New Homes Bonus and income versus substitution effects

Planning magazine reports (might require registration) that councils from the North of England have been told they stand to lose out from the government's New Homes Bonus, a scheme that would pay councils for new homes built in their area.

But Home Builder’s Federation planning director Andrew Whitaker told delegates at the event that the money will come from top-slicing general Whitehall funding for town halls, meaning that councils would have to allow housebuilding just to retain existing levels of central government money. "Most northern authorities will have to double their output to get back to where they were," he said. "But many southern ones will be able to reduce their output by 80 per cent and still maintain the grant they got before".

This generally seems consistent with the conclusions drawn by Brian Green of the Brickonomics blog, who wrote:

To break even under the New Homes Bonus regime the North and indeed London would have to work much harder at increasing their stock and would greatly over supply on the assumed need/demand suggested by the household projection figures. The contrary is true of the Southern regions.

I can't vouch for the accuracy of either of these assessments. But it does seem as though Northern councils' reliance on central government funding (which under Labour had been targeted towards more deprived areas) and their fairly weak demand for new housing may conspire to make the New Homes Bonus quite costly for them, while Southern councils may find themselves doing relatively well out of it.

For me the really interesting question is whether, as an economist might put it, the income effect of the bonus outweighs the substitution effect. If the substitution effect dominates, then we can expect the higher rate of bonus in more expensive areas to spur Southern councils to permit more housebuilding, but if the income effect dominates they might be content to maintain their current financial position by reducing the number of new homes, which could well be popular with local residents. Then again, so would the council tax cuts that could be funded by more NHB income. We'll have to wait and see which way things go - I'm not sure anyone really knows, least of all the government.