Sunday, 31 May 2015

Does requiring affordable housing reduce supply?

Planning authorities in the UK generally require that a proportion of housing on developments over a certain size is set aside as 'affordable' or else that a commuted sum is paid to the planning authority in order that they may provide affordable housing elsewhere. The definition of affordable here doesn't matter except to note that it is housing at below market prices (either for rent or sale). There is little political objection to this principle other than its degree and in the impact it might have on the viability of development.

The objectives of such policies are firstly to ensure that there is an adequate stock of affordable and social housing so as to meet need, and secondly that communities are 'integrated' (meaning that we don't repeat the errors of the past by building isolated or separate social housing 'ghettoes'). And the use of planning obligations seems to make sense as it ensures delivery.

However, these excellent policies may contain a problem by reducing supply of new housing across all tenures and housing types. In the USA these policies are called 'Inclusionary Zoning' (or IZ) - so named to set them as different from exclusionary zoning that it used to prevent the development of low cost housing - and a couple of US economists, Tom Means and Edward Stringham, have shown how these policies might not be the solution they're cracked up to be:

Between 1980 and 1990,” they write, “cities imposing below-market housing mandates end up with 9 percent higher prices and 8 percent fewer homes overall. Between 1990 and 2000 cities imposing below market housing mandates end up with 20 percent higher prices and 7 percent fewer homes overall.”

Put simply the imposition of requirements to provide affordable housing on a development site (or else pay a commuted sum) seem to result in less housing being built and, unsurprisingly, house prices being higher. Now it may be that the UK's housing market will behave differently - the problem is that most research into affordable housing here is either funded by affordable housing providers or else focuses on affordable housing supply rather than supply in general.

Like most policies around housing the real issue is hidden in a thicket of detailed studies. We need below-market prices for housing because housing is expensive. Housing is expensive because the land on which the houses are built is expensive. The high land price is a consequence of there being a limited supply of said land. And the limited supply is (to a considerable extent) a matter of policy choice:

The reason, after all, that housing is expensive in places like New York, San Francisco, DC, and other IZ-friendly (not to mention rent-controlled) locales is that zoning regulations prevent supply from keeping pace with population growth. In response, public officials have pursued demand-side solutions to this fundamentally supply-side problem, through a massive subsidy apparatus that includes rent-control, public housing, Section 8, tax credits, and now inclusionary zoning. Combined, these measures are band aids for a mortal wound, since they ignore the underlying cause of why hot urban housing markets remain expensive. And sometimes, by discouraging construction, these measures worsen the problem.

Translated into English this tells us that, where you have pressured housing markets (something that is true in London but not in Bradford), the answer lies in more supply of land and allowing higher densities rather than regulating or subsidising housing. Almost everyone who looks at the problem realises pretty early on that the barrier to our supply problem in housing isn't finance, isn't government funding and isn't the market. The problem is the planning system.



Woodsy42 said...

Common sense would suggest that the 'affordability' rules make houses more expensive.
Why? Because they ignore the fact that the purchaser of a more expensive new house will likely be moving up from a smaller cheaper house, which ultimately down the chain will leave the smallest and cheapest starter homes on the market for first time purchasers/renters.
The affordability rules increase the price to the more affluent purchaser thus making it harder for them to move and vacate cheaper property and increasing prices throughout the system. This in addition to reducing overall supply by making developments more difficult and increasing paperwork and bureaucratic costs which feed into the prices.

Anonymous said...

An 'affordable home' is probably the least affordable home on the market.
Once purchased it is almost impossible, due the restrictions on purchasers plus the 30% below value sale price, to sell. So these homes are only ever likely to appear on the market at the end of the purchasers life, or when the purchaser defaults on the mortgage and the Section 106 agreement is torn up so that the mortgage company can sell to anyone at market value.
Restricting successful planning applications forces up the price of the plot. This in turn means the value of the house built on it must be high enough to pay for that plot.
Affordable housing schemes are not the answer. Affordable plots are.