If you have ever wondered why property prices in Edinburgh are so high then it is worth considering the relationship between the property market and planning policy. Like most commodities, the prices we pay for properties are heavily influenced by supply and demand. The number of new houses that developers are allowed to build is set by councils using a complicated methodology. The numbers are called Housing Supply Targets and Housing Land Requirements, which are set out in each council’s Local Development Plan.
Edinburgh’s proposed Local Development Plan (City Plan 2030) aims to ensure that by 2030 Edinburgh is a “city in which everyone lives in a home which they can afford”. However, scratch the surface and it is clear that objective will never be achieved because City Plan is informed by a set of numbers that do not fully take account of the real need and demand that exists. Understanding this issue is important because it forms the basis on which the council will allow new housebuilding over the next 10 years.
A Local Development Plan sets out the policies that developers must comply with to obtain planning permission. If land is not specifically allocated for housing in the Local Development Plan, then it automatically becomes much harder to develop that site for residential use. If the Local Development Plan does not reflect the true need and demand that exists, then it will not plan for enough housing, meaning new supply is limited and prices will continue to rise.
The City of Edinburgh Council will publish its proposed City Plan 2030 on 7 November and invite comments for six weeks. It sets Housing Supply Targets of 19,559 new market housing units and 17,352 new affordable housing units to be built by 2032 for the council area. There are a number of problems with these figures, which are set out below.
Concealed and overcrowded households
The amount of housing required in an area is established using a Housing Need and Demand Assessment (HNDA). It splits housing into two broad categories: ‘market’ and ‘affordable’. Scottish Planning Policy requires the council to ensure enough housing is built to meet market demand. By contrast, councils do not have to meet all affordable demand. This is because affordable housing is delivered largely by the public sector and there may be resource constraints that prevent full affordable need being met. As mentioned above, The City of Edinburgh Council’s Housing Supply Target for affordable housing is 17,352 units, but by comparison, its HNDA identifies a need for 44,500 units over a broadly similar period. In effect, the council is therefore only proposing to build or permit enough affordable housing to meet a fraction of its calculated need.
The council commissioned a review of the most recent HNDA for the area to inform City Plan 2030. It was completed in September 2020, however the council has not yet made its findings public and we only obtained a copy following repeated requests. A HNDA predicts how many new households will form over a period of time and is based largely on past trends. The review suggests household formation may be lower in the future than previously predicted. However, it notes that part of the reason for this is affordability. More on that later but there is another fundamental point to consider first: the calculations do not take account of everyone who lives in Edinburgh.
Data published by the Office for National Statistics shows that over the last 10 years at least one in four young adults between the ages of 20-34 has been living at home with their parents. The council’s calculations do not consider these individuals at all, as they are not “households”. Nor do the calculations include young couples living in a parental home if they have their own bedroom.
If the Local Development Plan doesn’t plan to meet all of the demand that exists, there is a risk that prices will increase as a result. Basic economics tells us that if demand is higher than supply then price increases.
COVID-19 impact
The review was undertaken during the pandemic and was completed in September 2020. It places great emphasis on the potential impact of COVID-19 on the housing market. Many of the conclusions are already out of date (it refers, for example, to “an assumption” that a vaccine will be found) and this appears to have a significant effect on the number of houses the council is now planning for.
The study finds a general shift towards an increased need for affordable housing and a decreased need for market housing. To do this it uses market analysis conducted during the pandemic and affordability assessment of incomes, house prices and rent to come up with tenure split between market housing and different forms of affordable housing. To decide whether a household could afford a market house, the review assumes lenders would only offer a 75% loan to value mortgage to households with an income multiplier of 3.2. It then assumes that (based on requiring a 25% deposit in order to meet the value of the property) only 50% of households will be able to satisfy this affordability criteria. The rest, who are only considered to meet the income requirements, and do not have the means to pay a 25% deposit, fall into the category of requiring private rented housing, as they cannot afford to buy.
What is clear is that at the time of conducting the review, lenders were adopting a much more cautious approach in terms of mortgage offers, with a sharp decrease in high loan to value products. As an example, the study cites that at the time of writing (September 2020) there were only 10 mortgage products for up to 90% loan to value, with 30-40% deposits being more frequently required. The council does not appear to have considered whether the assumptions in its study are still valid. A review of the Scottish Housing Market published just a year later on 30 September 2021, shows a substantial increase in the availability of higher loan to value mortgage products (with 283 95% loan to value mortgage products available in September this year, compared with only eight in December 2020).
If the updated data were reflected in the methodology then it would clearly show more households are able to afford market housing. By failing to consider this, the council will artificially constrain the supply of new market housing to be identified in its proposed Local Development Plan. If there is not enough supply in the private housing market to meet demand, then it inevitably increases competition for available homes, causing prices to rise.
The council’s approach also means that some of those who, in reality, could afford a house are instead treated as being in “affordable need”. As mentioned above, the Local Development Plan does not currently plan to meet existing affordable need due to issues of “capacity and resources”, but it provides no explanation of what this means.
Conclusion
To summarise, Scottish Planning Policy requires councils to allocate enough land in their Local Development Plans to meet market demand. Edinburgh’s proposed Local Development Plan does not properly consider the true level of need and demand that exists in the city. This document, once adopted, will shape development in the local authority area for the next 10 years. In addition to the issue with the headline figure, the split between market and affordable housing appears inaccurate. This will restrict the housebuilding industry’s ability to meet the true market demand that exists. The council admits it will not be able to meet the affordable need it has calculated using out of date information. Its approach will not deliver enough homes to meet the aspirations of young people who want to live and work in Edinburgh.
However, as City Plan 2030 has only been approved in draft, there is scope for representations to be made in terms of its contents. This is a link to the consultation to allow those who wish to comment to provide their views.
For more information, please contact Caroline McGregor, a solicitor in our planning and environment group, at caroline.mcgregor@shepwedd.com.