LGA submission: The Future of the New Homes Bonus: consultation

The LGA believes that the New Homes Bonus (Bonus) should be separately funded and not drawn from a top slice of Revenue Support Grant or other grants. Drawing the Bonus from a top slice of RSG means that those councils who are unable to deliver homes above the baseline threshold lose out on core funding distributed on the basis of need.


About the Local Government Association

The Local Government Association (LGA) is the national voice of local government. We work with councils to support, promote and improve local government. We are a politically-led, cross party organisation that works on behalf of councils to ensure local government has a strong, credible voice with national government.

The LGA welcomes the opportunity to respond to this consultation and has engaged with the sector to formulate the responses set out below. This response has been approved by the Chairman, Political Group Office Leaders and Lead Members of the LGA’s Resources Board.

Introduction

The LGA believes that the New Homes Bonus (Bonus) should be separately funded and not drawn from a top slice of Revenue Support Grant or other grants. Drawing the Bonus from a top slice of RSG means that those councils who are unable to deliver homes above the baseline threshold lose out on core funding distributed on the basis of need. If the quantum of overall funding for local government was sufficient this would be less of an issue, but while the New Homes Bonus is being used to fund core council services, areas with less housing demand, and those that are constrained for other reasons outside of their control, are disadvantaged as a result of the scheme.

The Bonus makes up a significant part of some councils’ budgets, particularly but not confined to shire districts. Changes to the methodology for the Bonus should come with transitional funding to ensure that local authority services that residents rely on are not put at risk. It is disappointing that the government has made the decision to end the concept of legacy payments without consulting the sector. Legacy payments made up over two thirds of the total Bonus allocations for 2021/22, and previous Bonus award has enabled many councils to fund significant investments in infrastructure. The options presented in the consultation imply that the Government is intending a reduced envelope of funding for the scheme but does not indicate how the savings will be redistributed. Any savings should be invested in local government for them to use to fund services.

The Government sets out options for reform in the consultation but fails to provide the level of detail necessary to project the material impact these will have on councils’ finances. Councils also need certainty around future levels of funding as soon as possible and this includes clarity around the design of the new scheme and any constraints on the total level of funding that the Government is committing to the Bonus moving forward.

A key strength of the Bonus as it currently operates is that it is simple to understand and easy to evidence. The core principle of the scheme should remain as incentivising the increase of housing supply to match local need. We are supportive of an affordable housing premium and the potential for incentivising energy efficient homes. The LGA does not see merit in mixing objectives by adding other incentives to the Bonus especially when these are outside of local authority control.

The LGA would welcome the opportunity to work with central government, and the local government sector, to examine the impact of any reform of the Bonus, the challenges and opportunities the different approaches present.

The Future of the New Homes Bonus: consultation (closed)

Response to questions in the consultation

Question 1: Do you believe that an incentive like the Bonus has a material and positive effect on behaviour?

Councils are first and foremost incentivised by the needs of their community which includes, amongst other things, delivering housing to meet residents’ needs. It is a key priority for the sector and councils are a fundamental part of the process, as house builders and enablers and custodians of planning policy, as well as establishing the infrastructure that sits around housing growth, including strong transport links and a robust local economy. It is right that the government recognises the importance of increasing the housing supply and the work involved for the sector and provides an adequate incentive for councils to execute their housebuilding agenda.

While the Bonus is a welcome reward for councils’ efforts to increasing the local housing supply, they are disadvantaged by not being adequately funded to build the infrastructure that is required. New homes are essential to meet community need, but there are many factors for councils to consider; jobs, the local economy, congestion and air pollution to name a few. It is essential that councils, as leaders of place, are able to create the right environment for housebuilding, and reduction or removal of the Bonus could exacerbate the current infrastructure deficit.

A number of councils have been excluded from the Bonus since the introduction of the 0.4 per cent baseline. Low growth does not necessarily indicate indifference on the part of councils; the success of housing delivery is dependent on a diverse range of economic, geographic and environmental factors, and housing targets and strategy should be locally determined and locally accountable. There has been a steady growth in housing stock in the 10 years since the inception of the Bonus. It is difficult to attribute the success of this directly to the scheme, but the LGA considers the New Homes Bonus simple to understand, transparent and predictable.

Question 2: If you are a local authority, has the Bonus made a material impact on your own behaviour?

The LGA sets out a broad, sector perspective on this in the above response but would refer the Government to responses from individual local authorities to answer to this question.

Question 3: Are there changes to the Bonus that would make it have a material and positive effect on behaviour?

As a subsidiary objective, the LGA would suggest the Government explores the potential of using the Bonus to support the Government’s target of achieving net zero carbon by 2050. The Bonus could be used to incentivise and reward not only delivering housing, but also the delivery of energy efficient housing which, in the short term, has minimal environmental impact to build and, in the long term, is fuel-efficient to run.

Around 230 councils declared a climate emergency in 2019 and it remains a high priority for the sector. Environmental impact is assessed in local policymaking and more and more councils are incorporating environmental targets into their local plans. Councils are already innovating and investing in energy efficient homes which have an environmental benefit and are cheaper to run, delivering savings directly to residents.

We would support a premium for more specialist accommodation such as older people’s and disability access as reward for councils delivering suitable housing for residents with more complex needs.

Further to the point we raised in response to Question 1, the LGA would like to see appropriate levels of funding for infrastructure, allowing councils to create healthier communities and offset the pressures arising from larger populations and increased housing supply.

Question 4: Should the government retain the current 80/20 split in any reformed Bonus, or should it be more highly weighted towards the District Councils or County Councils?

The LGA recommends that the Government refers to the responses from shire district and county council authorities to this question.

Question 5: Should the affordable housing premium be retained in a reformed Bonus?

The LGA supports a premium for affordable housing. The sector recognises the need for such provision – house price growth has outstripped growth in wages, leaving an increasing number of households unable to afford housing of a decent standard that meets their needs. The LGA considers that further support to deliver affordable housing would be welcome, particularly where statutory requirements are not in place. For example, housing built in groups of less than ten, as well as housing delivered through permitted development rights are not required to provide affordable housing.

Question 6: Is £350 per additional affordable home the right level of premium, or should this level be increased or decreased?

The LGA would refer to council responses around whether £350 is sufficient, but any increase of the premium should be met with additional resource from central government rather than a top slice from local government. The premium goes some way toward offsetting the lower Section 106/Community Infrastructure Levy payment that affordable housing attracts. It is worth noting that a Band A property attracting 6/9 of the Bonus is £606 less than the award attached to a Band D home in the most recent Bonus.

Question 7: Should a reformed Bonus continue to reward local authorities for long-term empty homes brought back in to use?

Yes. The number of long-term empty homes is increasing and bringing them back into use is a high priority for local government. Councils make use of the powers they have to bring empty homes back into use, including Empty Dwelling Management Orders and Council Tax exemptions and premiums. Additionally, they take a proactive approach to improving the condition of homes that have become inhabitable, providing advice to landlords of empty properties and signposting to improvement grants where possible. It is a key element of councils’ housing plans and many local authorities have an empty property strategy to address the issue. The LGA considers the inclusion of these properties as part of the Bonus to be a positive incentive for councils to continue this work.

Question 8: Should the Bonus be awarded on the basis of the most recent year of housing delivery or the most recent three years?

We would refer to councils’ responses in this instance, as this is a question that LGA member councils are likely to differ on based on their individual circumstances and improvement performance. There are a number of possible reasons why growth fluctuates across years where variation may be warranted, as a result of explicit policy decision around housing need, and unwarranted, for example reduced housebuilding due to COVID-19, and local authorities should not be penalised for this.

Question 9: Do you agree that the baseline should be raised?
Question 10: If the baseline is to be raised, should it be raised to 0.6 per cent, 0.8 per cent or 1 per cent of
housing growth since the preceding year?
Question 11: Why should the government opt for the baseline you have recommended in answer to the previous question?

The LGA does not support a higher baseline threshold. In the 2015 consultation, 80 per cent of respondents did not support the introduction of a baseline threshold, and we expect the sector will respond similarly to strongly object to an increase. There is no evidence that introducing the 0.4 per cent baseline ‘sharpened the incentive effect of the Bonus’, and a higher baseline could disincentivise some councils because it may be difficult to achieve and only lead to a small payment of the Bonus thereby reducing the incentive.

In relatively low-growth areas which still contribute to housing development, and for whom significant effort is made to achieve this, the baseline exceeds actual growth. The vast majority of councils saw an increased supply of housing from October 2019 to October 2020, but 84 councils did not receive any New Homes Bonus for the homes delivered in their areas. The introduction of a 1 per cent threshold would mean that 84 per cent of all homes delivered between October 2019 and October 2020 would not have attracted any New Homes Bonus, and 231 councils would have received no reward for the homes they added to their stock.

A higher payment rate for each house delivered would be attractive to some councils, but it would have to be significantly increased to balance the effects of losing a proportion of new housing as a result of the increased baseline; a 0.6 per cent threshold would reduce the total Bonus paid out by £54 million. There is also a danger that this could concentrate funding in certain areas and reward those who do not have to make a significant effort to attract developers.

Question 13: Should the government adopt a new payment formula for the Bonus which rewards local authorities for improvement on their average past performance with respect to housing growth?
Question 14: If the government is to adopt such a payment formula, above what percentage (x per cent) of average past net housing additions should the Bonus begin to be paid? In other words, what should the value of x be?
Question 15: If the government is to adopt such a payment formula, over what period should the annual average of past net additions be calculated? Should it be a period of 5 years or 10 years?

As referred to in responses to previous questions, the LGA is not supportive of the current threshold for payment of the Bonus, and we are concerned that a threshold based on past performance may also reduce the incentive effect of the Bonus where growth may be difficult to achieve due to a number of characteristics of a local authority area.  Even where growth has been achieved it may be difficult to maintain at this level and therefore serious consideration should be given to the impact of this.  It would also result in additional complexity to the Bonus.

Question 16: Should the government adopt a new hybrid payment formula for the Bonus which rewards either improved performance or high housing growth? Please explain why or why not.
Question 17: Above what percentage (x per cent) of average past net housing additions should the Bonus begin to be paid? In other words, what should the value of x be in this proposed hybrid payment formula?
Question 18: Above what percentage (y per cen) increase in the authority’s housing stock should the Bonus be paid? In other words, what should the value of y be in this proposed hybrid payment formula?

For reasons outlined in the above responses to Questions 9, 10 and 11, the LGA is not supportive of a rise in the current baseline threshold of 0.4 per cent of the local authority’s housing stock.

The statement included in this section of the consultation, that ‘The government’s current preferred approach would be to set the value of y significantly higher than the current 0.4 per cent baseline’ is likely to raise concern among councils, as it implies substantial reduction in the total funding of the New Homes Bonus which, for many councils, makes up a significant part of their budget. Greater clarity is needed around the design of the new scheme, any constraints on the total level of funding that the Government is committing to the Bonus moving forward, and how the savings will be distributed.

Question 19: Do you agree with the proposal to repurpose the Bonus to balance the effects of the Infrastructure Levy by providing an incentive to authorities to bring forward development in lower value areas?
Question 20: What, in your view, would be the advantages and disadvantages of repurposing the Bonus in this way?

This is an interesting proposal but there is a lack of detail on how the Infrastructure Levy will work, as outlined in the LGA’s response to the Planning for the Future White Paper, and in particular the responses to Questions 21 – 25.  There is also a lack of detail provided in the Bonus consultation on how the Bonus would be affected by this proposal. Therefore, it is difficult to form an opinion on Option D. It should be noted that, should the Bonus become an incentive to fund infrastructure and affordable housing alone, it could effectively become ringfenced funding. We would have concerns if the Bonus funding was used simply to top up shortfalls in the Infrastructure Levy.

This question may receive varying responses from councils, whose land values will differ across the country. We are also conscious that the Infrastructure Levy proposed in the White Paper is currently being consulted on through another process, and it’s ‘core elements’ will be determined by the consultation. For example, the outcome of the question around whether the Levy rates should be set ‘nationally at a single rate, set nationally at an area-specific rate, or set locally’ will have significant consequences for councils.

Question 21: If the option is to be pursued, should this reform to the Bonus be postponed until the new planning system is enacted?

If such an approach were to be taken forward, it would be sensible to postpone this proposed element of reform to the Bonus until the new planning system is enacted.

Question 22: In your view, what levers do local authorities have at their disposal to encourage uptake of Modern Methods of Construction (MMC), and how impactful is such encouragement likely to be?

We understand from member councils that they do not collect data around MMC at present, and therefore it is difficult to determine how much leverage they have in encouraging their use. The lack of data also means that it is difficult to examine the advantages and disadvantages of including MMC in the New Homes Bonus, for example whether there are disparities regionally, between urban and rural areas etc. Additionally, the concept is relatively new, having only established the framework of MMC in 2019; many housing developments may already be incorporating use of MMC, but without the appropriate data, it is difficult to develop policy in this area.

Question 23: Should the Bonus include a premium for new homes built using MMC? Please explain why or why not.

We do not support a premium for MMC. As a general principle, the Bonus should retain a strong focus on increasing the number of new homes to match the local need and there is no evidence-based justification for rewarding one method of construction over another. This could also penalise areas e.g. where the majority of growth is on smaller sites, where MMC may not be cost effective or financially viable because of a lack of critical mass. Consideration should be given to whether the local authority is the appropriate party to incentivise the use of MMC, and whether it could be more effective to encourage this practice among developers and housing associations. We would welcome a conversation with the Government about new powers that could enable local authorities to encourage greater use of MMC, where that would support the delivery of the homes needed locally.

Question 24: If you are a local authority, would such a premium make a material impact on your behaviour? Would it, for example, encourage you to look for opportunities to bring through developments that are amenable to the use of MMC?

The LGA would refer to local authorities’ responses to this question.

Question 25: How onerous a data burden would this option impose on local authorities? Do you agree with the proposal to collect the MMC data at the point at which a local authority signs off a building as habitable?

We understand from member councils that this information is not being collected at the moment and the Government will need to examine the work that would be involved for councils in collecting and reporting this information. If the Government decides to proceed with this reform, councils must be funded in full for the new administrative data collection burdens.

Question 26: Should the government make it a condition of receiving the Bonus that w per cent of net additional homes used MMC in order for the Bonus to be paid? If so what should the value of w be?

The LGA would not support introducing this threshold as part of the New Homes Bonus.

Question 27: Why should or shouldn’t such a condition be introduced?

As a general principle, the Bonus should retain a strong focus on increasing the number of new homes to match the local need and there is no evidence-based justification for rewarding one method of construction over another. This approach may also disincentivise those councils who, through no fault of their own, are unable to attract developers using MMC. It is crucial that the development of MMC works within the locally led planning system, rather than be the subject of national targets which ignore or override community involvement.

Question 28: Do you think that local authorities should be required to have a local plan, or demonstrate satisfactory progress towards one, in order to receive funding?

The LGA would not support linking the award of the Bonus to a council’s Local Plan being in place. Many aspects may affect a local plan being up to date. As noted in our response to the Planning White Paper, constant changes to national planning policy have impeded councils’ ability to get plans in place and keep them up to date, or failure to meet the legal duty to cooperate. Under current planning rules, local plans may be delayed by landowners, promotors and developers, for many years in some cases. It would not be reasonable to penalise authorities that had completed all reasonable steps within their control but were waiting on external factors.

There is ambiguity over what ‘up to date’ means. A decision would have to be made as to what ‘satisfactory progress towards one’ looks like, and how an evidence base would be gathered for this. For the above reasons, the proposal is unpopular with the sector, as highlighted in the 2015 consultation on the Bonus, where 76 per cent of respondents disagreed with linking it to a Local Plan.

Question 29: Do you think the bonus should be paid at a reduced rate until such time as a local authority has an up-to-date local plan in place, and should it by 25 per cent, 50 per cent or 75 per cent?

The LGA does not support authorities losing bonus for years in which they do not have a local plan and does not see merit in such a reduction. The reasons for this are outlined in our response to Question 28.

Question 30: If you are a local authority, would this encourage you to develop or maintain an up-to-date local plan?

The LGA would refer to councils’ responses to this question. In our view, the purpose of the Bonus is to reward councils for creating housebuilding opportunities in their area and adding to the supply. We would not support mixing objectives.