Posted by: Colin Wiles18/09/2012
Why are we not building the number of homes we need?
Apart from a lack of public subsidy, most commentators agree that there are three principal culprits. Firstly, the planning system, which the government appears to believe is the ringleader in the dock. They are only half right. Planning departments spend much of their time on development control, which is important in preserving and enhancing our built environment. There is a debate to be had about the level of red tape, but the government’s decision to relax permitted development rights and allow unfettered construction of extensions and conservatories will do little to stimulate growth and will probably lead to community conflict – the very antithesis of localism. It is bonkers. The strategic side of planning is certainly a key barrier to growth by failing to release sufficient land for our housing needs. But here the government appears to have scored an own goal by removing national and regional house-building targets and putting the onus on local people to vote for development, using bribes like the new homes bonus, neighbourhood planning and the community infrastructure levy to persuade people to accept growth. The early evidence is that many local authorities are using the bonus for anything but new homes and are reducing their housing targets from the previous regional figures. Given that property owners tend to dominate local planning debates it seems unlikely that a bottom-up approach will provide the new homes we need, and there are no signs that the government is thinking about a new genernation of garden cities, as flagged in the NPPF.
The second culprit is the lack of mortgage finance, but this is both a bad and a good thing. Bad because almost an entire generation is being denied the chance to buy a home of their own but good because it is helping to suppress demand and thus keep house prices stable. But as soon as banks rebuild their balance sheets and turn on the mortgage tap house prices will rise and we will be in the foothills of yet another housing bubble. Why? Because, as we all know, house-building is inelastic to demand. Increasing demand without a corresponding increase in supply inevitably leads to higher prices.
Which brings me to the principal culprit of this blog, the house-builders themselves. We all know by now that our house-building industry is unfit for purpose. Their principal objectives are to speculate in land and maximise their margins, rather than respond to needs or demand. But in some respects house-builders are an easy target. I was struck by this recent blog from planning academic Sarah Payne who presents a great analysis of the world of risk that house-builders inhabit, where any slight change in land prices, house prices or interest rates can destroy their business plan at a stroke and where planning can take years to achieve, adding further uncertainty to their operations. So, like Winnie the Pooh with his honey, they hoard their land, minimise their risks and, in order not to unsettle fragile local housing markets they release new homes a few at a time. It keeps their shareholders happy, but land availability is at the root of this problem. If house-builders were certain that they could sell their product at the cost of production plus a reasonable margin they would be no different to car or widget makers, and would produce homes to meet demand, and even create new demand by diversifying their product. It is principally the scarcity of land that causes them to act so cautiously.
So house-builders act rationally in an irrational world. But they do it together and the industry is increasingly dominated by a few big players. Smaller builders are disappearing fast and the industry is failing to respond to demand, and failing to create new demand for their mostly unimaginative products (cedar cladding anyone?). As Jules Birch pointed out recently, they are increasingly feather-bedded with huge government subsidies. They also have the power to silence or suppress any criticism, as this incident shows. To me, the house-building industry looks and sounds increasingly like a cartel.
If we think about historic cartels like the supermarkets, the airline industry or telecoms, they were tackled by deregulation and competition. EasyJet and Ryanair destroyed the complacency and over-pricing of British Airways and other national carriers. Aldi, Netto and Lidl shook up the supermarket industry, the deregulation of BT allowed other telecom providers into the market. Not only did this increase choice and push down prices, but these new entrants also created demand – by flying to new destinations, for example. It’s debatable whether stag weekends in Prague are a good or bad thing in the wider scheme of things, but the budget airlines undoubtedly revolutionised a moribund industry.
Why has the same process not happened in house-building? Where are the new entrants, the competition, the innovation, the new products, the creation of new demand? An entire generation wants to buy but the house-building industry is simply not interested. Can you imagine any other sector where this would even be possible?
So what is the answer? More competition certainly. Nationalisation or enforced fragmentation of the sector? Deregulation? The creation of a new not-for-profit housebuilder who could take on public land and build to meet needs? More land obviously. But as Sarah Payne points out, if I had all the answers I would be on my way to London to bang on the door of the CLG! I don’t, but something clearly needs to be done. The last time the OFT investigated the house-building industry was in 2007. Perhaps they need to have another look.
From Inside out
An independent look at the housing sector and beyond from Colin Wiles