Research and analysis

The additionality of housing supply interventions: executive summary

Published 31 March 2023

1. This report presents the results of research undertaken to support analysis for assessments of the additionality of the impacts of support for housing developments by the public sector.

2. ‘Additionality’ can be defined as the extent to which an activity and/or its results take place at all, on a larger scale, earlier or within a specific designated area or target group as a result of the intervention. The concept of additionality is central to the appraisal and evaluation of the outputs, outcomes and other benefits of public sector interventions. It is used to convert gross effects into net effects and is crucial to the meaningful assessment of, for example, the cost-benefits and cost-effectiveness of interventions.

3. The principal elements of the additionality of housing supply support concern the extent of deadweight and displacement. As well as a review of existing research documentation and previous guidance, these aspects have been explored through a combination of both top-down (econometric modelling) and bottom-up (case study) analyses of a sample of some 100 previous interventions.

4. The modelling focuses on the house price effects in surrounding areas of previously supported developments and, while the main analysis is primarily concerned with the additionality of interventions in terms of their principal outputs i.e. the number of housing units, it also sheds light on wider outcomes such as an area’s housing affordability and its increased attractiveness for further development (‘placemaking’).

5. The assessment of deadweight requires determination of what would happen (or would have happened) in the absence of the intervention. Existing research on deadweight in housing development interventions is limited.

6. Our research indicates that deadweight has not been a significant factor in many of the previously approved case study projects. This appears to be due to robust appraisals that assessed financial viability. Where an element of deadweight has occurred it has mainly related to the timing and type of development.

7. Consideration of a development’s viability, why the market cannot deliver it and what would happen without the proposed support should always be a core part of appraisals. It should focus initially on a proposal’s commercial viability and then consider the market failures that may inhibit such viability or which represent other barriers to development that may justify intervention. These could include assessment of factors such as whether finance could be accessed elsewhere; whether other agents might be able to undertake the development; whether strategic infrastructure or significant extraordinary on-site costs are required; whether there is a need for inputs from multiple sources resulting in barriers or failures of coordination; or the existence of difficulties in demonstrating market viability due, for example, to the innovative nature of the proposal.

8. In most cases the preferred approach to assessing deadweight will be to construct a bespoke counterfactual case scenario based on evidence-based judgments. However, the report includes a flowchart indicating the factors for consideration (including those outlined above) and a plausible range of values that could be applied based on the research. These vary according to judgement of the significance of individual factors and the strength of the evidence.

9. There is also a lack of robust existing evidence regarding levels of displacement in supply-side housing interventions. Due to the difficulty in using housing units as a direct measure of displacement, trends in relative house prices have been employed as a proxy for displacement. Econometric modelling was undertaken to examine post-intervention trends in relative house prices, after allowing for local characteristics, in areas surrounding previous intervention sites (usually up to a maximum of 2.5km away).

10. Where price reductions occur, these potentially could lead through the price mechanism to a reduction in other new supply due to reduced development viability (i.e. a displacement effect). However, supply side housing interventions can also lead to higher prices which may increase the commercial attractiveness of areas for developers (i.e. a placemaking or spillover effect). For the purposes of this framework these placemaking effects have been treated as ‘wider benefits’ rather than as part of the additionality assessment and are the subject of separate research commissioned by Homes England.

11. However, the potential for these contrasting effects highlights the importance of being clear about the objective of interventions (e.g. increasing affordability or stimulating further development) and potentially the need for complementary interventions to address consequential effects.

12. The main findings of the modelling were that:

• price increase (placemaking) effects were slightly more prevalent than price reduction (displacement) effects (44% of cases as opposed to 38%);
• price impacts tended to be relatively localised – i.e. highest closer to the intervention site and then declined with further distance away;
• significant levels of price reduction or ‘displacement’ were more apparent in areas where there were already relatively high levels of development activity; and
• the largest house price decreases tended to be in areas where housing was already relatively affordable. In areas with already high house price to earnings ratios, there is little evidence of reductions in house prices within the nearest 2.5km (suggesting that a sustained significant increase in supply is needed if supply-side measures alone are to be used to address such issues).

13. The consequences of such price displacement for unit displacement (and therefore the significance of the above findings for appraisal guidance) were explored through further research which found that in an average West Midlands brownfield housing development scheme, a reduction in new house price values beyond 4% would render delivery of a scheme difficult and beyond 8% unviable. None of the modelled schemes had price-damping displacement effects of this magnitude across the whole of their areas and only 11% had reductions of greater than 2%. This suggests that unit displacement effects would usually be low. However, it is important to note that unit displacement effects could occur without an effect on price, which would not be picked up in the analysis.

14. Three key variables were identified as being of particular significance for price displacement:

• affordability of existing housing in the area i.e. the more affordable the existing housing, the greater the displacement;
• development rates in the area i.e. the higher the existing development rates, the greater the displacement; and
• scale of supported development i.e. the larger the scheme, the greater the displacement.

15. For the appraisal of market housing proposals, these factors (and a range of metrics to be applied) are incorporated into the proposed additionality framework (summarised in flow chart form in the report). However, (in line with the DLUHC Appraisal Guide) displacement for the social rented and affordable rented housing element of any development should usually be assumed to be zero, (it is unlikely that affordable housing provision will result in unit displacement given widely recognised shortages and the generally rigorous prior appraisal of need for such provision).