Is the Government's home building initiative founded on "bad maths"?

27 March 2013

Housing was at the heart of George Osborne's Budget last week, as the Chancellor claimed that home ownership was key to his vision of an 'aspiration nation'.

However Labour hit back, arguing that the measures announced by Mr Osborne ammounted to "subsidised mortgages for millionaires".

And the issue has thrown up more bad headlines for the Government this morning, with some newspapers reporting that its flagship homebuilding programme - the New Homes Bonus - was based on "bad maths".

So where has the Government gone wrong, and what does this mean for the number of new homes that might be available to aspiring house-buyers?

What is the New Homes Bonus?

The Department for Communities and Local Government (DCLG) has pledged £1 billion between 2011 and 2015 to incentivise councils to build new homes and reintroduce empty properties to the housing stock.

The money is paid to local authorities based upon the amount of extra council tax revenue that is raised through the creation of new houses over a period of six years.

How many homes will be built?

DCLG estimated in its Impact Assessment that the policy would result in 140,000 extra homes being created in the first decade of operation.

To put this in context, the Department reckons that around 232,000 extra properties per year may be required between now and 2033, of which only 115,600 were built in 2012.

Are these figures accurate?

Today, the UK's public spending watchdog - the National Audit Office (NAO) - released a report into the administration of the policy so far, which did indeed find that the Government's calculations that underpinned its claim that the policy would add 140,000 homes to the housing stock:

"contained a substantial arithmetical error which, when corrected, reduces the estimate by around 25 per cent."

This wasn't the only problem with DCLG's analysis of the policy spotted by the NAO. According to the watchdog:

"We also noted errors in the worked example of the Bonus given to local authorities, miscalculation of the level of agreement from respondents to questions in the public consultation, and poor design of the annual feedback survey of local authorities."

More fundamentally, the NAO also raised concerns about a lack of evidence to support the assumptions upon which the new homes figure was based. It argues that DCLG's expectations about how councils would respond to the policy were "not realistic", the range of scenarios considered was too narrow and there was not enough testing of its model on local authorities themselves.

What does this mean for house building?

According to the NAO, the Department has acknowledged the error it made when assessing the likely boost to the housing stock. This means that instead of creating 140,000 new homes, we might expect around 108,000 new homes to be constructed in the first ten years of the scheme, according to DCLG's model.

However there is also some doubt about whether even this reduced figure is sound, after the NAO pointed out some flaws in the assumptions that underpinned it. As is often the case with forecasts, we won't really know whether or not it is accurate until we have some hard data to analyse.

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