Winners and losers

It’s time to celebrate for the lucky winners of the New Homes Bonus - but yesterday’s announcement tells only half the story.

The distribution of the near £200m bonus is generating plenty of favourable coverage in local newspapers from Plymouth to Scunthorpe - and the announcement enabled a confident Grant Shapps to slap down opposition criticism at communities and local government questions yesterday.

Labour MP Heidi Alexander asked why his figures were so different from those of critics like the National Housing Federation, who say the scheme will penalise deprived areas in favour of more affluent ones. 

‘It may have escaped the attention of Opposition Members that the new homes bonus rewards the authorities that build homes,’ replied the housing minister. ‘That is why it is called the new homes bonus. Of the five areas that are building the most homes—the five top councils to receive the new homes bonus—three of them are in the midlands or the north.’ 

This is true. The biggest bonus beneficiaries in the final allocations for 2011/12 - Year one of the bonus - are:

Tower Hamlets (£4.3m)

Islington (£3.7m)

Birmingham (£3.2m)

Bradford (£2.8m)

Leeds (£2.7m)

Other authorities receiving more than £2m are Bristol, Croydon, Hackney, Milton Keynes, Salford and Southwark. Totals do not include the extra £350 bonus for each affordable new home that will be paid from next year.

So there seems a good regional mix there - even if it’s obvious that the biggest beneficiaries would include the largest authorities (Birmingham, Leeds, Manchester), the ones with lots of development (Tower Hamlets) and the ones with high house prices (Islington).

But it’s only half the story - or maybe less than half. 

First, that list takes no account of the size of the relative populations of individual authorities. On this basis, the biggest winner is actually the City of London. They know a thing or two about bonuses in the Square Mile and the City’s £242,908 of grant works out at roughly £25 each. In contrast, Birmingham’s works out at less than £3.

Second, these are only the allocations for the first year of the scheme, when the funding comes from central government. Year one is the only year in which the New Homes Bonus is really a bonus.

As I understand the scheme, each new home generates a bonus for six years. So assuming that the total amount stays the same, it will be worth £400m in year 2, £600m in year 3, £800m in year 4 and so on to £1.2bn in year 6. 

Which sounds like a truly powerful incentive, until you realise that the government has only committed to funding of £250m per year in years 2, 3 and 4. The rest comes from a redistribution of the formula grant paid by central government to local authorities. 

As time goes by the new homes bonus therefore becomes less a bonus for building new homes than a penalty for not building them. Any gains by one area are offset by losses kin another - and deprived areas have the largest formula grant and so are most at risk of losing out to affluent areas with the smallest formula grant.

That effect is compounded by a third factor: the way the scheme is designed based on an average of Band D of the council tax. That means each Band A or Band B home built  - meaning that homes on Bands G and H count for far more than homes on Bands A and B and poor areas in the Midlands and North automatically lose out to affluent ones in London and the South East.

The NHF calculates that the overall effect of the bonus and the formula grant redistribution in year six will be that northern regions will lose £104m while southern ones will gain £342m. 

Councils in the South East gain from doing what they are already doing - not allowing enough homes. 

So yesterday’s announcement tells only half the story - and maybe even less than half. Because at the same time as the government has been calculating the New Homes Bonus it has also been urging local authorities to renegotiate their Section 106 agreements with housebuilders.

Section 106 deals are a form of new homes bonus too - a way for local authorities to tap some of the increase in land values generated by planning permission for housing development to pay for the social and physical infrastructure to support that development. 

There may be a good case for renegotiating agreements made in boom times if they are stopping new homes from going ahead. However, any sensible local authority is already doing that, and it does not need ‘localist’ ministers instructing it what to do and undermining its negotiating position.