How will Sadiq Khan’s 35% affordable housing threshold work?

by Dave Hill

Sadiq Khan’s housing mission might be briefly summarised as trying to make the supply of new homes in London better fit the shape of London’s housing needs. Good for him, because the current mismatch is absurd. The chart from Savills below, produced earlier this year, makes the point, well, graphically. The supply forecast for sub-market homes to rent falls miles short of the demand for them, as does that for what Savills calls “lower mainstream” homes, costing less than £315,000. Meanwhile, at the other end of the scale, there are more properties priced upwards of £850,000 in the pipeline than people wanting to buy them.

That, presumably, helps explain why the highest end of the capital’s housing market has cooled recently, although, as LSE London’s recent report for Khan on the effects of overseas investors shows, that might actually hurt rather than help the supply of lower-cost homes, such are the perversities of housing finance. So what’s a London Mayor supposed to do?

Khan’s approach, as you’d expect from a Labour politician, is to use his planning powers in a more structured and interventionist way than his Conservative predecessor Boris Johnson did. He’s now published the final version of a document with the finger-popping title of affordable housing and viability supplementary planning guidance (SPG). This is designed to increase the percentage of what Khan calls “genuinely affordable” housing generated by private housing developments across the capital by offering the development industry a choice between a carrot and a stick.

It’s quite a friendly choice: the offer has been drawn up in careful consultation with a wide range of interested parties by Khan’s impressive deputy for housing James Murray and his team. Basically, Khan is saying to developers – and to London’s boroughs, which are the initial planning authorities for housing schemes – that if their projects meet a threshold of at least 35% of the new homes on the site in question being “affordable” in his terms without any help from public subsidy, he will guarantee a “fast track route” through the planning system so that they can get on with building stuff more quickly. If, on the other hand, a proposed housing scheme fails to meet that threshold or requires public subsidy to do so, he will make a nuisance of himself.

The mayor’s powers in this area are considerable. Although developers initially present their planning applications to the relevant borough (or boroughs, if the site in question straddles borough boundaries) for approval, the larger ones require the mayor’s approval too. This can be withheld and the borough told to reject the scheme unless and until it meets the mayor’s requirements. Or else the mayor can requisition the entire process if he thinks boroughs are getting in the way of things he wants (as Khan has over tall buildings in Hale Wharf in Haringey and Palmerston Road in Harrow, and as Johnson did over the Mount Pleasant project in Islington and Camden). But it’s the knowledge that the mayor can and will step in if he’s dissatisfied with the affordable housing component that can have the greatest effect – there’s not much point in boroughs and developers settling on a scheme they know the mayor will put a stop to, so if want to get stuff built they are better off doing what he wants in the first place.

Why, though, would developers be tempted by Khan’s carrot? The answer is that the “fast track route” can save them time, aggravation and money. The SPG says that if an application meets the 35% threshold, the developer will not have to produce an assessment of a scheme’s financial viability in order for it to progress. Viability assessments have become extremely controversial, seen, not without good reason, as secretive and devious ways in which developers wriggle out of affordable housing and other obligations that cut their profits (see, for example, Earl’s Court). But developers aren’t necessarily that keen on them either, as they eat up resources and are subject to long and sometimes fractious negotiations. And the alternative – Khan’s stick – is that schemes failing to meet the 35% threshold will not only have to produce a viability assessment, but it will have to include specified information and be pored over by borough and maybe City Hall number crunchers too and, in the words of the SPG, be “treated transparently”.

So you can see why the carrot might appeal. And the SPG offers further elements Khan believes will incentivise developers to take his “fast track”. Essentially, the certainty that Khan will want his 35% rule stuck to is held to provide developers with a certainty that is useful to them, including when they are negotiating to buy land. The cost of land, so scarce and so sought after in London and therefore often extremely high, is a huge element in the overall cost of developing a site, whether for housing or anything else. If developers know that 35% affordable is expected of them, they will do their maths and pitch their bids accordingly. The belief in City Hall is that this should result in the price paid for land being helpfully reduced.

There are many more layers of detail in the SPG, which can be read in full here. These include sections on housing density, different types of public subsidy (such as grant funding and public land), the tenure types Khan regards as “genuinely affordable”, how any loss of existing affordable housing should be re-provided and a specific set of arrangements for new homes built specifically for private rent. It’s no light read, but it is extremely educational.

Two closing points. Firstly, the SPG, in its own words, “does not an cannot introduce new policy”. That might sound strange, but there’s a clue in the use of the word “supplementary” in the document’s title. As Daniel Moylan has explained, Khan is formally still bound by statutory mayoral strategies that his predecessor introduced. These include, pre-eminently, the spatial development strategy or “London Plan”, which Khan’s team are in the unavoidably long, slow process of reviewing (a draft new version is expected late this year). Khan’s SPG, then, is a supplement to Johnson’s London Plan, designed to, as it puts it, “ensure that existing policy is as effective as possible”.

And so, secondly, will it work? Estates Gazette says it has detected early signs that Khan’s approach is already getting results. Meanwhile, another part of Khan’s approach to housing, his affordable homes programme through which he allocates money provided by the government to housing associations and others, seems to have got off to a good start. These and other housing strands will, he hopes, move him towards his long term goal of 50% of all new London homes meeting his definition of “affordable”.

There are, though, potential downsides to the framework provided by the SPG. For example, if landowners who aren’t developers become more likely to hold on to land in the hope that eventually it will command a higher price than at present, that could damage overall housing supply, and affordable supply in the process. Overall supply is not what it needs to be and, as sceptics like to say, 35% of nothing is nothing. As ever with market regulation, which is what planning rules and guidance are a form of, getting it wrong can make things worse rather than better. But people far more expert than I have confidence in Khan and, more particularly, James Murray, on this issue. Keep an eye on that Savills graph.

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