Calculating future housing needs

‘An algorithm solves the actual problem… whereas the formula is a tool used in the process’

Not Another Mutant Algorithm!

When The Prime Minister told a year 11 class “I’m afraid that your grades were derailed by a mutant algorithm” and “I know how stressful that must have been” the bemused pupils had absolutely no idea what he was talking about. They had not taken their GCSEs yet and had no grades to be affected by an algorithm – mutant or otherwise!    

On A-level results day the Prime Minister also described the results which had been through the algorithm as “robust”, “good” and “dependable for employers”.

Several hours after the mutant algorithm speech the permanent secretary of the Department for Education stood down from his post.

What! Another algorithm

So, it is little wonder that when the Government proposed to ‘improve’ the accuracy of the results produced by the long-standing formula, used by Local Authorities to calculate their area’s future housing needs, the word ‘algorithm’ was singled out for ‘special attention’ by critics of the Consultation White Paper.

Clearly, there are very serious and widespread concerns about the Governments latest housing proposals but, the well-used ‘standard’ formula, and the Government’s proposed changes to it, are not the real issue.  

What answer do you want?

Sure, it appears that the Government have pre-selected a build target of 300,000 houses a year, and now want to ‘adjust’ the formula so it produces an answer close to the target. But, household projections, which are based on publicly accessible data, freely available at a local authority level, are still the most robust estimates of future growth trends. These projections have been used for decades in the planning system as a basis for future housing land requirements due to their simple and relatable concept of linking housing growth to the population.

Household growth projections

Currently, the method for calculating the areas housing need comprises a baseline of household growth projections which are then adjusted to take account of affordability and capped to limit the increase for areas.

Three steps to…

Step 1 of the current method sets the baseline using a 10-year average of the 2014-based national household growth projections.

Step 2 goes on to adjust the Step 1 outcome based on the affordability of the area, using the most recent median workplace-based affordability ratios so that for each 1% the ratio is above 4, the average household growth is increased by a quarter of a percent (with a ratio of 8 representing a 100% increase).

Step 3 then applies a 40% cap to limit the increases an individual local authority can face. The way this cap is applied depends on the current status of an area’s strategic policies for housing.

Could do better

Household projections, used in the current method, have attracted criticism for their volatility and the way in which they can result in artificially low projections in some places, where overcrowding and concealed households suppress the numbers. Crucially, they cannot in isolation forecast housing need –they project past trends forward

The new standard method

The proposed improvements on the current standard method are designed to:

a. Ensure it is more agile in using up-to-date data. The Government announced in the February 2019 it’s response to the technical consultation on updates to national planning policy and guidance 7, that the standard method would remain based on the 2014-based household projections. While this as an appropriate solution in the short-term, a new standard method is intended to be more agile in using the most recent data.

b. Achieve a better distribution of homes where homes are identified in more high-demand areas and in emerging demand areas across the. This will help avoid issues where unaffordable areas in high demand are planning for low numbers of homes due to past trends of suppressed household formation. In addition, the Government has heard powerful representations that the current formula underestimates demand for housing in the growing cities in the Northern Powerhouse by being based on historic trends.

c. Provide stability to the method by smoothing out areas of potential volatility so that the basis on which local authorities are expected to plan for is more predictable. 

d. Be consistent with the Government’s ambition for a housing market that supports 300,000 homes by creating a method with a suitable overall national number that enables achievement of this aim.

Counting housing stock

There is general support for incorporating housing stock into the methodology, as a way of balancing out some of the issues identified with relying on household projections in isolation. The Government have taken into consideration the varied and useful feedback, both on the individual data inputs and also on how these might be applied in informing options for consideration.

Revised standard method

In line with their commitments, they are now proposing a revised standard method which aligns with the Government’s aspirations for the housing market. This should provide stability and certainty for all stakeholders and seek to address the issues with the current approach and use of household projections identified above.

Supplying demand

The new standard method delivers a number nationally that is consistent with the commitment to plan for the delivery of 300,000 new homes a year, a focus on achieving a more appropriate distribution of homes, and on targeting more homes into areas where they are least affordable

The local area decides

The standard method results in a local authority-wide number that needs to be planned for. The local area then decides how and where in their authority that need is best met in accordance with national policy.

Existing housing stock levels

The Government propose to introduce a new element into the standard method, a percentage of existing housing stock levels, which takes into account the number of homes that are already in an area. This should ensure that diverse housing needs in all parts of the country are taken into account. It should also offer the stability and predictability which has been absent when solely relying on household projections.

Publicly accessible data available

However, household projections, which are based on freely and publicly accessible data available at a local authority level, are still the most robust estimates of future growth trends. Projections have been used for decades in the planning system as a basis for future housing land requirements due to their simple and relatable concept of linking housing growth to the population. Therefore, it is proposed to retain a role for them as part of the new blended approach which takes account of (housing) stock. This helps achieve the stability and distributional benefits offered by stock whilst not losing the benefits of using projections.

Affordability factor

The Government also proposes to introduce an affordability adjustment that takes into account changes over time, in addition to the existing approach of considering absolute affordability. This will increase the overall emphasis on affordability in the formula and ensure that the revised standard method is more responsive to changing local circumstances, so that homes are planned for where they are least affordable. For example, where affordability improves, this will be reflected by lower need for housing being identified.

Adjusting for market signals

It is proposed that the standard method will include two adjustments to the baseline using the workplace-based median house price to median earnings ratio. Initially it is proposed that the ratio for the most recent year for which data is available in order to address current affordability of homes would be used. Then how affordability has changed over the last 10 years of published data would be incorporated, using that same statistic

Removing the cap

The Government also proposes to remove the cap which artificially suppresses the level of housing identified.

It’s a start

This standard method provides the starting point and not the final housing requirement.

More information

These notes are based on extracts from the Consultation White Paper.

Further details of the proposals are set out in ‘Changes to the Current Panning System Consultation’

Mutate to survive!

The proposed formula:

‘An algorithm is in its most general definition is a way of achieving a desired goal. Formula are merely recipes or components.’

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