Housing Targets - Part 1
What are housing targets, and how are they set?
The key to understanding how the UK planning system works is to notice that it is not a system for delivering houses. It is a system for delivering developable land.
British land is, by default, not developable: it is illegal to build a house without the explicit permission to do so. Your land needs to be converted from its raw, unpermissioned state to its permissioned state, and the supply of these permissions are tightly controlled.
We do, however, recognise that some amount of these permissions need to be given out every year. The national government, in particular, wants enough houses to be built on net to meet demand, encourage economic growth, satisfy a particular voter base, or otherwise achieve some orthogonal political or socioeconomic goal. In order for houses to be built, enough permissions need to be given out.
The trouble, of course, is that the national government is mostly not responsible for giving out these permissions – that power usually lies with an organisation called a local planning authority, often a town or county council. For various structural reasons – political psychology and selection effects, amongst others – these local planning authorities generally don’t like giving these permissions, and will often go to great lengths and expense to avoid doing so. So there is a preference clash: national government wants permissions to be granted, local government doesn’t.
Housing targets are an attempt to resolve this clash, by forcing local authorities to give out a certain number of permissions each year. This obviously needs to happen via some mechanism. It isn’t enough for the government to say “you should give out this number of permissions”, since many local authorities would rather not, so we need to get these targets from the government’s PR team down to the decision-makers in the local authorities by some route that incentivises or even compels them to do so. Whether these targets are successful is therefore mostly dependent on whether this mechanism actually works.
Right now, it doesn’t: the number of houses built has been lower than the target every year for over two decades:
So Angela Rayner, the new Labour government’s Secretary of State for Housing, Communities and Local Government, has been talking about fixing it: both changing the target and how it’s distributed, as well as changing the mechanism through which it compels local authorities to give out permissions.
Since it has been in the news, I thought it might be a good idea to see how these targets work right now and work out what the proposed changes actually mean. This post is the first of three on this topic, which will set out:
How housing targets are currently determined;
How those targets translate to developable land, and
What our new Government is proposing to change about it.
I’ll begin with a high-level overview of how the targets system currently works.
A High Level Overview of How Housing Targets Currently Work
‘Housing targets’ means a few different things in the British system. There are five sorts of targets in the UK system that we’ll talk about over the next two posts:
National targets
Local housing need figures
Local Plan housing requirements
Five year land supply requirements
Housing delivery tests
Each of these ‘targets’ serves a different purpose. (1) and (2) reflect, crudely, ambition and assessed need. (3) and (4) try to indicate planned supply. And (5) is a post-hoc measure to see whether that ambition and need was actually met.
In slightly finer detail:
Central government conjures up some national targets, based, as far as I can understand, entirely on what is politically convenient and salient. These targets are used primarily to shape political discourse.
Central government ‘distributes’ this national target around the country by giving each authority a local housing need figure, derived through a process called the Standard Method (SM). This figure provides a baseline for a given local authority to plan around, and is only advisory.
Local authorities take this local housing need figure as a starting point, and then produce their own Local Plan housing requirement based on a different set of data (and opinions). Local Plan housing requirements are the actual number of homes that local authorities plan to deliver, and form the quantitative benchmark for a set of documents that outline the local authority’s ‘spatial strategy’: where new development should or should not go, and what infrastructure will be put in place to support it. This set of documents is called a Local Plan.
Local Plans specify where land is likely to be given permission through a process called allocation. Specific parcels of land are allocated – marked out as the sort of place where development is likely to happen – and each allocation has a number of dwellings that the council believes it could support. Local plans are supposed to allocate enough sites to meet the Local Plan housing requirement over the lifetime of the plan, usually 15-20 years. But they also need to ensure that there is enough supply available in the short term. In particular, a local plan must demonstrate at least five years of land supply, enough deliverable housing sites to meet five years of required supply based on the local housing requirement.
Eventually, the local plan is agreed upon and landowners begin to ask the council for permissions to build there. At this stage houses can start to be built, and the actual delivery needs to be tracked against what the local plan suggests. This is what the housing delivery test does: it, in effect, closes the loop between the national housing targets and the amount of land that a given local authority plans to make developable. If a borough fails to meet its housing targets, there are various consequences which, ostensibly, should encourage local authorities to get their act together and grant more permissions.
In this post, I’ll discuss (1) and (2) – how do we set our national target, and how do we split that target up amongst the various authorities that have to deliver the permissions required to meet it?
National Targets
National housing policy is decided by the UK government, specifically the Ministry of Housing, Communities and Local Government (MHCLG).1 A lot of British state power flows through the Secretaries of State, a practice tracing back to the ancient court in which officers of state had separate property, powers and responsibilities granted directly by the Monarch. So it’s likely that the Secretary of State, working with her political team, the civil service, and the Prime Minister’s office, will be responsible for deciding what the target should be.
But that is about as concrete as it is possible to be. There is no government whitepaper explaining how the current 300,000 figure was derived. There is no chapter in any textbook detailing who is responsible for deriving it, or what formula they use, or what we would expect to see if the target was hit, missed, or exceeded. There isn’t even a reliable chronology of how it has changed over time.
So, absent of any other evidence, the natural conclusion is that housing targets are born from political expediency and not much else. Which would make sense: they are usually announced in manifestos before elections, and the methodology is rarely published. This isn’t to say that they don’t want houses built, just that the headline number is more for PR purposes and doesn’t bear much on what the local authorities actually do.
In particular, a national target doesn’t tell us how many houses a particular authority should deliver. This matters not only because housing demand differs depending on where you are in the country – just compare house prices in, say, Burnley against those in, say, Cambridge – but also because housing markets aren’t coextensive with these authorities. If you can get a neighbouring authority to build more than they need, they can ‘absorb’ your demand and you have an incentive to free-ride. So we need authority-specific targets to tell us both what demand in an area is likely to be and what we want to happen given that information.
The Standard Method
These ‘targets’ are called local housing need figures, and they aim to be a measure of the minimum number of homes needed within a given local authority area. They are measured through a process called the Standard Method (SM):
The SM consists of three steps for each local authority in England:
Start with a household growth projection2 from 2014, for that authority, taken as an average over a 10-year period (with the current year as the base year);
Adjust that projection upward based on local housing affordability;
And cap the increase at 40% of the baseline need.
In certain urban local planning authorities, an additional fourth step applies:
Increase it by 35%
This method currently produces an England-wide target of 305,223 dwellings, with London accounting for roughly a third (98,822). This number is pretty close to the 300,000 total, which I have to imagine is no coincidence: without the 35% urban uplift, London alone drops the total by 35,000, so step (4) feels like a relatively ad-hoc way to distribute the ‘remaining development’ to hit the target. But London needs more development than anywhere else, so in practice this looks like a good thing. (The new Secretary of State disagrees, but we’ll come to that in Part 3.)
Using household growth forecast from 2014 as a benchmark for future housing needs has some obvious problems (some of which I’ve discussed already). For one, household formation changes over time: as patterns of divorce, cohabitation, multi-generational living etc., change, so does the way that the changes in the number of households responds to changes in the number of homes built for them. If household formation in the years leading up to 2014 looks different to the years leading up to, say, 2040, the assessed need will be more inaccurate. Another, simpler, problem is that household formation is a function of housing supply. We’ll see both of these problems occur in the Brighton case study below.
There are plenty of criticisms one can make of the SM. But the basic idea seems to be a good one: if we’re going to have to try to predict what future housing need will be, we should probably do so in a standardised way that can’t be institutionally captured by veto players.
Local authorities are supposed to use the SM to determine housing need unless there are ‘exceptional circumstances’ to the contrary. What are these exceptional circumstances? The National Planning Policy Framework gives us an idea:
The outcome of the standard method is an advisory starting-point for establishing a housing requirement for the area (see paragraph 67 below). There may be exceptional circumstances, including relating to the particular demographic characteristics of an area which justify an alternative approach to assessing housing need; in which case the alternative approach should also reflect current and future demographic trends and market signals
Which is elaborated further in a footnote:
Such particular demographic characteristics could, for example, include areas that are islands with no land bridge that have a significant proportion of elderly residents
Perhaps most significantly of all, however, is that the number is meant merely to be advisory, and this is said quite explicitly. The resulting figure is intended as a starting point for local planning processes, not a final housing target. What this means in practice is that local authorities have significant discretion in determining their actual housing targets, and frequently rely on a broad understanding of exceptionalism to achieve lower targets than they otherwise would.
This flexibility is supposed to be a benefit: many of the criticisms of the standard method imply that it is too centralised, too uniform, and that allowing for flexibility is crucial to recognise the ‘unique characteristics’ of a specific area. But in practice it provides a loophole for development-averse councils to set targets well below what is genuinely needed.
Local Housing Need Is An Opinion
When trying to determine what they need to plan for, the local authority puts together a document called a Strategic Housing Market Assessment (SHMA), which does this working out – and often finds the assessed need is lower than the standard method suggests. Here is Brighton’s, picked for no other reason than it is recent and happened to be at top of my Google search.
The current standard method housing need for Brighton and Hove is 2,319 dwellings per annum. The consultants that wrote Brighton’s SHMA found instead an assessed need of 810 dwellings per annum, nearly three times less than the standard method suggests. The real coup-de-grace, though, is the reasoning:
The Standard Method household growth figure uses the 2014-based household projections which are now over 8-years old (in terms of the base data for analysis). However, the more recently published data from the 2021 Census suggests the 2014-based projections are fundamentally wrong.
Overall, the 2021 Census indicates that population growth has been substantially lower than the 2014 projections and that trends observed previously are no longer reflective of recent trends.
The population of the city grew less than we were expecting over the past decade. Therefore, there is a lower ongoing need of new housing. Do you spot the problem?
Population growth is itself constrained by how many new houses get built. So past population growth is not the sort of thing that should be used as a measure for future need: if population growth has been low, but prices have increased, then there has been more demand for population growth than there is the ability to grow it. Median house prices in Brighton have increased comfortably by over 2% each year during the same period, and the rate at which they increase has also been increasing. So we can fairly confidently conclude that either:
House prices are increasing for reasons independent of supply and demand, and their increase does not encode any information about what the population would grow to were it not constrained by supply; or
Population growth has been constrained by a lack of supply, which would tell us the opposite of what Brighton conclude – namely, that housing need is greater in the future than it is today, both to plan for future increases and to absorb any residual growth that would have occurred were it not for the constraint on supply.
But prices aren’t used as a measure for demand, despite the NPPF’s suggestion that alternative methods pay attention to ‘market signals’. So this thought doesn’t occur to Brighton, and they revise their housing need downward. They rely on their own past failures to meet housing need as a justification for lowering future targets. Remarkably, however, it gets worse:
In reality, the level of future housing delivery in Brighton and Hove is likely to relate more to capacity than housing need. On this basis, it was considered that the housing target in the current City Plan (660 dwellings per annum) would provide a realistic assumption for housing delivery moving forward.
Not only do Brighton and Hove acknowledge that they are likely to fail to plan enough permissions to meet the need that they themselves have already reduced by a factor of three because they failed to plan enough permissions, but they then suggest that they are actually going to plan around the number of permissions that they think they will decide they want to grant, rather than trying to meet any measure of housing need at all.
Under what circumstances does this make sense? You would need to believe at least one of the following:
The current housing supply in Brighton and Hove is adequate or close to adequate, despite high prices suggesting otherwise;
The city's infrastructure and environmental constraints are truly immovable, with no possibility of improvement or expansion to accommodate more housing; more development capacity simply can’t be found;
The negative impacts of increasing housing supply (e.g., strain on local services, changes to community character) outweigh the benefits of addressing housing shortages and affordability issues;
Economic growth and population increase in the area will naturally slow down or reverse, reducing future housing demand;
The spillover effects of inadequate housing supply (e.g., increased commuting from surrounding areas, potential economic stagnation due to workforce housing issues) are negligible or acceptable;
The housing market will somehow self-correct without intervention; or,
The long-term social and economic costs of sustained housing shortages – e.g., increased inequality, reduced social mobility, impacts on local businesses – are less important than short-term stability or political expediency.
Brighton's approach only makes sense if one accepts a highly constrained and pessimistic view of urban development possibilities, combined with a prioritisation of maintaining the status quo over addressing pressing housing needs. It views the city's development capacity as fixed rather than something that can be expanded with proper planning and investment.
And this is an adjustment justified merely on the grounds of terms internal to the standard method calculation. There are also external reasons that a local authority might claim exceptionalism: special land-use designations such as green belt, environmental designations, flood risk, the agricultural quality of land. We’ll see in the next post that the processes by which these targets are supposed to influence the allocation of land and eventual development of homes are no stronger than the justifications for the targets themselves.
Conclusion
We now have a sense of how housing targets are determined, and a sense of why this framework is flawed. If the goal of our regime – a regime of politically-expeditious national targets distributed across local authorities by means of a standard method – is to actually deliver the number of homes in that target, than it doesn’t appear to be working. But we have only just started looking at why it doesn’t work, and in order to do that we need a clearer idea of how it is supposed to work. That will be the subject of the next post.
Up until recently this department was known as ‘DLUHC’ – pronounced “dee luck” – the Department for Levelling Up, Housing and Communities. It was renamed as one of the first acts of the new Labour government.
The Office of National Statistics (ONS) is the UK’s rough equivalent of the US Census Bureau (and the various Bureaux of Statistics). The ONS produce national population predictions every couple of years, which then get turned into household predictions – these two things are, of course, importantly different!