sets out the operating costs for those associations with over 250 units, allowing the Housing Corporation to consider what drives such costs. In addition, how associations overall and individual service costs compare with other similar organisations is looked at in Audit Commission housing inspections which also examine how well associations manage and improve value for money.
    
    While there has been a move towards more regionally based decision making about housing need and provision, this has not always led to a change in working practices at a local level
    
18. The establishment of Regional Housing Boards and the forthcoming transfer of their responsibilities to Regional Planning Bodies should potentially allow for more coordinated decision making about when and where affordable housing should be built taking better into account issues around the economic and social needs of the region rather than, as in the past, focussing on the immediate housing needs of a local authority.
     
19. In addition, local authorities are increasingly working jointly with their neighbours at a sub regional level to develop a more accurate understanding of and better strategies to address wider housing markets rather than focussing within local authority boundaries. Expectations of sub regional working have increased with recent ODPM policy proposals but there is not as yet clarity about the boundaries or the mechanisms for such working. This has created room for confusion amongst developers who are unsure about the status of sub regional documents and processes.
     
20. There is some lack of clarity around the status of sub regional housing strategies. Despite ODPM advising that there is no need for local authorities to produce local housing strategies where they have produced a sub regional strategy with neighbouring local authorities (so long as they have demonstrated a clear commitment to the sub regional strategy) some local authorities continue to do so resulting in duplicated effort. Nor is there control over the timing, quality and frequency with which individual local authorities prepare Housing Needs Surveys. This leads to a range of different surveys being produced at different times. ODPM is addressing the need to create more consistency by developing a new approach to local housing assessments which will focus more on assessing housing demand and by requiring the preparation of coordinated Surveys and Housing Market Assessments.
    
    Government Offices could play an enhanced role in providing guidance to local authorities
    
21. Acting as a key link between central government, local areas and the regions, Government Offices are uniquely placed to help local authorities to improve their performance in delivering affordable housing, but their role has evolved in different ways and at different rates across the regions. This means that their role is not clear to local authorities resulting in some local authorities not making as much use of the advice and guidance that Government Offices are well placed to provide. To deliver consistency on guidance and good practice, requires a more proactive approach by Government Offices including:
    • encouraging local authorities to share good practice and, where appropriate, resources, such as housing and planning staff, particularly where smaller authorities are faced with large housing schemes which they do not have the in-house capacity to deal with; and
       
    • to better coordinate the activities of government departments in the regions including ensuring, in partnership with English Partnerships, that opportunities to use surplus land for affordable homes are explored and where possible exploited.
    Section 106 has proved an effective lever for increasing the supply of affordable housing, but there is a need for clearer and more consistent messages from local authorities so that developers do not waste time and effort in putting forward unacceptable proposals for new schemes.
22. Forty per cent of the Housing Corporation’s Approved Development Programme is now channelled to Section 106 sites, where developers are building affordable housing as part of a private development. However, to ensure value from the available resources the Housing Corporation’s preference is that affordable housing on such sites should, wherever possible, be built without grant. This increasingly important lever is a complex part of the delivery chain and one that causes most delays to the delivery of more affordable housing. Audit Commission data show that the time taken to negotiate Section 106 agreements can vary from 6 to 67 weeks. The process is lengthened because:
    
    • local authorities have implemented ODPM guidance inconsistently, causing delays in reaching agreements between developers and local authorities because of confusion and disagreements around what an appropriate contribution of affordable housing should be for a given site; and
       
    • reaching agreements around planning obligations under Section 106 involves complex negotiations between developers and local authorities. Local authorities often lack the necessary skills in negotiation and in the use of technical financial tools, which means that these negotiations often take longer than they should, adding extra costs to delivery.
23. However there is some progress, with some local authorities developing good practice that is reducing the time taken to process agreements to weeks rather than months. The Housing Corporation also needs to improve its negotiation capacity on Section 106 work and has put in place steps to achieve this by, for example, introducing the Economic Development Tool. This helps Housing Corporation Regional Teams to make independent assessments over the amount of affordable housing that a housing development can financially bear.
    
    Most local authorities now have affordable housing as their corporate priority, but for this to be achieved it needs the support of the community
    
24. Where local authorities have established affordable housing as a key corporate priority, they need to work alongside housing associations and developers to provide a clear message about housing need and to involve people in how developments might be designed and delivered. This is already happening very effectively in some areas, where local authorities are actively consulting the community about new developments; holding events where the community can see plans, models and artists impressions of future housing schemes. Concept statements, for example, supported by the Improvement and Development Agency, [Footnote 7] provide diagrams and a statement of the future layout; visual images showing the design of the new housing; and what the tenure of the development will be. But this good practice is not widespread. Many local authorities have not taken on the leadership role needed to convince their communities of the need for developing more affordable housing and have done little to allay fears around developing more affordable housing.
    
    The release of surplus land for housing by departments could be aided by more coordination at the national, regional and local level
    
25. Shortages of land for housing development are a major constraint in increasing the supply of affordable housing, particularly in South East England. The public sector is in a position to influence the delivery of affordable housing through the disposal of land and buildings that are suitable for housing. This would also help to alleviate recruitment problems in the bodies they are responsible for, such as the National Health Service. Departments often sell land, however, at best consideration the highest obtainable market price on the basis that this represents the best value in accounting terms.
     
26. ODPM and HM Treasury have in part addressed this tension by asking English Partnerships to establish the Register of Surplus Public Sector Land following the publication of the Sustainable Communities Plan in 2003. The requirement on central government bodies to place surplus sites on the register has now been incorporated into Government Accounting. Government departments are also now required to give 40 days notice to other central departments prior to disposing of surplus land. In their recent announcement on extending home ownership, ODPM and HM Treasury said that English Partnerships would be reviewing the 700 surplus public sector sites currently on the register to assess their potential to deliver more affordable housing. English Partnerships is currently exploring ways to expand the Register to include local authorities, the Housing Corporation and the Regional Development Agencies. More could be done, however, to ensure that surplus public sector land that has value for other public sector objectives is transferred effectively to other agencies.
    
    Making the delivery chain more efficient
    
27. The challenge for the delivery chain is how to gear up delivery of new dwellings to meet the need for social rented housing and the demand for home ownership.
     
28. This can be achieved through two ways: by increasing the speed of delivery by removing blockages, simplifying processes and making sure that roles and responsibilities are clear; and by reducing the unit cost of housing by rationalising the delivery chain. There has been good progress in improving efficiency in recent years with, for example, the introduction of new funding arrangements for housing associations that has encouraged greater partnering and reforms to the planning service that are likely to speed up the processing of planning applications.
     
29. In Figure 2, we set out five key areas where ten efficiencies can be realised.
    
    Figure 2 ("Increasing efficiency in the affordable housing delivery chain") is not available in this version of the executive summary.
    
    (All three notes below refer to the fig 2 above)
    
    11. Housing Corporation, South East Allocation Statement for 2004-06.
    
    12. Investment Partnering. An Evaluation of the Pilot Programme. Chartered Institute of Housing and Tribal HCH June 2005.
    
    13.Investment Partnering. An Evaluation of the Pilot Programme. Chartered Institute of Housing and Tribal HCH June 2005.

We recommend that:

• ODPM develops guidance setting out a clear definition of local authorities’ strategic enabling role in relation to housing, drawn from evidence about how the best performing authorities are behaving.
   
• ODPM clarifies the role of Government Offices to improve links between the national, regional and local levels so that guidance and decisions are made consistently and local authorities make more use of their expertise and advice.
   
• Public sector land that is being sold by a Government department that may be used for another public sector objective (such as affordable housing) should be transferred effectively. To help ensure that this is the case, when new land is entered on the Register of Surplus Public Sector Land this should trigger a process of notification, by English Partnerships, to the relevant regional and local offices such as the Housing Corporation, the Regional Development Agency, local authorities and other relevant bodies.
   
• ODPM, HM Treasury and the Housing Corporation should extend funding to a three to five year funding cycle as an incentive for those bodies in receipt of social housing grant that demonstrate good financial stewardship and performance in developing new housing. Such funding should be allocated on a reducing scale to encourage sustained efficiency gains throughout the supply chain.
   
• The Housing Corporation should build upon its recent initiatives to channel resources into the best performing housing associations by requiring them to demonstrate efficiency savings through the increased sharing of services by development consortia.

We recommend that:

• Government Offices encourage local authorities to enter into Local Public Service Agreements whereby financial incentives are available for initiatives that bring about co-ordinated action and sharing of staff between local authorities, such as around the preparation of Local Development Frameworks and Local Housing Need Assessments.
   
• In helping to establish sub regional working arrangements, the Government Offices are explicit about which matters should be dealt with in sub regional housing strategies and which in local housing strategies.
   
• Where effective sub regional partnerships and strategies do exist, Government Offices, in conjunction with ODPM, should clarify that there is no need to produce a local housing strategy so long as the relevant local authorities demonstrate their commitment to the sub regional housing strategy.
   

• Government Offices should act as champions for the good practice on Section 106 set out in Circular 05/2005, Planning Obligations to improve local authorities’ performance and build a greater degree of consistency.
  

We recommend that:

1.  [back from footnote 1] Review of Housing Supply, Delivering Stability; Securing our Future Housing Needs. Kate Barker, 2004
    
2.  [back from footnote 2]   ODPM Quarterly statistical release on homelessness.
    
3.  [back from footnote 3]   MORI survey of 50 local authorities in the South East, the South West and London.
    
4.  [back from footnote 4]   Investment Partnering. An Evaluation of the Pilot Programme. Chartered Institute of Housing and Tribal HCH June 2005.
    
5.  [back from footnote 5]   A.T. Kearney (2005) Success Through Shared Services: From Back-Office Function to Strategic Drivers. Chicago, Ill.: A.T. Kearney Marketing and Communications, Inc.
    
6.  [back from footnote 6]   The savings so identified will be specified in housing associations’ annual efficiency statements.
    
7.  [back from footnote 7]   The Improvement and Development Agency works to improve performance of local authorities through promoting and disseminating good practice. It is part of the Local Government Association.