Housebuilding: Averting an unfolding disaster

Can you imagine?

Close your eyes for just a second and imagine that you live in a Country that takes pride in how many homes it builds for its populace. Until the 1960s this was a regular feature of UK public life; it now sounds like the demented ramblings of an errant idealist.

The sad reality, as we’ve regularly expounded through our previous reports, is that the UK has not built enough new homes for several decades – and the situation is getting worse. Whilst we do not share the doomsday predictions of Capital Economics, who suggested last Autumn that Housing starts would fall by nearly 40% in 2023 (from a predicted 178,000 homes last year to just 110,000 this year), a number of headwinds – including planning challenges (reports passim and with further comment below), the increasing cost of mortgages and inflation-busting construction cost increases – means that we believe the UK will not start more than 150,000 homes this year. Or, to put it another way, less than half the number that the UK should start every year.

This view has been reinforced by the views of housebuilders in recent weeks. A number have publicly decried the tough conditions they face just to get new developments going, with Northern housebuilder SkyHouse’s CEO David Cross summing it up thus:

Its extremely expensive, extremely complex and extremely slow with no guarantee of success. Creating pipeline for SMEs is so hard. Funding risk is also very difficult and very cash intensive.

This should ring alarm bells for anyone interested in the UK being a mature, properly functioning economy and society. The IMF emphasises here why it matters, with the following paragraph considered essential reading:

Housing also plays other key roles; for instance, mortgage markets are important in the transmission of monetary policy. Adequate housing can also facilitate labour mobility within an economy and help economies adjust to adverse shocks. In short, a well-functioning housing sector is critical to the overall health of the economy. And as economies develop, we expect a corresponding deepening and growth of housing markets.

What we appear to have in the UK is the very opposite: a retrenchment of markets, completely at odds with its underlying importance. Even the Government, hardly regular bedfellows with the truth, have admitted to the scale of the problem. In his foreword to Bright Blue/Shelter’s latest paper entitled ‘Home Advantage: a new centre-right vision for housing’, Michael Gove reflects that:

That the current housing model – from supply to standards and the mortgage market – is broken, we can all agree.

So what should we do to turn this round? Whilst the aforementioned report has (typically) longer-term suggestions from across the political spectrum, this is an immediate problem that frankly needs some immediate answers. We’ve put forward our prescription for immediate use…

I’ve had my youth, so stuff yours

STEP 1: Ensuring a stable land supply through the planning system

With a yawning inevitability we’ve hurtled straight towards one of our favourite subjects – the planning system. A stable, predictable land supply – underpinned by clearly understood, up-to-date local plans with multi-year allocations – should be the aim of the system.

We’re some way off this in the UK and continual Governmental policy and political tinkering – as explained in our previous reports here and here – is making this situation worse. By the start of April, a total of 55 local authorities had abandoned their Local Plans, including Mr Gove’s own constituency of Surrey Heath as well as high-demand areas like Buckinghamshire, East Hampshire and North Somerset. Executive chairman of the Home Builders Federation Stewart Baseley hit the nail squarely on the head with his assertion that:

The collapse in planning permissions is a direct result of the Government’s increasingly anti- development policies and negative rhetoric which has effectively created a nimby’s charter. Ministers have capitulated to anti-development backbenchers and now 55 local authorities have abandoned their housing plans, with others following every week. The social and economic consequences could be felt for decades.

Make no mistake, this is a political choice – and the solutions to this are also political. The first solution is for the Government to directly intervene or further support local authorities that are not making progress with their Local Plan development, as Sajid Javid – then Secretary of State for CLG – threatened in 2017. This power is already in place and does not require any tinkering of the system to enact – hence it is a complete failure of responsible Government to do so. (You can read how the Government instead chooses to spend its time on planning matters via this excellent blog on consultation by Nicola Gooch of Irwin Mitchell here).

The other solution of course is, quite frankly, for local leaders to show some mettle and to progress with local plans regardless of the big top at Westminster. Leaders and Councils who deserve great credit for pushing forward with their plans in recent weeks include North Norfolk, West Berkshire and the mighty Sheffield, recognising that all communities benefit from having certainty put into future development. The 55 that have pulled their plans, plus those increasing number that do not have up-to-date plans (including St Albans, who’ve not had an up to date plan since 1994!) really ought to take note…

Sky-House Co at Oughtibridge: a leading SME housebuilder

STEP 2: Get supporting SME housebuilders

Next, we move onto the housebuilders themselves. The UK’s largest housebuilders, including the likes of Taylor Wimpey and Barratt, are both well-capitalised and have an immediate land pipeline to move forward with – which means they are capable of absorbing wider market shocks.

SME housebuilders do not have this luxury however and are finding it increasingly difficult to operate. A comprehensive survey of Small and Medium Enterprise (SME) housebuilders undertaken this year, conducted by Close Brothers Property Finance, the Home Builders Federation (HBF) and Travis Perkins, found that:

– Securing and processing planning permission to the point where construction work can start is the major barrier to growth according to 93% of SME developers;

– The availability of land is a major issue for 52% of SME builders;

– 76% believe Local Authority staffing shortages are the main cause of delays in the process;

– Rising material (99%) and energy (88%) costs are a major concern for companies;

– Over two-thirds are impacted by the ‘nutrients’ issue that is restricting development in more than a quarter of England’s local authority areas; and

– 92% of SMEs are unhappy with the Government’s current approach on housing (our emphasis)

Fenwood Estates at Mexborough: another quality SME housebuilder

Their subsequent report makes some recommendations as to how SME housebuilders should be better supported (see here) – ranging from better resourcing local authorities through to supply side reforms to encourage and keep young talent within the industry. Our focus however is a financial one….

– HBF’s report recognises that development finance should be made ‘easier to access on terms that allow builders to recycle their equity more quickly‘. We completely agree – which means both reforming Homes England’s existing fund and role and in working with the country’s biggest lenders to adjust their demands on current and potential lenders. We are still not seeing anywhere near enough progress being made by the ‘traditional’ banking sector in softening their expectations; could this be an ESG-motivated move in the future?

– Secondly, let’s have a look at some of those supply-side issues. A number of housebuilders are struggling to make their financial models work to meet new building regulations – yet if you speak to a number, they are often in favour of the policy thrust. A bridging solution would be the creation of a ‘National adaptation fund’, administered through (we suggest) Homes England, to support them to make the change – in turn supporting key policy commitments on decarbonisation and biodiversity.

– Whilst HBF’s report offers a number of sensible suggestions on labour market/skill reform to offset future increases in Construction costs, it avoids a fairly hefty part of recent cost increases – you guessed it, Brexit. With large swathes of the supply chain dependent on imports, how exactly are we speeding up the movement of goods through major UK ports, including through the PM’s fabled Freeports exercise? Answers on a postcard…..

– Our final suggestion is one for regional leaders to ponder ahead of the return of UKREIIF on 16-18 May in Leeds. UK devolution is appearing to become fiscally ‘looser’, with fewer strings tied to government funding to (predominantly) Mayoral led regional bodies. With funding becoming gradually more elective, this puts the focus on Mayors and their advisors to come up with funding packages that address local circumstances – and we’d expect at least some nod to ramping up SME housebuilding, whether through land assembly, remediation or viability funds.

Sir Oliver Letwin, undoubtedly refuting landbanking

STEP 3: Do not introduce any form of Land Value Taxation

Who fancies killing housebuilding stone dead in the UK? Then introduce land value taxation, the call to arms of many an economist….

In the current electoral scramble to work out how to fund public services in the medium-term without ramping up personal taxation during the ‘cost of living crisis’, a number of commentators have called for a mechanism to be introduced to monetise a percentage of the gain made on land once planning consent has been received. Some believe this will also prevent housebuilders ‘landbanking’ – the suggestion that housebuilders ‘are hoarding land after gaining planning consent in order to benefit from a rising market’.

We disagree with both suggestions. The HBF, following on from the findings of the Letwin Review in 2019, found once again that landbanking does not exist in the UK and that sites are built without delay – read more here.

More worryingly, the imposition of any form of universal land value tax further erodes returns and would render a number of smaller schemes completely unviable – directly affecting the outlook of (predominantly) SME housebuilders, particularly in lower value areas. Savills’ report on the myth of landbanking rightly stresses that:

A levy to reduce land banking is not the answer. Instead, it should restore full focus on ensuring there is a sufficient pipeline of development land, especially in areas where demand is the highest.

STEP 4: The next generation of buyers: creating an economy that works

All of the suggestions above relate to supply – yet the most difficult aspect of this conundrum relates to increasing the demand (and to sustainably pay) for new homes. How can we create a more competitive and productive economy to support future housebuilding? What is our industrial strategy?

Martin Wolf’s latest opus in the FT sums up the predicament we face:

According to the IMF’s latest data, real gross domestic product per head in the UK rose by a mere 6 per cent between 2008 and 2022. This was the second worst performance in the G7, above Italy’s. To put this dire outcome in context, UK real GDP per head rose by an impressive 33 per cent in the 14 years to 2008. Such weak growth ensured austerity. But the decision to make almost all the post-financial crisis fiscal adjustment by cutting spending made this even worse.

Blimey. So where to begin in addressing this long-term malaise? We believe the UK needs to strengthen its economic underpinnings; in Martin Wolf’s words, this means the UK (raising) its dreadfully low national rates of savings and investment, build far more houses, and reform its pension system, in order to generate more risk-taking capital, create dynamic new businesses, discover a route towards better opportunities for trade in its European neighbourhood, offer high quality jobs to its people and fund the education and training they desire.

What are those dynamic young businesses though and which sectors give us the best chance of overall success? Tej Parikh’s recent piece in the FT rightly stated that ‘British industrial policy has come to resemble a confused mix of pledges to rebuild UK manufacturing and take a lead role in the full array of industries of the future’ which leaves it without a recognised identity.

Our view is that the UK should double down on where it has a geographic or IP advantage on the world, with Government providing a long-term policy and incentive structure to directly support them rather than the ridiculous obsession with competitions it presently has. These areas include:

– Advanced manufacturing, including the lightweighting of materials required to support the net-zero transition in key industries;

– Energy generation, transmission and storage, including off-shore wind and the nuclear sector (both fission and fusion); and

– As Parikh points out, the UK’s professional and financial services and research-intensive universities are world class; we need to continue backing them.

This recurring question was also the subject of a recent UK Onward event on industrial strategy; you can read Professor Richard Jones’ thoughts on this here.

Example of lightweighting opportunities, courtesy of the University of Sheffield AMRC

One final thought: who’s fighting the industry’s corner?

All of this of course is compounded by the industry’s image problem – one which is typified by a lack of people speaking in its defence and a large number of people attacking it (often unfairly) across a range of fronts.

We think this can only be solved by a large body of people being consistent – and vocal – as to why this matters to all of our futures. Bellona Advisors will continue to do its bit; get in touch if you want to talk through any of this report further.