Demystifying affordable housing in the UK

What do we mean by "affordable housing"?

There are many different types of affordable housing – some more affordable than others.

While there is no statutory definition of affordable housing, for the purposes of planning, the National Planning Policy Framework (NPPF) defines affordable housing as “housing for sale or rent, for those whose needs are not met by the market (including housing that provides a subsidised route to home ownership and/or is for essential local workers)”. This can include rental housing, starter homes, and discounted market sale housing, as well through other routes such as shared ownership and rent-to-buy schemes.

What are the main types of affordable housing?

Social rented housing perhaps best fits the public perception of "affordable housing". It represents affordable accommodation provided on a secure basis to people on lower incomes or with specific needs. It can be traced back to a combination of Victorian charitable housing trusts (such as Peabody and Guinness), and council-owned and managed housing arising from the aftermath of World War I.

Social rented housing is often the most affordable type of affordable housing. The  Government’s Direction on rents for social housing (published in February 2019 and in effect from 1 April 2020) sets out the specific formula used for calculating Social Rent, including rent caps, though on 31 August 2022, a public consultation was published on revisions to this Direction to limit the effects of higher inflation on annual rent increases.

By contrast, affordable rented housing (including services charges) rents must not exceed 80% of gross market rent, but must not be any lower than would be charged as Social Rent.

Both types of housing need to be owned and managed through a registered provider (save for build to rent schemes) and the NPPF specifies conditions including that the rent must remain at an affordable level for future tenants and that any subsidy must be recycled for alternative housing provision.

The NPPF also confirms that for either form of rent, annual increases are index linked to the Consumer Prices Index plus 1 percentage point.

Is renting the only option?

Not at all - there are two main ‘products’ used in planning for providing affordable home ownership:

• Shared Ownership: where eligible buyers are able to buy into a share of property (normally between 25% and 75% of the open market value) and then pay rent on the remaining share. Shared Ownership also provides a mechanism (‘staircasing’) to enable buyers to increase their share in the property over time. 
• Discounted market sale housing:  where housing is sold to eligible buyers at a discount of at least 20% below the open market value.

Prospective purchasers for both products must meet specific eligibility criteria based on local incomes and local house prices.  Restrictions ensure that the discount remains in place on future sales.

What about Starter Homes, and are these the same as First Homes?

Starter Homes, introduced by the Housing and Planning Act 2016, were intended to be homes for first time buyers and were offered at a 20% discount from open market value.  Where such homes were included in a development, no further affordable housing would be required. However, the NPPF guidance for this scheme was withdrawn in 2020. 

The government’s First Home Scheme, launched in 2021, provides a new form of affordable housing and effectively replaces starter homes. Under this scheme, restrictions in section 106 agreements ensure that developers or subsequent owners sell the homes at a discount of at least 30% from open market value. The sales must be to eligible first-time buyers within the local area. Properties within this scheme are also subject to a £250,000 cap across England (after the discount) (with a higher cap of £420,000 in London). A restriction is also placed on the title of the property so that any subsequent sale must also be made as a First Home with the same percentage discount and eligibility criteria. Government guidance states that a minimum of 25% of all affordable homes secured through developer contributions should be First Homes. 

Do all residential developments need to provide affordable housing?

Housing need is set within local planning policy, and the NPPF guidance sets out that where a need for affordable housing is identified, the local plan policy should specify the types required.  This applies for any development and the affordable housing should be onsite unless:

(a) off-site provision or an appropriate financial contribution in lieu can be robustly justified; and

(b) the agreed approach contributes to the objective of creating mixed and balanced communities.

The NPPF makes clear that affordable housing requirements should apply to major developments, being those providing 10 or more homes or comprising 0.5 hectares or more of land. In rural areas a lower threshold may be set.

However, this can vary significantly in practice, as demonstrated by two recently adopted Local Plans in Southwark (February 2022); and St Helens (July 2022). 

• The Southwark Local Plan requires major developments to provide the maximum viable amount of social rented and intermediate homes subject to a minimum of 35% (subject to viability) for the majority of its borough.
• Major developments in St Helens must contribute at least 30% affordable housing on greenfield sites, or 10% on brownfield sites (set against specified housing zones across the borough). Where triggered, a target of at least 10% of the overall home delivery should be made available for affordable home ownership, with the remainder being affordable rental accommodation.

Is the position different in the Capital?

In addition to the plans of the individual London boroughs, development in Greater London is subject to the London Plan 2021, which has set a strategic target that 50% of all new homes delivered across London should be genuinely affordable.  A ‘Threshold Approach’ is provided, which enables fast-tracking.  This means determination without the need for submitting viability appraisals where a major development provides for either a minimum 35% affordable housing or a minimum 50% for certain public sector land sites or strategic brownfield sites.  Specific conditions must also met.

Is viability relevant?

If a proposed development would not provide the minimum level of affordable housing, this must be justified using a viability assessment. This provides an appraisal of the anticipated costs, values and profitability of the proposed development.  An assessment can then be made of the appropriate level of affordable housing that should be included while still enabling the developer to realise a worthwhile return.

Appraisals generally include for the existing use value (EUV) of the site, the gross development value (GDV) of the completed development, and the build and other professional costs required to carry out and complete the development. Land value assessment has been the subject of much debate, but government guidance suggests the use of EUV ‘plus’, where a premium payment to incentivise sale is added.

Viable development normally looks for anticipated profits of between 15-20% of the GDV (though this can vary).   Fixing these rates can be a bone of contention between developers and the local planning authority, but where a fully policy-compliant development is not deemed viable, in most cases the authority will look to agree delivery of offsite affordable housing to make up any shortfall.   Alternatively, it may be willing to agree to a financial contribution towards provision of affordable housing in the area.

In cases of reduced affordable housing delivery, or where otherwise required by policy, developments are often subject to early stage and/or late stage re-appraisals.  Early stage re-appraisals occur where a substantial start to the works has not taken place within 1-2 years of the permission.  Late stage reappraisals occur when the development completes. These can result in the developer having to convert market housing to affordable housing or making a further financial contribution. This arrangement is now common in London following the Mayors’ Housing Supplementary Planning Guidance adopted in August 2017.

Finally, how do LPAs ensure that affordable housing is genuinely affordable?

One of the most contentious issues around affordable housing is whether it is actually affordable to the local community. Often, policy requirements and local expectations differ considerably. There are also differing approaches to how affordability should be determined, with housing charities such as Shelter suggesting that instead of being based on market values, affordable housing should cost no more than 35% of household income exclusive of tax and benefits. Such an approach may gain traction in light of current inflation affecting the CPI basis for increases in rent.

However, given that affordability, in planning terms, continues to be benchmarked according to open market values, this can allow policy-compliant schemes which arguably fail to deliver genuinely affordable housing.  While these concerns are not new, the draft Levelling-Up and Regeneration Bill didn’t included any express reforms on affordable housing. Will there be a change of approach following the appointment of Liz Truss as Prime Minister? With the political roller-coaster of the last few months, one can never tell. 

A previous version of this article appeared in EGi on 12 September 2022.

Authored by Robert Gowing.