Housebuilding Crisis in the UK Linked to Section 106 Policy

The UK property market is facing significant challenges, primarily attributed to a decades-old policy aimed at increasing social housing. The Government mandates that housebuilders contribute affordable homes to secure planning permission for new developments. These homes, priced below local market rates, often reduce profitability for developers. While some view this policy, known as Section 106 of the Town and Country Planning Act, as a vital tool for aiding low-income families, others believe it is a hindrance to essential housebuilding.

Recent estimates indicate that affordable housing requirements have delayed the construction of over 45,000 homes across the UK. The Adam Smith Institute, a think tank, claims that Section 106 has cost builders £1.3 billion in the last year alone. This translates to approximately £13,000 lost for each open-market home built by private developers.

Andrew Dawber, a founding partner at Civitas Investment Management, states that the current system is a brake on all types of housing development. The number of new housing starts has stagnated, impacting both open-market and affordable homes. This issue has reached a crucial moment, especially as Labour’s pledge to construct 1.5 million homes by 2030 appears increasingly unachievable.

The Government maintains its commitment to Section 106, arguing that it has successfully facilitated the construction of over 20,000 new affordable homes in the previous year. A spokesperson for the Ministry of Housing, Communities and Local Government affirms the need for more affordable homes and highlights ongoing efforts to simplify the Section 106 system.

Critics, including Sir James Cleverly, the shadow housing secretary, argue that excessive Section 106 requirements, particularly in London, have rendered many developments unviable. The burden of these requirements is reflected in the struggles of small housebuilders, who often cannot find housing associations willing to collaborate on affordable homes.

Developers are expressing frustration as projects stall due to the inability to engage housing associations, which are themselves constrained by financial challenges arising from capped social rents, limited government grants, and rising maintenance costs. Some developers have reported securing permissions for homes, only to face a lack of responses from housing associations, leaving projects in limbo.

The historical evolution of Section 106, introduced during Margaret Thatcher’s administration and expanded under Tony Blair, marks a significant shift in housing policy. What was once a minor component of affordable housing delivery has grown to constitute nearly half of all affordable homes built in the UK by the early 2020s.

Recent government data shows a decline in the contribution of Section 106 to affordable housing, dropping from 51% in 2019-20 to 36% by 2024-25. This trend indicates that reliance on Section 106 may be increasingly problematic amidst rising build costs and heightened taxes.

Recommendations from the Adam Smith Institute urge the scrapping of Section 106 in favour of grant funding through Homes England. They advocate for incentivising developers to produce affordable homes where demand is greatest. This could pave the way for increased private capital in the affordable housing sector.

While Labour appears hesitant to pursue structural changes, the pressing need for more effective housing solutions continues to escalate. With housing starts at significantly low levels, the pressures on policymakers to explore new avenues for housing development are mounting.