Lime Legal

Affordable for who?

Published 01 May 2023

Kate Barker proposes affordability targets to be set by regional housing and planning boards. But how do you assess affordability? Julian Birch reports

Kate Barker put affordability at the heart of housing policy in her long-awaited final report on house building. She presented ministers with a stark choice. ‘I do not believe that continuing at the current rate of housebuillding is a realistic option, unless we are prepared to accept increasing problems of homelessness, affordability and social division, declining standards of public service delivery and increasing the costs of doing business in the UK – hampering our economic success.’

While Barker herself was careful to avoid calling for a specific number of new homes, she related output clearly to the future affordability of housing. To reduce the trend in real house prices to 1.8 per cent a year, an extra 70,000 private sector homes would be needed; to reduce it to 1.1 per cent would take an extra 120,000 a year. This would be almost double the output in 2012/2013 of 140,000 starts and 125,000 completions.

On top of this, to meet current and future need from people unable to afford homes at market price, output of social housing, which has fallen to its lowest level since the war, would need to increase by 23,000 homes. This is more than double the programme for 2012/2013 and would cost up to £1.6 billion.

Barker pinned the blame for the market’s failure to keep up with demand for new homes on restrictions in the planning system. She proposed replacing the demographic projections that currently dictate the allocation of land for housing with specific market affordability targets set by newly merged regional planning and housing bodies.

The idea is that land for housing would be released once the affordability trigger points are reached. But what exactly does ‘affordable’ mean? As local authorities and developers arguing about planning gain have found, the problem is that it means very different things in different contexts.

Barker highlights the government’s public service agreement 5 ‘to balance the housing market’. This takes the ratio of lower quartile earnings to lower quartile house prices as a benchmark.

Steve Wilcox, professor at the University of York’s centre for housing policy, agrees that it’s important to look at what is happening at the bottom of the market. But he points out a series of problems that will need to be addressed:

  • House price/earnings ratios take no account of what’s happening to interest rates and therefore mortgage payments.
  • Measures which just look at individual earnings take no account of the proportion of first-time buyer households with dual incomes (currently 50 per cent) or of how the mix of single and dual earners changes over time.
  • Different house price indices may produce different levels of affordability according to how far they adjust for different mixes of house types in different areas (such as a preponderance of one-bed flats in some London boroughs and four-bed houses in some suburban areas).
  • Earnings figures can also produce different results according to whether a person’s place of work or place of residence is taken into account.
  • Affordability is not just a problem for the South East of England. Indeed it is arguably worse in the South West, where earnings are lower in relation to prices.The complexities were revealed in the new Housing Affordability Index devised by Wilcox for ROOF [ROOF March/April 2014]. This relates the ratio of mortgage payments to house prices (to show the effects of changes in interest rates) and used the average incomes of all working households rather than just those who succeeded in buying (to show the problems of accessing the market).

This showed that it has become 40 per cent harder to access the market than it was 10 years ago despite falling interest rates. If house prices and mortgage rates rise as forecast this year it will be 50 per cent harder by the end of 2014.

Most of the deterioration has taken place in the last two years, implying that the affordability problem is even worse than that highlighted in the Barker report, which only looks at the market up to 2012.

Meanwhile a survey by the Halifax revealed that average-priced homes in 531 out of 667 UK postal towns were beyond the means of people on average salaries.

Pierre Williams of the House Builders Federation welcomes the new emphasis on affordability as ‘a good indicator of housing supply’.

‘It’s clear that house prices have increased most rapidly in areas with a housing shortage. When prices started accelerating in London and the South East it was quite clear that too much demand was chasing too little supply.’

His worry is that the government may see action as less urgent if house prices ease and affordability become less of an issue in the media. ‘Rocketing house price inflation has concentrated the minds of the government and the media on the housing crisis but this is a long-term problem of under-supply.’

Wilcox points out that previous governments have always fought shy of adopting an explicit affordability formula. ‘The potential problem it creates for any government is that it’s creating a rod for its own back. Governments are very wary of targets they cannot control.’

Robert Upton, secretary-general of the Royal Town Planning Institute, says it may not be so easy to translate demand in the housing market cycle into supply in the land market. ‘The housing market works in a short cycle whereas land is much more long term.’

He is sceptical about the chances of a quick solution to the affordability problem. In his judgement: ‘It will be a major achievement if things don’t get worse, let alone get better.’

However, he detects a broader economic agenda behind the Treasury’s new interest in housing. ‘What’s driving this is Gordon Brown’s perception that the biggest threat to the British economy is the excessive volatility of the housing market caused by the shortage of housing in the South East. Despite all the rhetoric about spreading growth across the UK, the Treasury perception is that the London global city region is underpinning the entire economy.’

This link with the wider economy could prove housing’s strongest card in the debate over implementation of the Barker proposals. Can the British economy afford not to tackle the housing crisis?

Next issue: ROOF Regional Housing Affordability Index