Boosting economic growth is a key focus for both major parties in the run up to the General Election, appearing in both Labour’s 5 missions, and the Conservatives’ 5 top priorities. UK productivity growth has been slow since the Global Financial Crisis, and output per capita is 15-20% below the highest performing G7 countries of Germany and the USA.

Labour productivity is increasingly important given its bearing on attracting inward investment, ability to pay higher wages and higher tax revenues for the Government which can be reinvested in critical services and infrastructure.  The UK’s low labour productivity is a major reason why our growth has stalled and why we are less resilient to economy shocks compared to other major global economies.

An undersupply of housing has contributed to this problem.  A shortage of new housing connected to growing employment locations limits the ability of workers to move to more productive jobs. In turn, this means that the potential for cities to benefit from the agglomeration effect, where higher concentrations of firms and workers drives economic efficiencies, is constrained.

High housing costs can also act as a disincentive for investment and employers. We have previously highlighted the risks to the growth potential of cities like Cambridge and Bristol.  When considering the location of their business, commercial occupiers need be sure they will be able to attract and retain the workers they need and a key part of that is being confident that there is an adequate supply of housing. In some high growth knowledge intensive sectors, the choice of location is not limited to different UK centres but includes  international competitors. Delivering the housing to support productive locations is therefore fundamental – a key piece of infrastructure to support long term economic success.    

Room for improvement

At present, economic growth projections or ambitions are not factored in to planning for housing in England through the Standard Method calculation. Instead, housing affordability and household projections are the key metrics to consider. However, building a strong economy is outlined as one of the three overarching objectives of the planning system in paragraph 8 of the NPPF, and paragraph 67 states that the housing requirement figure in a local plan may be higher than the identified need if it “reflects growth ambitions linked to economic development”.   

How far are local plans actually responding to economic growth projections? We have split the country into quintiles using Oxford Economics forecast for GVA growth over the next five years. The areas with the highest economic growth (shown in dark blue on the map) are mainly in London and the South of England, with the Oxford-Cambridge Corridor and Thames Valley standing out. Beyond the South East, Manchester, Newcastle, Bristol and the South West peninsula are the top performing regional economies. 

This top quintile for economic growth represents over a third of housing need in England, based on the Standard Method calculation. With the addition of the second quintile, over 50% of housing requirements is allocated to high growth local authorities. The NPPF does therefore establish the principle of aligning housing delivery with economic growth. 

The main difficulty is whether LPAs implement this principle effectively. Notwithstanding the guidance in the NPPF, our research has found that 85% of the fastest growing local authorities in England have housing targets in their adopted or emerging plans that are lower that the standard method would determine.  The total shortfall in local plans in highest growth areas against the standard method is 35,000 homes, over 10% of the total requirement in England. LPAs in the next two fastest growing quintiles have also adopted targets that are below the standard method calculations. 

The shortfall in housing supply against economic ambition is compounded further when looking at delivery levels. The LPAs with the highest forecast economic growth only built 23% of new homes in England in 2022-23, resulting in a shortfall of over 41,000 homes against standard method requirements. Rather than using the standard method as a starting point, and adjusting upwards to reflect economic growth potential, LPAs with the highest productivity potential are not meeting even the baseline level of  housing need. This will lead to worsening affordability, reducing the ability for workers to move for more productive jobs.

Unlocking opportunities

The incoming Government after the July election could choose to tackle this challenge in a variety of ways. One clear option would be to set clearer requirements through revisions to the NPPF that require local authorities to respond to future economic growth projections when setting housing targets. This would also need to be coupled with a strengthened strategic approach across adjoining local authorities to make sure that overspill need from urban local authorities with tight boundaries is accommodated in linked Travel to Work Areas. 

An alternative option could be to use infrastructure investment to unlock sites and market capacity in high growth areas. The 2018 NPPF identified the link between investment in new infrastructure and the delivery of housing. Six years on from this guidance, our analysis of infrastructure spending shows that investment in infrastructure is still not aligned with wider planning objectives. 

For example, the map below shows the locations of  the Department for Transport’s current major transport infrastructure projects. Transport infrastructure has a strong enabling role in delivering housing, unlocking more land and linking new homes with jobs. But while high growth areas in the Oxford-Cambridge corridor, and cities in the Midlands and the North are benefiting from new investment, there is little that could support potential growth along the South Coast, in the South West or the East of England. 

Equally, the £3.6bn of Housing Infrastructure Funding (HIF) allocated to date has been spread fairly equally across the country, rather than concentrated in the places with the greatest growth potential or the greatest affordability challenges.  Almost a quarter of HIF projects are in local authorities in the bottom two quintiles for economic growth, despite the initial prospectus stating that money would be allocated to unlock homes in the areas with the highest housing demand. 

Allocating infrastructure funding to lower growth areas can serve a valuable function, such as facilitating urban regeneration. However, it does not support housing delivery in the locations where there is the greatest market capacity to absorb new homes, or where there would be the greatest impact on national economic performance. Much more could be done to ensure that the right infrastructure is delivered in line with housing and employment growth. In addition, in higher value areas, there is an increased opportunity for planning gain to be re-invested in good infrastructure.