Outbreak of common sense in Islington

Opinions are divided on the topic of ‘affordable housing’ quotas*, and I am pretty indifferent either way, but rules are rules.

The scam in question goes like this, based on a real life example that Peter S helped me piece together:

1. Developer bought some land in London pre-2008. He planned to build 100 units, 30 affordable units were to be sold at break even and he hoped to make £100,000 profit (i.e. selling price minus construction costs but ignoring the land price) on each of the other seventy unaffordable units = £7 million profit. The amount he paid for the land was a large chunk of this £7 million, call it £5 million, leaving £2 million normal builder’s profit.

2. In 2009, selling prices had fallen. The developer managed to get the affordable quota reduced to zero by submitting a new viability assessment…

3. The developer’s logic was this: the profit per unaffordable unit has fallen from £100,000 to £70,000, so to make my normal builder’s profit and recover the £5 million I paid for the land, I have to be allowed to sell all 100 units for the new (lower) unaffordable price.

4. The council gave in, scrapped the affordable quota and told him to get on with it.

5. The developer cheerfully did nothing for a few years until prices had recovered back to pre-2008 levels. So the potential profit was now 100 units x £100,000 = £10 million; £3 million more than he had originally hoped for.

6. The council did not re-impose the affordable quota, even though logic says they should have done.

7. That developer then sold the land to another developer for nearly £3 million more than he had paid for it pre-2008 (to reflect the additional £3 million profit which the next developer can make).

8. Clearly, if the council now tries to re-impose the affordable quota, the second developer can submit his own viability assessment, and say that if he is not allowed to sell all 100 units for the unaffordable price, he will be pushed into losses, bearing in mind the £8 million he paid for the land.

9. As we can see, viability assessments and the price paid for land are a circular argument.

The Planning Inspectorate has finally decided that overpaying for land (or falling prices) are simply not an excuse to wriggle out of the affordable quotas any more.

Islington’s housing boss Cllr Diarmaid Ward said the decision would help stop developers “manipulating” the viability process.

“The decision sends a strong signal that developers need to take into account planning policy requirements when bidding for land, and that they cannot overbid and seek to recover this money later through lower levels of affordable housing.”

* On a very small scale, I don’t think it has much impact and normal supply-demand rules apply, whereby selling prices are dictated by the incomes of potential purchasers. A developer would normally sell all finished units for the same price – based on the average incomes of all purchasers (price differentiation is nigh impossible).

If some units have to be sold for a lower price (and a much lower profit), then that takes the lower-earners out of the market. The average income of the remaining purchasers is therefore higher, so the unaffordable units can be sold for a higher price and the overall average selling price is not wildly different.

It is however a beggar-my-neighbour situation. An individual developer is always better off he can wangle a lower affordable quota that other developers in the same geographical area. Taking all developers in that area together, it doesn’t make much difference.