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Dick Sorabji: Economics could shift how London funds housing

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During austerity the government has used market incentives to encourage others to fund new house building. But economic uncertainty may mean that this is about to change.

Home building is private sector led. As the campaigning group London First reported in 2018, of £48bn spent, £43bn was private sector investment. Developers’ profits fund 20% of affordable housing through section 106, which sets planning obligations. The rest is funded by grants.

These were cut when austerity began. Since 2010 grants have not covered the cost of affordable homes. The gap was closed by housing associations’ contributing income from house sales and borrowing against their assets.

The result is that all affordable housing depends on a healthy private market. The private market is being kept healthy with an annual injection of £23bn from the government’s Help to Buy scheme. Businesses need certainty to make these big investments.

Today a range factors have created uncertainty, and this partly explains why delivery is now in decline. In London net new homes fell 23% in 2018 year on year. New build was down 13%. The controversial quick fix of office to residential conversion may have run its course and is 37% down. Housing starts in late 2018 were down 7%.

Less supply of homes means higher prices. The market price to salary ratio in London is now over 13 to one. Most Londoners cannot afford to buy at market prices. To meet their needs at least half of all new homes should be discounted to be genuinely affordable. That is only possible when funded by a healthy private market.

London government has been assessing the possible effects of our departure from the EU. There is already evidence that new projects are being held back until certainty returns. If a sharp downturn occurs there will be an urgent need to protect London’s current pipeline of 30,000 affordable homes and the linked 9,000 market sale homes providing cross subsidy.

The mayor, the boroughs and London’s housing associations have written to housing and communities secretary James Brokenshire pointing out that in a downturn there is a need to invest to keep the housing market afloat.

Local and regional government investment could increase the share of affordable homes for rent. This has worked before. In 2009 the Kickstart programme bought into the market to protect the building industry.

Without affordable housing, we are not addressing the needs of most home seekers. Yet affordable homes depend on a thriving private sales market.

Eventually all markets go down. If there is a downturn in building it will be vital that national government provides funds for local and regional government to intervene and protect our house building industry. The upside is that we can use the downturn to make more homes affordable.

Dick Sorabji, corporate director for public policy and affairs, London Councils

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