Can housing supply absorb another development cost?

The building safety levy comes into effect in October, but does it run counter to the government’s commitment to boost housing supply and its newly announced equity loan scheme?

The Grenfell fire tragedy in 2017 led to a fundamental reassessment of building safety regulation in England. It also left the government facing the question of who should meet the enormous cost of making thousands of existing residential buildings safe.

The Building Safety Levy was first announced in 2021 as a means of making developers contribute to the cost of remediating historic building safety defects. Although initially intended to apply to certain high-rise residential developments, the levy was subsequently widened, under the Building Safety Act 2022 and is expected to raise around £3.4bn over at least 10 years.

Concerns were raised at the time of the consultation that the levy would result in fewer affordable homes being delivered through s106 agreements, as it would push more development sites closer to the threshold, especially on brownfield sites, where construction costs are higher, or in areas with lower house prices.

The principle of protecting leaseholders from remediation costs attracted broad support. More contentious was the decision to raise the money through a levy on new development, including from developers with no connection to the buildings requiring remediation.

The government sought to lessen the impact on affordable housing by excluding affordable housing from the levy. Developments of fewer than 10 units are also exempt from the levy, as a means of protecting the viability of smaller sites.

But three years on from the initial response to the consultation, the market has changed significantly. Development costs have risen further still; viability has become a more acute concern and sector experts are warning that the levy risks tipping some schemes from marginal to unviable.

UK construction activity declined for the twentieth consecutive month in August 2026, according to the latest S&P Global UK Construction Purchasing Managers’ Index (PMI).

The housing pipeline has also weakened. According to ministry of housing, communities and local government (MHCLG) figures, published at the end of September, the number of homes granted planning permission fell by 12% on the previous year, and was around 30% below 2022 levels.

A weaker residential market is the main factor behind this sharp decline in activity as housebuilders struggle with a lack of demand, increased construction costs and wider economic uncertainty.

MHCLG’s announcement at the weekend of a new scheme to help first buyers is designed to combat this by ‘tackling the deposit barriers for first-time buyers, with details to follow in the Budget. It will, says the government, provide some stimulus to the market and boost housing supply.

But how comfortably do the two policies sit alongside each other?

The Home Builders Federation has called for the tax to be suspended, noting that it is ‘unfair that one sector is expected to fund more than £9.4bn of remediation costs without extracting any commitments from other sectors with responsibility for remediation’.

The planner’s perspective:

Stuart Tym, planning lawyer at Merali Beedle:

“Developers will need to include the levy in their financial modelling and viability assessments,” he says. “Less funding is likely to be available for site-specific mitigation when it comes to planning obligations. The BSL is a front-loaded statutory charge, a bit like the community infrastructure levy (CIL) or the biodiversity net gain (BNG). There is no discretion available to discount it off via a negotiated section 106 agreement.”

“Planning obligations often have a ‘tiered effect’ in my experience. Highway obligations, for instance, are crucial, as without them the site is not safe to permit. This then leaves the other contributions – improvements to local schools, the NHS or even public art contributions. As you run through a hierarchy of obligations, they get less and less clear-cut in terms of their justification – public art, for instance – whilst nice to have is not essential.”

“It is another strain on an otherwise struggling system. It will not be determinative, but it will not help. The bigger issue is the lack of buyers – my developer contacts are reporting a huge drop in their completion rates in the last 9-12 months.”

The property consultant’s perspective:

Mark Byles, director, development consultancy, Newsteer:

"The proposed Building Safety Levy is an unwelcome additional tax burden to all new residential developments at a time of significant development viability challenges. This additional tax will be levied on the development of all new-build market housing in the UK and is proposed to fund remediation works to buildings that have, or have had, unsafe cladding.”

He adds that the levy will ‘disproportionately affect SME developers’.

A survey carried out in August by the Home Builders Federation (HBF) and Quantum Development Finance in August 2026 found that 91% said the levy would make developments financially unviable and 36% said they had already delayed, redesigned or cancelled schemes because of it.

Byles notes that by introducing a further “blanket tax on developers, some of which will never have built or contributed towards a building requiring remediation, the government is adding to the deliverability challenges its own emergency measures are seeking to alleviate.”

“It also runs counter to the government’s economic strategy that relies upon construction and development activity – particularly for affordable housing,” says Byles. “Whilst affordable housing is itself exempt from the charge, the marginal additional decrease in viability for market forms of housing decreases the overall deliverability of cross-subsidising development and thus availability of s106 affordable homes. For SME’s looking to repurpose and revitalise town-centres through the introduction of residential use to support wider economic renewal, a new marginal tax will further decrease viability and slow growth in every postcode.”

The conveyancing perspective

On 26 September, the MHCLG announced plans for a new equity loan scheme, Your First Home, which will be confirmed in the Autumn Budget. The scheme is intended to help first-time buyers purchase new build homes as well as acting as a ‘stimulus to support the market and boost housing supply’.

Conveyancers, however, remain sceptical of a ‘Help to Buy part 2’.

“It’s a very bad idea trying to bring in another HTB scheme. The issue is not the amount of homes, but the quality of those homes. They are being built so badly, not to mention that homeowners are being burdened with estate service charges,” says Zahrah Aullybocus, a consultant at Nexa Law.

Stephen Larcombe of South West Locum Services adds that while one scheme claims to boost access to homeownership, the other raises the cost of building the very homes first-time buyers are meant to purchase. “This is the pattern now. Government’s policies do not merely pull in different directions. They actively collide,” he says.

“Too many of today’s policies appear to be drafted in isolation,” adds Larcombe. “Technically weak and operationally unworkable.”

Charles Davidson, a senior associate at Edwin Coe notes that: “There is something beautifully mad about making new homes more expensive to build and then making it easier for buyers to pay more for them. If supply does not respond quickly, the danger is obvious: the levy pushes cost up, the equity loan pushes purchasing power up, and somewhere in the middle the price quietly follows.”

Further detail on Your First Home is expected at the end of October.

The question for the market, however, is whether a policy designed to stimulate demand for new homes can translate into additional supply at a time when developers are already under increasing cost and viability pressure.