Published: 25 Jul 2018 by Rose Grayston

New planning rules released yesterday signal the beginning of the end for the viability loophole. Developers will now find it harder to get out of building the affordable homes we desperately need. We explain how.

Over the last year, we’ve been raising a racket about viability assessments. Since 2012, the viability system has allowed big developers to shirk their affordable housing obligations if they can show that building low-cost homes on a scheme will threaten their ability to make a 20% profit. As a result, developers and land traders have been able to overpay for land by assuming they will not provide affordable homes, then use the high price they have paid for land to ‘prove’ they cannot afford to provide those affordable homes. To add insult to injury, all this has been allowed to take place behind closed doors, with the viability assessments used to cut affordable housing hidden from public view. In the context of a national housing crisis which has left 300,000 people with no permanent place to call home, this is nothing short of scandalous.

Yesterday, the government acted to end this shameful gaming of our planning system. Ministers have heard our calls to create a viability system that is fair, limited and transparent. While we will need to pay close attention to how the new system works out in practice, councils that want to get more affordable homes built for their area have a much stronger hand to play now. Here’s how:

Is the new system fair?

Fairness in the viability system is all about how the benefits of new housing are shared between landowners, developers and communities. What balance does the new system strike between profits and affordable homes?

A much better one. The old viability system inflated profits for developers and landowners, sacrificing affordable housing in the process. The new system is crystal clear that the price paid for land must account for councils’ affordable housing policies. To underline the point, the following words appear no fewer than four times in the new guidance:

‘Under no circumstances will the price paid for land be relevant justification for failing to accord with relevant policies in the plan.’

This leaves very little room for landowners’ profit expectations to reduce affordable housing on individual schemes through viability assessments. However, the new approach does leave room for landowners’ profit expectations to reduce affordable housing policies in Local Plans.

Policies will be viability tested before they are introduced to ensure they can realistically be met. This is a good thing, providing certainty for everyone on how much affordable housing should be provided on new schemes so that it becomes part of the normal cost of doing business – not an optional extra. Crucially, this will level the playing field between big developers on the one hand and small and medium sized (SME) developers  on the other. SME developers have been far less likely to use the viability loophole, which only benefits those with the scale and resources to exploit it. So making affordable housing policies clear up front will remove a barrier to entry, providing a much-needed boost to capacity within the housebuilding sector.

However, the new rules are murky when it comes to just how those new affordable housing policies will be decided. The guidance says councils ‘should establish a reasonable premium to the landowner for the purpose of assessing the viability of their plan’, but just what that means will come down to negotiations between councils, landowners and developers – all of whom will need to agree in order for a Local Plan to progress. Councils that want affordable housing and that are in a strong bargaining position are likely to be able to set ambitious but realistic policies that get a good deal for their communities. However, it is not difficult to see how a council with a high housing target to meet and a limited supply of land could be forced to accept a less ambitious affordable housing policy to get landowner buy-in for their plan. The introduction of a new Housing Delivery Test for councils risks turning up the heat, shifting the balance of power in landowners’ direction.

All that said, the language in the new guidance is clearly intended to moderate landowner returns. A ‘reasonable’ return should be less than the old, ‘competitive’ return, and the guidance is clear that landowners’ profit expectations are to be balanced against the need for affordable housing. All the signs point to more affordable housing making it through the system.

Shelter will be keeping a very close eye on what happens to affordable housing policies as a result of this guidance.

Is the new system limited?

In a word: yes. The rules limit the use of viability assessments to reduce affordable housing on individual schemes to exceptional circumstances. Whereas previous versions of the guidance left the door open for developers to use viability to manage normal market risks, this is now gone. Instead, the guidance suggests viability could be used ‘where a recession of similar significant economic changes have occurred since the plan was brought into force’.

On the other hand, the new system will make it easier for councils to use review mechanisms to increase affordable housing numbers, where viability evidence demonstrates that a scheme has become more profitable than originally thought.

Is the new system transparent?

It will certainly be far more transparent. Under the old system, viability assessments were kept hidden by default – though some councils took action to get them out in the open, and local housing campaigners fought lengthy legal battles to access information about particular schemes. Now, viability assessments will be public by default, and developers will have to make the case for them being private.

What next?

There is, of course, much more to do. More “affordable housing” does not necessarily mean more genuinely affordable housing. The definition of affordable housing in the new rules is still too weak to meet local housing needs. And we need to ensure that adequate public subsidy is available to build homes that local people can really afford. In the end, we need to unleash a revolution in public housebuilding to build our way out of the mess we’re in. But we have closed the viability loophole, and that is an excellent first step.

Many individuals and groups have been instrumental in securing this change. There are too many to thank here – so we’ll save that for another upcoming blog.