Democracy and the Challenge of Affordability: London’s ‘Squeezed Middle’
By: Harvard Ash Center
Tags: Health, Housing, London, Challenge

Edited by Harvard Kennedy School Assistant Professor Quinton Mayne, this is the first of three interviews extending a previous eight-part series focused on affordable housing as a challenge to the health of democracy in cities and major urban areas.

For these new posts, we asked Harvard Graduate School of Design doctoral candidate Adam Tanaka to explore the ways in which housing shortages in the expensive global cities of London, Paris, and New York are leading to a redefinition of affordability, both for low- and middle-income residents. All three cities are experiencing population and productivity growth, coupled with increasing income inequality, contributing to a pressure-cooker housing market in which supply is falling far short of demand. As a result, public authorities are finding new ways to partner with private developers to try and meet demand for below-market housing. To learn more about the political and policy implications of these new partnerships, Tanaka sat down with three private developers, each of which is playing an important and telling role in the delivery and management of affordable housing in London, Paris, and New York.

For his first interview, Tanaka travelled to London to learn more about the politics of delivering affordable housing. He met with Russ Edwards of Pocket, a development firm that is pioneering a new model of micro-unit, moderate-income housing. Their discussion ranged from the new architectural and financial approaches needed to drive innovation in affordable housing, to the complicated politics of who benefits — and who loses — from affordable housing policies.

By Adam Tanaka

Like its counterparts across the Atlantic and the Channel, London is facing a severe housing shortage. Boris Johnson, the city’s mayor, set a target of building 42,000 new homes a year to keep pace with demand, but in 2014, the city’s housing stock grew by only 18,000. As a result of many years of failing to meet demand, housing costs have risen dramatically in both the rental and for-sale sectors. Between the second quarter of 2013 and the second quarter of 2014 alone, average home prices rose by over 25%. At the end of last year, the average price of a London home was £465,000–14 times the annual income of the average Londoner.[1]

What is contributing to this increasing disconnect between supply and demand? Some of the shortfall is due to internal shifts within the private housing industry, such as corporate mergers and land-banking strategies that have kept new housing offline as volume home builders wait in anticipation of ever higher per-unit profits.[2] Some of it is due to the London mayor’s relatively limited resources and powers to shape city-wide policy.[3]

But the most dramatic change is the UK central government’s increasing inability — or unwillingness — to build or fund new social housing. In the post-war period, the vast majority of social for-rent (low-income) and intermediate (middle-income) housing was built by local authorities with central government grants. Across the United Kingdom, these local councils were responsible for 50% of new homes completed between 1960 and 1980.[4] In London, this massive public intervention led to a checkerboard pattern of public and private housing investment, much of it linked to the redevelopment of areas bombed during the Second World War.

During the Thatcher years, social housing policy underwent a massive transformation in intent and extent. The adoption of the Right to Buy program, which allowed council tenants to buy their homes at discounted prices, cut into the overall supply of social for-rent housing while also contributing to the “gentrification” of numerous council estates.

Graph courtesy of the Architects’ Journal.

Today, the private sector dominates new development of affordable housing, and local authorities have transferred much of the ownership and management of the existing social housing stock to quasi-private housing associations that operate under fewer legal restrictions, particularly in terms of financing. In central London, local authorities are exploring new ways of leveraging their most valuable remaining assets — their land — to generate new sources of public revenue. This has led to a number of controversial redevelopment schemes, perhaps the most notorious of which is the so-called “regeneration” of the iconic Heygate and Aylesbury Estates in the borough of Southwark. In partnership with Lend Lease, a private developer, the Southwark council is demolishing several of London’s largest housing estates in a move that has been branded “social cleansing” by its critics, particularly as the number of new social for-rent units will be well below the former tally. Meanwhile, the ongoing conversion of social for-rent units into privately-owned properties through the Thatcher-era Right to Buy policy continues to erode the overall supply of affordable rental housing.

Image of Heygate Estate demolition (source).

This picture is complicated by the growing popularity of “affordable housing” as a policy alternative to “social housing.” Where “social rents” are typically capped at 50% of private market rents (and often even lower than that in parts of central London), “affordable rents” — a new benchmark introduced by the UK’s central government in 2010 — typically hover around 80% of comparable private rents. Local councils and housing associations are now required to build to the paradoxically less affordable “affordable rents” in order to qualify for housing grants, and are encouraged to convert social for-rent units to affordable units when they become empty and available for re-let.[5] In 2013, even Westminster council — which, like the Mayor and the Prime Minister, is Conservative — warned that these new rent levels would be out of reach to most of its low-income tenants. Affordable rents would require a three-bedroom household to earn £109,000 a year, while the council estimated that half of its social for-rent households had an annual income of less than £12,000.[6]

To learn more about the ever-changing landscape of social — and affordable — housing in London, the Ash Center spoke to Russ Edwards of Pocket, a private-sector developer pioneering a new model of micro-unit, moderate-income housing. Pocket builds for the “squeezed middle,” a demographic of late-20s and early-30s Londoners who in prior decades would have been known as the “first-time buyer” market, but who today struggle to afford down-payments on the city’s increasingly expensive homes. In the context of London’s inflated property market, Pocket is expanding the definition of who deserves and benefits from below-market housing. Pocket does not build traditional “social housing” for low-income renters, but rather a new form of owner-occupied affordable housing catering to young professionals, including nurses, journalists, teachers and web developers. Pocket describes this constituency as the “city makers,” young professionals “who contribute so much economically, socially and culturally to our city, yet are unable to buy their first home.” Our conversation with Edwards reveals the sheer range of strategies — physical, financial, and above all political — needed to tackle the housing crisis in London.

Adam Tanaka: Can you describe the most common model for affordable housing development in London at the moment?

Russ Edwards: The typical model for providing affordable homes in the UK is that a Registered Social Landlord (RSL) would act as developer. They would typically provide a stand-alone development providing affordable for-rent homes, often cross-subsidized by intermediate tenure or shared ownership homes, which are intended for middle-income brackets. [Note: Shared ownership schemes allow tenants to own a share of their home, between one and three quarters of total value, and pay rent on the remaining share.]

Often this combined development of social for-rent and intermediate homes is included in a much larger development that includes market homes. Government policy in London is that when a developer wants to bring forward a site, a certain percentage of homes have to be affordable, and that percentage is negotiable in a portion of the planning permission known as Section 106. Policy targets for provision of affordable housing within a mixed tenure scheme might be as high as 40%, however the typical provision is about 20–25% of homes, which is then negotiable in terms of whether it’s homes by unit number, by habitable rooms, or by square feet.

All of this is subject to a viability assessment, which has become a hot discussion point in the UK. A viability assessment is a financial appraisal of the development that demonstrates the maximum affordable provision that a developer can provide. There’s a lot of controversy around this process, because the format is open to “tactics,” let’s say. You can effectively use it to demonstrate reduced profitability and therefore lower your affordability provision, and there’s a suggestion that this is happening quite commonly. Nevertheless, it’s really the only way that affordable housing is being provided now in the UK, because the Conservative government has withdrawn the grant funding that used to subsidize social for-rent housing.

What does Pocket bring to the table that is different from the work of other private developers of affordable housing?

Pocket is currently the only private-sector developer in London doing entirely affordable homes. We take small- and medium-sized sites, typically 20–40 units, and we build only intermediate homes on those sites, and only one-bed apartments. That counters policy on two major fronts. One, all housing policy requires a mix of tenures above a certain number of units (typically, ten). Policy also requires a mix of housing types (one, two, and three-bedrooms). We tell local authorities that we are going to give them a mono-tenure, mono-type apartment block, but we’re going to deliver 100% affordable homes on that site, as opposed to 25%. In the bigger picture, that’s quite a compelling offer to local authorities, particularly in the context of housing targets which they’re typically failing to meet.

Our units are all one bed, they’re 38 square meters, which puts them on the absolute lowest end of the space standards. Our homes qualify as affordable by three mechanisms. One, you have to earn below an income threshold set by the London mayor. You have to live or work in the borough in which we’re developing. And it has to be your only home, you can’t be a buy-to-let investor or an owner of another property. Two, we’re typically providing homes at a minimum of 20% discount to market, and often up to 40%. Thirdly, we are also offering homes that are affordable in perpetuity. The price is considerably discounted to the market upon resale.

Russ Edwards points out the location of the next wave of Pocket housing developments (photo credit: Adam Tanaka).

What sorts of public assistance does Pocket rely on to make its homes affordable to individuals of modest income?

We’ve benefited from a very large equity loan from the Greater London Authority — and that’s an investment in the business, rather than project-based financing. About five years ago, Mayor Boris Johnson gained control of the Houses and Communities Association budget for London. Historically, that was the allocation of grant funding for social for-rent housing. Since then, Johnson has launched a number of Housing Covenants as ways of assisting supply of affordable housing in the city. We’ve benefited from about £23 million worth of funding from that. It’s a ten-year, interest-free loan, so at the end of 10 years we hand back £23 million. So it’s not grant funding, it’s a commercial investment. But during that ten years, all the interest on the investment and all our profits on that investment are continually reinvested in the pot. So the pot grows, like a sort of revolving loan fund. It could equate to up to £600 million worth of investment over the cycle. The expectation is that over the 10-year cycle we’ll deliver about 4,000 homes.

Has the mayor given explicit support to Pocket developments, enabling you to over-ride borough-level planning powers?

Well, the fact that the funding has come from the mayor has arguably given us some advantages in terms of negotiations with individual local authorities. Though all of our schemes to date have been determined by the local borough with no intervention from the Mayor; there’s no explicit directive from the GLA that the boroughs must sell their land to us, but it has an obvious influence. If there is skepticism around the model, whether it serves the needs of the borough, we can then rely on GLA support in our lobbying of local authorities.

Can you describe the nature of your resident demographic in a bit more detail?

We’re building for a very specific audience. While social for-rent covers the whole demographic spectrum, we are very much targeting middle-income, first-time buyers. Typical income is about £39,000 per annum, which is still significant, and higher than the average London income. These are people who are ineligible for social for-rent housing, and indeed they often find buying one of our apartments cost-neutral or even more affordable than the private rental sector in a similar area.

They tend to be between late-20s and late-30s, higher educated, more female than male, 80% singles, 20% buying as a couple. They are generally a similar bunch of people. Our research suggests there’s about a million and a half of that demographic in London. Currently only about 180,000 — or 12% — of that population can afford to get on the property ladder, based on typical incomes and typical property prices in London.

Our research suggests that our model could price in another 180,000 people on top of that, thus doubling the potential ownership for that demographic. That’s not going to solve the housing crisis by any stretch, but we think we’re one of what needs to be a whole range of solutions that starts unlocking supply in London.

Learn more about Pocket.

How do you think this group of Londoners has made its needs heard, politically? How would you compare the political organization of this group to other groups of Londoners who are being negatively impacted by high housing costs?

I don’t think this group has made itself heard. The market that I’ve described is traditionally unengaged in politics. They don’t vote, and as a consequence politicians don’t value their housing needs particularly highly. It was only in the most recent General Election that this demographic started to come through in the political debate for the first time. And I don’t think it was the demographic itself that caused that — I think it’s the parents of this demographic, who are really struggling, having to massively subsidize their children’s lifestyle because of the lack of affordable housing. And their parents are voters, and very important voters at that. This apolitical stance is really striking, and it’s one of my common complaints in public speaking events: the market we serve is just not that vocal. If you compare this group to other high-profile media groups complaining about the housing crisis, other groups are far more engaged, far more vocal, far more militant. For example, residents of the Aylesbury Estate, which is currently being redeveloped, have generated a huge amount of publicity and have actually made the architectural profession sit up and think hard about their ethical obligations.

What do you think is driving that difference in political activity regarding housing costs?

Well, you fight a lot harder at the prospect of losing something. If you haven’t had it, it’s a lot more difficult to get engaged about it. There’s a degree of resignation among the historic first-time buyer demographic in London that the gap is too far, the leap to ownership is so large that it’s an abstract equation. So this group is already resigned to renting.

Given the lack of political organization within that demographic, what motivated Pocket to step in? Purely the feeling of an “untapped” market niche, or something more?

One of our founders’ daughters was in exactly the position that I described earlier. Our other founder has a background with the Peabody Trust, the UK’s largest private, affordable landlord. They had undertaken some research around this market and what it might take to increase ownership options, away from shared ownership. When they came together, Pocket was born. Beyond the parental concerns, it was about recognizing that this need had become particularly acute. There had been a lot of rhetoric about “the squeezed middle” in the last couple of General Elections, but very little being done in terms of homeownership. And arguably, recent government policy has all been about stimulating demand, not supply, which is arguably making things worse. So we wanted to look at the supply side of it. The industry knows how much brownfield land there is in London and how the return on this middle-income model could be quite significant.

Has there been any NIMBY (“Not In My Backyard”) neighborhood resistance to Pocket developments?

In London, decision-making power really rests with the local borough. If a borough doesn’t want us, we can’t overcome that. That said, NIMBYism isn’t really a problem for us. There’s always some resistance to change. But then we go into local authority estates and explain that these homes are not for bankers, they’re for your sons and daughters and prioritized for people who live and work in the borough. You have to earn below the mayor’s threshold to qualify. Then it switches and people are suddenly very supportive.

You’ve described Pocket’s approach of targeting middle-income, first-time buyers as “one approach among many” to solving the housing crisis in London. What other strategies do you think need to be adopted to help close the “housing gap” and make life in London less of a cost burden?

The real issue with London is that there is no innovation in terms of how we address the housing shortage. Everyone is just regurgitating numbers about what happened when we last built the number of homes that we needed to keep up with demand. At that point, at the end of World War Two, the country had a completely different economic structure. The overwhelming majority of construction was being undertaken by small and medium-sized developers. Now all the power in house-building resides with two or three developers. Back then, we would have been a big boy. But now 250 units a year is absolutely nothing. The landscape is very different. Back then, local authorities were building a massive amount. That’s just not going to happen anymore. So there needs to be a rethink in how we unlock supply. It has to be design; it has to be politics; it has to be economics. Pocket is one of those ideas, but it’s only one. We need far more lateral ways of thinking about housing, whether it’s about supply or unlocking particular sites, like TFL’s [Transport for London] huge swathes of land. TFL are going to launch feasibility work on 300 or 400 sites in their ownership. They’re looking to joint venture.

Lending is also a massive barrier to innovation. Mortgage lenders are incredibly conservative. We only have four lenders that will work with us. No lender wants to provide more than 25% of the development cost anyway, so literally we are on that tightrope at the moment. We’ve been talking about things like whether we might offer a shell and core apartment to bring the cost right down. 40% of the build cost is in the fit-out, so give that choice to the buyers, much like the generation used to buy a wreck and renovate it while living in it. But we can’t offer that because mortgage lenders won’t lend against it. So people can only buy a white magnolia box with furniture from Ikea; everything Fight Club was railing against is the only offer available!

Everybody needs to become a bit more flexible and think a bit more laterally. Policy needs to unlock a lot of that thinking. Central government needs to play an active role in forcing these industries to meaningfully address what’s going on. I heard recently that building societies, which were founded to financially enable homebuilding, are now treating new residential development as a part of Corporate Social Responsibility. To me it’s shocking that we have to rely on CSR to unlock new housing supply. The government should be more proactive in trying to encourage, if not force some of these institutions to deliver.

Adam Tanaka is a Ph.D. student in urban planning at the Harvard Graduate School of Design and a Meyer Fellow at Harvard’s Joint Center for Housing Studies. His research focuses on housing policy and development in the contemporary United States, drawing from the fields of political science, law, urban planning, and real estate to develop methods for understanding and improving urban housing provision.

Notes

[1] Andrew Adonis, “Introduction,” in City Villages: More Homes, Better Communities, ed. Andrew Adonis and Bill Davies (Institute for Public Policy Research, 2015), 5.

[2] James Pallister, “The Housing Crisis: How Did We Get Here?” The Architect’s Journal, Vol. 241, Double Issue 24–25 (June-July 2015): 11.

[3] Ben Derbyshire, “Building Greater London: An End to the Capital’s Crisis of Affordability,” The London Society, Paper Number 2 (2015): 2.

[4] Adonis, 6.

[5] John Bibby, “Does Affordable Rent really mean the end of social housing?” Shelter Blog, 17 December 2014, accessed 31 August 2015.

[6] Colin Wiles, “Affordable housing does not mean what you think it means,” The Guardian Housing Network, 3 February 2014, accessed 31 August 2015.