Letwin: speed of delivering affordable homes constrained by cross-subsidy

He added that the absorption rate of homes sold on a site appears to be guided “at present” by the type of home being built and the pricing of the homes.

The “principal reason” why developers can “exercise control” over sales rates appears to be because there are “limited opportunities for rivals to enter large sites and compete for customers” by offering different types of homes at different prices and tenures, Sir Oliver concluded.

Sir Oliver said he has seen “ample evidence” that the speed at which affordable and social rented homes are completed on large sites is “constrained” by the requirement to cross-subsidise the affordable housing through open market sales.

On sites where a developer is “limited” in price setting because of the price of similar homes in the area, “this limits the house builder receipts available to provide cross-subsidies” for affordable housing.

He said: “Where the rate of sale of open market housing is limited by a given absorption rate for the character and size of home being sold by the house builder at or near to the price of comparable second-hand homes in the locality, this limits the house builder receipts available to provide cross-subsidies.”

He added: “This in turn limits the rate at which the house builder will build out the ‘affordable’ and ‘social rented’ housing required by the Section 106 agreement – at least in the case of large sites where the non-market housing is either mixed in with the open market housing as an act of conscious policy (as we have frequently found) or where the non-market housing is sold to the housing association at a price that reflects only construction cost (as we have also seen occurring).”

Sir Oliver said if developers were “freed from these supply constraints”, the demand for affordable homes including shared ownership and social rented homes on large sites “would undoubtedly be consistent with a faster rate of build out”.

He will publish his findings by the end of June in the form of a draft analysis.

Sir Oliver set out a number of questions that have arisen as a result of his investigation. These include whether the build-out rate would be different if large sites were “packaged” in ways that led to other types of house builder offering different types of housing, or if the major house builders offered “markedly” different types of homes.

He also questioned whether the absorption rate would be different if there was less reliance on large sites to deliver local housing.

When a large developer occupies the whole or majority of a site, the size and style of homes on offer “will typically be fairly homogenous”, he said.

Sir Oliver added it is clear from his investigation that differences in tenure are “critical”.

He said he had heard from witnesses that constraints on build-out rates include limited availability of skilled labour, limited supplies of building materials, limited availability of capital, constrained logistics on the site, the slow speed of installations by utility companies, difficulties of land remediation and providing local transport infrastructure.

However, he said he is “not persuaded” that these constraints are the “primary determinants” of the speed of build out on large sites, and pointed to the absorption rate as the “fundamental driver” of the speed at which sites are built out.