4. Residual versus average method
4.1 The aim of this section is to highlight how different methods and assumptions influence the required scale of a forward 5 year effective housing land supply.
4.2 The 5 councils which experienced the most planning appeals for the exceptional release of housing land were identified. These were the SESplan authorities of Edinburgh, Fife and West Lothian and also North Lanarkshire and Stirling.
4.3 For each council, the published Housing Land Audit (HLA) and the current development plan was reviewed to establish the key data requirements. These were: the Housing Supply Target (HST); Housing Land Requirement (HLR); completion information; and the plan period. Where necessary, appeal decisions were also reviewed to obtain or confirm data. In order to aid comparison, the different 5 year effective housing land supply calculations were expressed as an annual equivalent build rate. This was then also expressed as a percentage of the annual average completion rate. Due to differences in the availability of data, the annual average completion rate covered different periods for each of the councils.
4.4 The three main comparisons were a) the average method, b) the residual method using HST and c) the residual method using HLR.
Calculating the Residual and Average Methods
4.5 SPP 2014 in paragraph 123 currently states that there should always be enough effective land for at least 5 years. Paragraph 125 currently states that where a shortfall in the 5 year effective housing land supply emerges, development plan policies for the supply of housing land will not be considered up to date. However, how a 5 year effective housing land supply should be quantified is not set out.
4.6 SPP 2014 also distinguishes between the HST and the HLR. The HST is the number of homes that is planned to be built and is derived from the Housing Needs and Demand Assessment (which has to be checked as robust and credible by the Scottish Government). The HLR is the amount of land the development plan should allocate and is an increase from the HST by a generosity figure, typically between 10%-20%.
4.7 The residual method uses the following formula:
[(Homes to be built - completions to date) / years left for plan to run] X 5
For the purposes of this research paper, the calculation for the homes to be built uses both the HST and the HLR (except for the SESplan authorities which is explained in that section).
For the purposes of this review the average method is the HST divided by the plan period to give an annual figure then multiplied by 5.
4.8 Although these are the two main approaches there numerous potential variations depending on assumptions made regarding time periods, completions, treatment of demolitions etc.
4.9 SESplan and the associated housing supplementary guidance were approved prior to SPP 2014 and use terminology, which although are the same words, now have different meanings. In SESplan, the total number of houses is called the Housing Land Requirement. However, that is not the same as the HLR used in SPP 2014 and is closer to the SPP 2014 definition of HST. SESplan also allocates the housing requirements into two separate periods 2009 - 2019 and 2019 - 2024. The two periods have different annual building rates for different councils.
4.10 For Edinburgh, SESplan allocates 22,300 homes for the period 2009 - 2019 (2230 per year) and 7210 for 2019 - 2024 (1442 per year). The number of completions 2009 - 2019 is reported by the council to be 18,984 (1898 per year as an average).
4.11 For the purposes of this paper, in order to calculate the forward 5 year effective land supply using the average method, both periods have been combined. Using the average method the forward 5 year effective land supply would be:
22,300 + 7,210 = 29,510
29,510 divided by 15 = 1,967
1,967 X 5 = 9,837
4.12 Again, for the purposes of this paper, it is assumed that the total SESplan allocation up to 2024 is equivalent to the HST. To calculate the forward 5 year effective land supply using the residual method it would be:
29,510 - 18,984 = 10,526
4.13 In this particular case, as there is 5 years of the plan left to run, that also equates to the forward 5 year effective land supply. The annual equivalent is 2105. The residual method results in a larger figure than the average because the previous shortfall (in completions compared to the planned requirement) are taken into account.
4.14 For West Lothian the SESplan allocation is 11,420 homes for 2009 - 2019 (1,142 per year) and 6,590 homes for 2019 - 2024 (1,318 per year). It should be noted that SESplan increases the rate of growth in the second period. From the HLA the average completion rate in West Lothian between 2011 and 2018 is 642 a year.
4.15 Using the average method for the first period only equates to:
11,420 divided by 10 = 1,142
1,142 X 5 = 5,710
However if the two periods are combined it equates to:
11,420 + 6,590 divided 15 = 1,200
1,200 x 5 = 6,000
4.16 To calculate the forward 5 year effective land supply using the residual method, again for the combined period, it is necessary to take into account completions. The council's 2018 HLA reported 5,189 completions between 2009 and 2018 (577 a year).
11,420 - 5,189 = 6,231
The total dwelling requirement from 2018 to 2024 would be:
6,231 + 6,590 = 12,821
There is 6 years of the plan period to run so this would be:
(12,821 divided by 6) X 5 = 10,684 (2,137 annual equivalent)
4.17 Again, the residual method results in a higher figure for the forward 5 year effective land supply because it takes into account the shortfall, which in West Lothian's case is significant. This is compounded by the fact that the 2019 - 2024 allocation increases the build rate still further.
4.18 It should be noted that if the residual method was employed to just the first period it would mean that the outstanding requirement would have to be completed in the final year.
11,420 - 5,189 = 6,231
The theoretical 5 year requirement would therefore be 31,155 (6,231 x 5). This is an example of a recognised weakness of the residual method. In situations where the actual completions lag behind the planned requirement, as the plan period left to run reduces, the forward 5 year effective supply calculation becomes larger and larger and arguably becomes unrealistic.
4.19 The development plan situation for Fife is complicated. The southern part of Fife is in SESplan but the northern part is in TAYplan. The SESplan allocation for the southern part of Fife is 17,140 homes between 2009 - 2019 (1,714 per year) and 7,430 between 2019 - 2024 (1,486 per year).
4.20 In the time available it was not possible to get the data to establish the completions in the SESplan area only. However, the total completions for the whole of Fife 2009 - 2019 was 9,666 - substantially less than was planned.
4.21 Using the average method for both periods the forward 5 year supply for Fife would be:
(17,140 + 7,430) divided by 15 = 1,638
1,638 X 5 = 8,190
4.22 Clydeplan's allocation for North Lanarkshire between 2012 and 2024 is a HST of 12,720 (1060 per year) and a HLR of 14,630 (1219 per year). In a recent appeal decision (ref PPA-320-2134) there was a dispute as to the number of completions that had occurred between 2012 and 2017 and how demolitions should be taken into account. The council argued that the number of completions was 4,673. However, the appellant argued that the official NB2 returns (building completion certificates) were only 3,170 and that the HST should be increased by 1,700 to account for demolitions. We note that the Clydeplan land monitor reports record the completions as 3,885 for this period. For the purpose of this research paper we have used the Clydeplan figure and ignore that matter of demolitions. The annual average completions between 2007 to 2017 in North Lanarkshire is 824.
4.23 Using the average method the forward 5 year effective housing land supply would be:
12,720 divided by 12 = 1,060
1,060 X 5 = 5,300
4.24 For the residual method using the HST the forward 5 year effective land supply would be:
12,720 - 3,885 = 8,835
As there are 7 years between 2017 - 2024
(8,835 divided by 7) X 5 = 6311 (1,262 annual equivalent)
4.25 For the residual method using the HLR the forward 5 year effective land supply would be:
14,630 - 3,885 = 10,745
(10,745 divided by 7) X 5 = 7,675 (1,535 annual equivalent)
4.26 The Stirling LDP 2018 states that the HST between 2010 - 2027 is 7,072 (416 a year). The LDP calculates the HLR by taking into account completions between 2010 - 2015. This is stated as a HLR 2015 - 2027 of 6,417 (534 a year). The completions between 2010 and 2019 are 2,361 equating to an annual average of 262 a year.
4.27 Using the average method the forward 5 year effective land supply would be:
7,072 divided 17 = 416
416 X 5 = 2,080
4.28 For the residual method and using the HST the forward 5 year effective land supply would be:
7,072 - 2361 = 4,711
As there are 8 years left to run the calculation would be:
(4,711 divided by 8) X 5 = 2,944 (589 a year equivalent)
4.29 If the HLR is to be used then the completions between 2015 and 2019 need to be considered. From the Council's HLA's 863 completions took place within this period. The calculation would be:
6,417 - 863 = 5,554
(5,554 divided by 8) X 5 = 3,471 (694 a year equivalent)
4.30 The above figures from each council area are summarised in the following table for comparison purposes. However, any comparisons need to be treated with caution. Not all the figures are directly comparable because of different sources of information, different periods and some data was hypothetical. Nonetheless, it is considered that comparing the actual annual average completion rate with the implied annual average completion rate for the various different approaches to calculating a forward 5 year effective land supply allows some conclusions to be drawn.
|Edinburgh||West Lothian||Fife||North Lanarkshire||Stirling|
|Established supply 2019||30,164||24,846||37,549||22,827||7,483|
|Plan period||09 - 19 & 19 - 24||09 - 19 & 19 - 24||09 - 19 & 19 - 24||12 - 24||10 - 27|
|Planned annual average||1967||1200||1638||1060||416|
|Actual annual average||1898||642||967||824||262|
|5 yr supply (Average method)||9837||6000||8190||5300||2080|
|% Actual annual average||103%||187%||169%||128%||159%|
|5 yr supply Residual method (HST)||10526||10684||N/A||6311||2944|
|% Actual annual average||110%||333%||N/A||153%||225%|
|5 yr supply Residual method (HLR)||N/A||N/A||N/A||7675||3471|
|% Actual annual average||N/A||N/A||N/A||186%||264%|
4.31 All the councils had a high planned house building rate compared to the actual average annual completions. Some would argue that the failure to build what was planned actually demonstrates that councils have allocated many inappropriate and unmarketable sites. However, as demonstrated in the responses to the consultation, many would argue that variations in completions are due to a whole range of factors including overall economic circumstances.
4.32 The average method, using the HST, resulted in the least amount of units necessary to demonstrate a forward 5 year effective land supply. The residual method also using the HST resulted in a higher figure because previous shortfalls were taken into account. The highest forward 5 year effective supply comes from the residual method using the HLR. This is because the HLR is 10% - 20% higher than the HST and therefore any shortfalls will be compounded.
4.33 The argument against the average method is that it does not take into account previous shortfalls and remains the same regardless of actual completions. However, although the residual method does take into account previous shortfalls, it has a practical disadvantage, which is illustrated in 4 of the councils but particularly West Lothian. As previous shortfalls are taken into account, any continuing shortfalls against an increasing requirement means that the forward 5 year effective supply becomes larger and larger until it is unrealistic compared to likely completions. So for West Lothian a forward 5 year supply equates to 10,684 (2137 a year) but the actual annual average completion rate since 2011 is only 642. This tendency is particularly likely towards the end of the plan period.
4.34 It should be noted that in practice, any individual exceptional grant of planning permission is unlikely to address a shortfall quickly (see section 2). A site would require at least one or 2 years after planning permission had been granted before construction could commence. Many sites would need longer. Annual construction rates on any individual sites tend to be limited to a maximum of 50 - 100 units. A typical average would be between 25 and 50. In West Lothian's case, many sites would have to be exceptionally released to make up the shortfall between 2137 and 642 a year. This is does not appear to be practically or economically realistic.
4.35 The rationale behind a forward 5 year effective housing land supply is that there is always sufficient land in the "pipeline". The scale of forward supply that is considered to be acceptable is a matter of policy judgement.
4.36 In all the council areas there is a healthy established land supply. The challenge to address is how this identified land can get to market, even in relative depressed economic conditions.