Only local government can break the developer’s strangle hold on the housing market

Copied from Sunday Telegraph Sunday 16 April 2017

Economic Agenda
The key to opening up the housing market

By Liam Halligan

For decades across much of the UK far too few homes have been built. The average house now costs almost eight times annual earnings – an all-time record. In London and the South East, of course, this ratio is even higher.

Much of “generation rent” is simply unable to buy a home. For millions of youngsters, even those with professional qualifications and good jobs, property ownership is an ever more distant dream. Ten years ago, 64pc of 25 to 34-year-olds, the crucial family-forming age group, owned their own home. In 2015, it was 39pc.

Three fifths of an entire generation of young adults is locked out of the property market. Over half of first-time buyers get assistance from “the bank of Mum and Dad”, rising to two thirds in the South East. The housing market, once a source of social mobility, has become a source of growing resentment.
Part of the solution, as we so often hear from our politicians, is to “get Britain building again”. Yet the March PMI construction index, which monitors the UK’s leading building firms, last week pointed to a housebuilding slowdown. During the final three months of last year, 2pc fewer new homes were completed in England than the same period in 2015.

Over 2016 as a whole, while the construction of 5pc more homes was started than the year before, the number of new-builds actually completed was 1pc lower. Just 168,000 new-builds came to market across the UK as a whole in 2016 – way below the 250,000 needed annually to meet demand. The UK has built, on average, 100,000 too few homes a year since the 2008 financial crisis. For decades before that, housebuilding was also too low. The last time we did build a quarter of a million homes was back in 1980 – and 113,000 of those were council houses. With council-housebuilding now barely a few thousand each year, the UK’s housing needs are largely reliant on the private sector.

Although few homes are built, the UK’s three largest developers still report surging profits. Barratt saw a 40pc rise to £295m during the second half of 2016 – despite completing fewer homes. Taylor Wimpey made £733m last year, up 22pc. Persimmon’s full-year profits were £775m, 23pc higher.

These three developers now build a quarter of all new homes, with the eight largest accounting for over half. Small developers, suppliers of two thirds of new homes in the 1980s now build less than a quarter. It’s hard not to conclude the big housebuilders, who control so much of the land granted planning permission, are deliberately building slowly, to keep prices and profits up. Waiting to build creates a shortage and means their extensive land holdings also rise in value.

The “big developers” have “a stranglehold on supply”, said Communities Secretary Sajid Javid, at last October’s Conservative Party conference. They are “sitting on land banks”, while “delaying build-out”. The House of Lords economic affairs committee has also weighed in, saying the UK housebuilding industry has “all the characteristics of an oligopoly”. These two statements alone, in my view, mean our competition authorities should take a closer look. The UK’s housebuilding giants deny any go-slow, of course.

When the long-anticipated housing White Paper was published in February, some of us were disappointed at the lack of bold measures. While admitting “the UK’s housing market is broken”, there was no mention of a previous pledge to build a million new houses by the end of this Parliament – so, by 2020. That’s probably because, in the words of Paul Cheshire, a professor at the London School of Economics and probably the UK’s top housing academic, there is “more chance of me living on the moon”.

‘It’s hard not to conclude the big builders are deliberately building slowly, to keep prices and profits up’

Since the White Paper was published, though, having followed various behind-the-scenes struggles across Westminster and Whitehall, I’m pleased to report a little-noticed development that may soon help unlock UK housebuilding.

This column has previously called for the creation of powerful Housing Development Corporations (HDCs) – state-initiated bodies that acquire land, grant themselves planning permission, selling on the land in parcels to private developers. The HDCs then use the “planning gain” from the sharp rise in land value to fund new schools, hospitals, roads and so on. If new housing means local public services are significantly enhanced, there would be far fewer objections from existing residents. Variations of this model have been successfully used in countries from Germany and Holland to Singapore and South Korea.
Under existing “New Towns” legislation, national government can set up HDCs – which, crucially, can buy land at “existing use” value. Arable land, for instance, is purchased as arable land, bringing a healthy upside once residential planning is granted – guaranteeing ring-fenced cash for extra local infrastructure. That’s far better than current “Section 106” negotiations, under which powerful housebuilders hold most of the cards and often spend less on local amenities than councils expect.

What’s new and interesting is that an amendment has been made to new housing legislation allowing local government, with central government permission, to set up HDCs. Councils can buy land for a large development, partnering with the private sector if needs be – but, crucially, the planning gain receipts stay at the local level.

Such cash can then be used to build local amenities or even give residents a council tax rebate, which should make housebuilding much more popular.

This could massively empower local government, while finally sparking the housebuilding the UK so desperately needs. “If councils are considering a sizeable development,” says an insider at the Department of Communities and Local Government, “they should give us a call”.

A lesson in planning from the Germans?

We will probably never experience a totally pain free development process in this country; nimbyism has become too ingrained in our culture. However, we could go a long way towards reducing the almost universal resistance we currently experience, to new housing, by actually delivering the high quality development, instead of just talking about it.

The question is, how do you ‘force’ developers to build homes that have suitable room sizes, enough inside storage, outside storage for wheelie bins and bicycles, sufficient off street parking – and of course, look good?

In defence of developers, they often start on the back foot, by paying too much for the land they want to build on.  It’s easy to suggest that this is the developers’ fault and that they should just refuse to pay the inflated prices demanded by the landowners.  However, developers have businesses to run and would soon be on the breadline if they held out for a more sensible price, as there will always be another developer willing to pay.

So what’s the answer? Whilst there are many who distrust much about Europe – mainly because of the EU – we do admire much of what the Germans do and the way they do it. As well as their black and white traffic laws, highly efficient manufacturing base and litter free streets, the Germans also seem to have a planning system, that delivers high quality housing.

They do this is two ways. Firstly, they use zones of development, within which building can take place without the need to go through the sort of planning processes we use in this country. Of course, underpinning these zones, there are a raft of design and development guides, that have to be applied to the build.

The second thing they do and the one that must surely allow them to deliver high quality development, along with the required infrastructure and facilities, is exercise a degree of control on the price of land.  They do this by ensuring that there is enough of it available to satisfy demand, thereby avoiding the sort of price inflation that always happens when something is in short supply and high demand.

I suspect the present government has attempted to mimic the German system to some extent, by requiring all local authorities to have a Local Plan identifying a five year supply of housing land.   In addition to this five year land supply, councils must also have an ‘objectively assessed need’ of what housing is required for their area.   In practical terms, this means that the council can’t just produce a Local Plan and stick it on a shelf the next 20 years, as seems to be the passed practice.

Of course, this housing needs assessment and five year housing land supply requirement has not gone down well with the majority of councils, especially those in areas where house prices are high, such as the south east and rural areas adjacent to large cities.

The politicians in these councils are screaming blue murder about concreting over the countryside, the loss of the green belt and urban sprawl, all this whilst ignoring the increasing demand for housing and the ever increasing difficult for young people trying to get on the housing ladder.

Frustratingly, the government has failed to explain the thinking behind the changes introduced by the National Planning Policy Framework, fuelling the suspicion that these changes are more about the bank accounts of the developers, than providing homes that people can afford. This suspicion is further reinforced, by the trump card government handed to developers, in the form of a viability test.

The viability argument allows developers to wriggle out of providing affordable housing, community facilities and just about anything else they believe will, according to them, make the development financially unviable. Which of course rolls us all the way back to the price paid for the land in the first place. If you provide enough of anything to satisfy the demand, then the cost of the commodity on offer, in this case land, not only remains stable , but often reduces in real terms. Clearly, we’re not ‘making’ any more land, so it has its own dynamic when it comes to value. As such, it wouldn’t be helpful to compare it to something that was in the past expensive to produce and therefore expensive to buy, but now has become affordable to all, such as the simple cup of tea, but it does help to set the scene. Provide enough of anything and then make it readily available to those who want it and the price of it finds an affordable level. That seems to be the very simple rule the Germans have used.