Posted by: Jules Birch06/03/2012
Can cutting red tape for housebuilders deliver the new homes and growth the government needs? Here’s why I’m sceptical.
Clive Betts summed up the problem neatly when Grant Shapps appeared before the Communities and Local Government committee at the end of January. With household formation running at 250,000 a year, social sector output around 40,000 to 50,000 a year and the private sector never building more than 150,000 in recent times, the committee chair asked who would build the rest?
The answer from Shapps was that the housing strategy listed 100 different ways to fill the gap. Reform of planning, 100,000 right to buy sales to generate the money for 100,000 homes, 100,000 homes on public sector land and the mortgage indemnity scheme were just four of them. When pressed he added ‘not piling costs on developers’ to the list. ‘That was completely counter-productive and led to the lowest house building since the 1920s. If you keep saying to developers, “Oh, and by the way, whilst you are building these homes, we also expect you to deliver X, Y, Z in addition,” then unsurprisingly you get to the point where it is just unsustainable for them to build the homes. I have been trying to loosen the load on developers in order for them to get the homes built, and there is a commitment in the last Budget to make sure that we are not loading on new bureaucracy and red tape. Indeed, we are cutting it by 2015.’
Nobody could accuse him of failing to back his words with actions. Even before the housing strategy was published, the government was introducing changes likely to boost the value of housebuilders’ land holdings by hundreds of millions of pounds. Design and sustainability standards, a weaker definition of zero carbon and reform of section 106 were all targetted from 2010. Labour’s HomeBuy Direct gave way to the coalition’s FirstBuy and record low interest rates continued to put a floor under house prices.
The housing strategy extended the subsidy still further. There was not just the £400m Get Britain Building Fund and NewBuy, as mentioned by Shapps, and confirmation of the other deregulation, but a new consultation on proposals to allow developers to require local authorities to reconsider section 106 agreements agreed in more prosperous market conditions prior to April 2010. To give some idea of the scale of that last subsidy, research for the DCLG estimates that section 106 deals worth £9 billion were agreed in 2006/07 and 2007/08.
Put all that together and you have what amounts to a corporate welfare package worth several billion pounds. That’s something that would require intense scrutiny even if housebuilders were delivering on their side of the bargain by building more homes. It isn’t getting any and they aren’t delivering. But far from changing course the government is preparing to hand over even more goodies through the red tape challenge. In the short term, the effect of all this will be to boost margins for the major firms. In the longer term, although it may make some sites more viable to develop, it will also increase the value of that land – and increase land prices in general.
As I argued last week, all of the major housebuilders are concentrating on increasing their margins through tight control of costs and careful management of their land and what and where they build. The strategy is working with increased profits and, in the case of Persimmon, a nine-year programme to return £1.9 billion to shareholders. The one thing they are not doing is building a lot more homes (a few more but nowhere near enough to meet the aspirations of the government).
Given how close they came to disaster in the wake of the credit crunch, that is a perfectly understandable strategy. And it’s clear from recent statements that they are not planning to change it any time soon. Persimmon, for example, currently has a land bank of 63,300 plots. ‘Whilst this currently represents over six and a half years forward land supply, our longer term objective remains to return to a five year supply,’ said chief executive Mike Farley in its results last week. ‘We expect to achieve this through both the expansion of our output as the market allows and the selective replacement of the plots we legally complete each year.’ The clear implication is that it will only expand its output from 9,360 homes in 2011 to a maximum of 12-13,000.
Taylor Wimpey made the same point even more explicitly in a presentation at the Bank of America Merrill Lynch building conference in October. The company said that it ‘won’t return to the volume-driven mentality of the last cycle’ although this ‘does not mean that we will not grow volumes from current level’. Growth would come naturally from new sites and an uplift in sales rates as the market recovers but the company sees ‘c 14,000 plots as a soft cap on volume, even in strong markets’. To put those figures in perspective, Taylor Wimpey was building 21-22,000 homes a year in 2007 and 2009 while Persimmon was building 16-17,000.
Of all the schemes and subsidies introduced by the government, NewBuy looks like the most promising scheme at first glance. Available on new-build homes worth up to £500,000, it will allow lenders to offer 95 per cent mortgages to up to 100,000 buyers with builders (3.5 per cent) and the taxpayer (5.5 per cent) underwriting some of the risks. In theory, that should help not just first-time buyers but also ‘second steppers’, people trapped in their first home with insufficient equity to move, and get the whole market moving. The obvious objection is that it could just give builders the chance to raise their prices but the scheme seems to be facing more fundamental problems ahead of its launch next Monday. The Financial Times reported yesterday that the scheme is being rushed through ahead of the Budget despite concerns from lenders, regulatory hurdles and IT problems. It also revealed a row over the price that banks will charge, with housebuilders arguing that the premium being charged by lenders could make the whole scheme unattractive. There are also worries from smaller builders that the rush to get the scheme in place has put them at a disadvantage to the major firms.
If NewBuy is running into problems like that, there have to be worries about the government’s approach in general – and about its reliance on major housebuilders in particular. There are some exceptions to the rule (for example, Galliford Try, the 11th biggest housebuilder by turnover, increased its output by 59 per cent last year) but most of the major firms are concentrating on a strategy of building their margins and rebuilding their balance sheets rather than building new homes. That is perfectly logical and perfectly understandable but it does not offer much encouragement for the government’s housing strategy.
In a report that did not get enough attention when it was published between Christmas and New Year, the IPPR think-tank concluded that reform of the housebuilding industry is urgently required if we are to avoid the lost decade that followed the two previous downturns in 1974 and 1990. ‘We cannot afford a repeat. And yet, if we duck reform at this critical juncture, that is exactly where we are heading, only, this time, worse,’ it said. ‘But the government’s new Housing Strategy does not demand the reform that is needed. Instead, it offers the major housebuilders public land, money and guarantees without articulating a serious quid pro quo. The result, as things stand, is likely, as in the past, to be subsidised stagnation. If we want a can-do supply-side response, government must demand more bang for the taxpayer’s buck.’
The report called for measures to stop developers ‘playing the land market and the planning system’ rather than building homes, with strict conditions applied to public sector land release including rapid build-out and lower profit margins. A fifth of the land should be earmarked for self-build and all of it should go to joint venture partnerships that would share the uplift in value between the government, communities and developers. Financially unviable builders should be allowed to go bust and their land banks redistributed. Community land auctions and modern garden cities should be on the agenda. And land should be de-risked by splitting the development process into land trading and housebuilding – in much the same way as the banks are being made to split their investment and retail operations.
The government has flirted with some of those options, such as community land auctions, and the Treasury is said to be studying a report by Policy Exchange calling for new garden cities. However, its strategy looks dangerously over-reliant on the handful of major firms that dominate the market. Deregulation and the housing strategy are giving the big housebuilders practically everything they want without being committed to anything in return: why are there no building targets to match the lending targets imposed on (and largely ignored by) the big banks? If billions of pounds worth of subsidy is available, why not use it to encourage new players to enter the market? If red tape needs to be cut, take a look at the barriers to entry? If cheap public land is available, use it to attract new players rather than hand it over to the big firms, who will simply use it instead of their existing land?
The government is throwing billions of pounds worth of corporate subsidy at major firms that will not deliver the numbers needed for its growth strategy to work. If it has to subsidise anyone, it should be looking at smaller builders, housing associations and new entrants to the market.
From Inside edge
Housing commentator Jules Birch puts the latest news in context