The case for public investment in affordable housing funds

This paper was written by Marley Miller with input from Homes for the North who commissioned the report. Homes for the North are an alliance of 17 housing associations who want to deliver more homes across the North of England. Global Counsel was commissioned to write this report exploring how the government could use new financing mechanisms to drive regeneration and support more affordable homes to be built as it seeks to meet its objective of delivering 1.5 million homes this Parliament. 

The challenge 

Delivering on an ambitious housing target

The government has been clear that it sees building 1.5 million more homes as a central plank of its mission to kickstart the economy this Parliament. It has taken welcome action to drive forwards this agenda, prioritising much-needed reforms to the planning system, which has been holding back development. Bringing back mandatory, and substantially higher, housing targets will increase the ambition of local authorities to build homes where they are needed. Enabling building on the “grey belt” will bring more land into the system for affordable housing, especially in those areas which are most constrained.

However, these planning reforms alone won’t be sufficient to deliver 1.5 million homes this Parliament. Many of the changes will take time to have an impact as they rely on local authorities making new local plans, which currently take an average of seven years to produce.  Even if the government manages to get this down to its target of 2 and a half years, they are starting from a challenging position. Housebuilding rates are at the lowest levels since the pandemic, as high interest rates have softened demand and increased borrowing costs. 40 percent fewer projects were started last year than the year before, with a similar number of new developments as during the period after the financial crisis. 

HOUSEBUILDING RATES ARE AT THE LOWEST LEVEL SINCE THE PANDEMIC

Housing starts and completions, 12 month rolling total, 2002-2024

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For housing associations, the challenge is more acute. With rising construction costs and new government safety and efficiency standards necessitating substantial improvements to existing stocks, many associations have been forced to slow down or pause their development programmes, resulting in the largest fall in housing starts since records began in 1978. 

If the government is to deliver on its ambitious target, it will need to ensure all parts of the housing market are firing on all cylinders, which will require identifying solutions for the challenges holding back housing associations’ delivery. The government has made clear that it wants to put affordable housing “at the heart of [its] plan to deliver 1.5 million homes” and has pledged to deliver the “biggest boost to social and affordable housing”. As such, as the Comprehensive Spending Review approaches in June, the key question facing the government is how it can provide the support the sector needs to ramp up housebuilding before the next election, while managing its increasingly tight fiscal situation.

A new Affordable Homes Programme, with longer term funding certainty, will be vital for housing associations, especially for the delivery of social rent homes where there is an acute shortage after delivery has fallen substantially in the past decade. However, to bolster this and deliver on its mission with limited resources, the government will need to consider what actions it can take to drive greater private investment into affordable housing and how it can support the sector to draw on wider financing mechanisms to ramp up construction. 

There are already examples of new models for financing affordable rent housing in the UK which do this. For instance, the Scottish Government and Greater Manchester Combined Authorities have given a mixture of low-interest loans and equity investment to funds established to deliver affordable housing for key workers on low incomes. They have been able to leverage substantial investment from pension funds and private investment to drive urban regeneration and enhance the affordability of what would otherwise be market rate housing.

This report makes the case that to deliver on its twin objectives of delivering affordable homes and driving growth, the government should consider how it can scale up these mechanisms to a national approach. To do this, it should consider two options.

Establishing Homes England as an affordable housing investment bank

At the Autumn Budget, the government changed the measure of debt used in the fiscal rules to “Net Financial Debt”, which includes the value of financial transactions as well as their costs. The government should harness this change to invest in, or issue low-cost loans to, funds focused on delivering affordable housing, drawing on existing programmes in Scotland and Greater Manchester. 

The government should bolster Homes England’s role in investing in funds established to deliver these projects, giving it the function of a national affordable housing investment bank and designating it as an expert financial institution under the Financial Transactions Control Framework. This would provide a low-cost route for government to support housing associations to substantially increase housebuilding and mean that grant funding could be more targeted on social housing, which requires a higher level of government subsidy. It would also support the government in its ambition of encouraging pension funds to diversify their portfolios and focus on UK assets that are integral to economic growth.

Bolstering combined authority capacity for innovative affordable housing investment

Through the English Devolution White Paper, the government set a clear ambition to devolve more powers and funding for housing and regeneration to Combined Authorities and new Strategic Authorities. Many councils currently don’t have the resources, expertise or risk appetite to explore more innovative options for financing affordable housing delivery, which is holding back supply. As part of its approach to new Integrated Settlements for Combined Authorities, the government should consider how it can support them to explore these options, including investing in affordable housing funds. 

This could be through a dedicated service in Homes England, which provides expertise and capacity to support local authorities to structure arrangements with housing associations and private investors to leverage their financial resources. Alternatively, the government could provide funding for local authorities to recruit in-house expertise and issue national guidance on best practices. 

Read the full report