A lot of quid, not much quo

The bail-out of the banks quite rightly led to calls for them to do something in return. Why is nobody saying the same about the bail-out of the big housebuilders?

Each new scheme for the banks has come with strings attached designed to ensure that they make more loans. None have worked so far but a quid pro quo is seen as a political necessity every time a new scheme is suggested. Under the latest wheeze, the Bank of England’s Funding for Lending scheme, banks can borrow money at just 0.25 per cent for four years but if their lending falls between now and 2013 the rate on the loan will be steadily increased.

Contrast that with what has happened with the major housebuilders. Just as with the banks, the credit crunch triggered a crisis for the industry, this one caused by having paid too much for land that fell in value and sites full of homes they could not sell. Just as with the banks they have been bailed out by the taxpayer – and, just to be clear, we are not talking about tens or hundreds of millions but several billion pounds.

Housebuilders have benefitted from three different types of support. First, just as with the banks, they have been general beneficiaries of the policy of record low interest rates and quantitative easing. This has put a floor under house prices and the value of their land and helped prevent a wave of repossessions that would have triggered further price falls as in the early 1990s.

Second, they have received direct financial support including government funding for equity loans and guarantees for buyers. This began with the purchase of thousands of unsold homes and the introduction of the £400 million HomeBuy Direct equity loan scheme by the Labour government in 2008.

The latter was criticised at the time by the shadow housing minister Grant Shapps as ‘a very expensive flop’ that not even the state-owned banks would support but that did not stop the coalition introducing a very similar £300 million equity loan scheme called FirstBuy in the 2011 Budget. At the time this was described as a fixed-term measure.

By the housing strategy of 2011, the government was also underwriting NewBuy, a scheme devised by the Home Builders Federation, with up to £1 billion of taxpayer guarantees and finding another £400 million for loans from the Get Britain Building Fund. Then, just for good measure, last week’s housing package discovered another £280 million down the back of the sofa to fund another year of the supposedly time-limited FirstBuy.

Red tape

Third, and much less visible than the first two, housebuilders have gained from a series of measures to ‘cut red tape’ and regulation. In the 2010 spending review committed to reducing the regulatory burden on housebuilders. That was followed by a more relaxed definition of zero carbon, the removal of centrally imposed standards on homes built on government land and the launch of a Red Tape Challenge for housing, planning and construction.

The fruits of that were evident in last week’s package with the promise of legislation to allow developers of sites that are unviable because of the number of affordable homes to go over the heads of the local authority and appeal directly to the Planning Inspectorate. This was on top of an existing consultation on measures to require councils to renegotiate non-viable section 106 agreements made before April 2010 and the government has had to find an extra £300 million to compensate housing associations for the resultant loss of affordable homes. There will also be a ‘fundamental and urgent review’ of variations in local standards with the prospect of legislation if a significant rationalisation cannot be agreed.

Each of these measures can be justified in its own terms by a government looking to get housebuilding and the housing market moving. A case can even be made that action by the Homes and Communities Agency rescued the industry in 2008 and 2009. However, each of them is also an implicit or explicit subsidy to housebuilders and if you put them all together you have a support package worth billions of pounds. I estimated in 2010 that up to £60,000 per plot was potentially at stake in the drive to cut red tape and that even a reduction of £20,000 per plot would increase the value of the land holdings of the biggest housebuilders by £5 billion.


Most of the major firms were on their knees four years ago. In 2011/12 by contrast, according to an analysis by Building magazine, the biggest eight housebuilders increased their pre-tax profits by 160 per cent to a combined £566 million. Their position is getting healthier all the time. Thanks to canny management of the sites they choose to build out, their operating margins currently average more than 10 per cent. Thanks to canny management of their product mix, increasing the number of new houses and reducing the number of flats, average new build prices have far outstripped average prices in the re-sale market over the last two years, as this graph from the ONS house price index shows:

Annual % rise in prices of new build and pre-owned homes (ONS)

Neither the housebuilders, nor the Home Builders Federation, can be blamed for the highly effective lobbying that has delivered such favourable treatment: they have a responsibility to their shareholders to maximise the return on their investment. The big question is why they have been asked for so little in return. If banks are expected to increase their lending as the price of support from the taxpayer, why aren’t housebuilders expected to increase their building? Instead, as the DCLG housing starts figures show, private sector starts in England recovered from a low of just 66,000 in 2008/09 to 86,000 in 2010/11 only to fall back again to 84,000 last year.

If part of the price of the banking bail-out is to force the big firms to offload branches to create new, challenger banks, why has there been no targeted support for new entrants into housebuilding? If anything, the opposite has happened as existing small and medium sized firms were forced to build out their sites and went bust while their bigger rivals were given time to restructure. The big firms almost certainly dominate the market more now than they did at the time of the crash.

While some of the measures may have specific strings attached, there is no overall target to increase production. Housebuilders will be free to pick and choose which sites they choose to build out first but, with mortgage finance still in short supply, where is the incentive to build more homes rather than simply increase their margins?


So why can’t the government see this? Two main reasons, I would suggest:

First, it does not understand the housebuilding industry. It assumes that the main business of housebuilders is to build homes, when in fact it is to trade in land and make the maximum margin possible on those homes. Meanwhile, decisions are taken on grounds of ‘viability’ as though this is an objective measure rather than one based on the return that housebuilders decide they need (the hurdle rate) before they will start building. The assumption seems to be that if you make sites more viable they will be more profitable and housebuilders will build more homes; but why would they when they can build the same and be more profitable?

Second, the way that the government frames questions about subsidy and red tape does not allow it to see the scale of the support package it has put in place for the industry. As the debate started by Grant Shapps about ‘taxpayer-funded housing’ demonstrated, the mind-set is that ‘subsidy’ is something that applies to social housing and social tenants. ‘Red tape’ is the barriers to business set up by public bureaucrats. Cut both and, hey presto, you have economic growth and more homes because you are freeing the private sector to do what it does best (except of course that half the problem is that the same private sector bought land at too high a price at the top of the market).

However, every bit of ‘red tape’ that is removed is also an implicit subsidy to housebuilders. There may be cases where processes can be made more efficient but there will also be explicit costs to the public purse. In the short term, affordable homes and community benefits will not be built; in the longer term poorly planned developments will cost more in all sorts of ways.

Advocates of more radical reform of the planning system, such as the think-tank Policy Exchange, argue that it is planning and the distortions in land values it causes that are the fundamental problem. There are calls from across the political spectrum for a Land Value Tax to address this. Both are probably correct in the long term.

However, we need homes in the short term too. On all the sites where section 106 agreements are now said to make schemes non-viable, housebuilders will have agreed to a certain level of affordable housing with the local authority and bought the land on that basis. They can already renegotiate section 106 deals and are doing so successfully around the country (just ask Tottenham Hotspur and its ex-manager Harry Redknapp). Forced relaxation of these agreements increases the value of the land in the name of getting Britain building without doing anything to ensure that this actually happens.

A comprehensive support package for the housebuilding industry can easily be justified on the grounds that we need new homes and we need economic growth. However, leaving it to housebuilders without any incentives to deliver or any penalties if they fail to deliver looks like an astonishing leap of faith.


9 Comments on “A lot of quid, not much quo”

  1. Keith Cooper says:

    Interesting. You might want to look at this piece about how much of the government’s £772m investment in developer plc has found its way back to the Treasury. Answer: virtually zilch.


    Keith Cooper

  2. julesbirch says:

    Thanks, Keith – great point. If the government didn’t get the money back from the first and second rounds, maybe it thinks third time lucky? There are big sums of public money involved here that don’t seem to be getting much scrutiny.

  3. John Newton says:


    Yes, in a nutshell the business model of the private housebuilding industry needs to be realigned from land speculation to house construction.

    Similar case in greater detail was made in ippr report ‘We must fix it’ by Matt Griffith. Its conclusions are worth highlighting as the occasion demands (often given current policy directions)

    Have a look:

    • julesbirch says:

      Thanks for the comment, John and will take a look. I think that the problem goes deeper than just the housebuilding industry to the wider housing market and planning system too. Individual companies can’t be blamed for maximising their returns within the existing system so it’s the system as a whole that needs addressing, not just the housebuilding industry.

  4. John Newton says:

    Absolutely, Jules. To be fair both referenced documents make that same precise point.

    Change does need to be ambitious and big bang as highlighted today by Larry Whitty his report, but it also needs to be sustinable across electoral and economic cycles and capable of attracting Caolition support and commitment now. Tall orders, of course.

    In that light, what is your integrated package of proposals?

    • julesbirch says:

      No pressure there then, John, it’s a lot easier for armchair critics to sit on the sidelines criticising! Pressure of other work means I’ll have to come back to that another time but have been pushing the QE for housebuilding idea for ages (see https://julesbirch.wordpress.com/2012/07/05/qed/) and also think compulsory purchase of land and incentives for new entrants to market have big part to play.

      • John Newton says:


        Just accessed your QE proposal : In essence, the idea is that the government should set up a not-for-profit public interest company with a remit to fund house building. The Bank of England would use £50 billion of housing QE to buy bonds in the company to fund the construction of homes and associated infrastructure and the bonds would be repaid from the rental and eventual sale of the homes.

        Well… in a rational world, why not, but in a polity with entrenched and confllcting ideologies/ vested interests?? In effect this would be public capitalisation of a company operating in the tradeable marketised economy: hear the baying: crowding out of the private sector, distorting competition, new quango, and so on.

        I am sure you aware of Policy Exchange pamphlet that (from memory) set out an equitisation model involving the conversion of housing associations (RP’s) into ‘social enterprises’ allowing them to raise sufficent additional capital finance on back of their existing rental surpluses and future rental flows in order to provide 100,000 extra dwellings year. Well that is aspiration/theory, of course, plus (likely great, without entrenched safeguards) danger of capture by private interests greedy for short term gain, rather than sustainable production, but more realistic starter in current political environment?

  5. William says:

    I think the government knows full well what it is doing. The Homebuy Direct scheme was introduced in 2008 after meetings between the treasury and the banks who were demanding that the government did something to stand behind house prices. It wasn’t enough, so one by one the other measures were duly dreamt up and implemented.
    All these schemes are as much about bailing out banks as they are builders.
    Of course when you stand back and look at them you see their main function is to help people up to the asking price rather than have the asking price move down to what the buyer can afford. So the few homes that are built are guaranteed to always sell for the highest price.
    Think of the growing millions whose taxes fund and underwrite a housing market they are priced out of, it amazes me just how little awareness there is of how people are taxed in order to price themselves onto the streets, you’d think politicians and newspapers would be jumping up and down about it, but no…odd.
    If the foremost aim of your policy is to maintain prices then supply plays its part as well, its no accident that home building has ground to a halt in recent years yet the cost of a roof over your head remains at all time highs despite being in the longest economic slump since the 1930s. That takes a bit of doing, and they’ve done it!
    Yet at the same time we also need a construction industry so the various top-ups and guarantees are extended and added to, meaning that an extra few thousand more homes can safely be built while still sold at maximum profit.
    The taxpayer subsidises housing now. It is no longer a free fair market. All those families living in bed-sits, people knocking 40 still at home with mum and dad and youngsters sleeping on mates sofas need to realise that their taxes are keeping the housing market going and start asking where the affordable homes are for them that they are paying and underwriting for everyone else.
    Finally the reason Grant Shapps is so keen to stigmatize social housing is because while building it provides work for builders and affordable homes to people every pound spent on it gives zero return if all you want is to increase house prices.
    Its all about house prices.

    • julesbirch says:

      Thanks William – some good points there and you could well be right because both governments knew the political damage that falling prices and a repeat of 1990s negative equity and repossessions would cause but I think they have rather stumbled into mass subsidy of private housebuilding. You can sort of see the logic of everything done in 2008 from cutting interest rates to nothing to introducing HomeBuy Direct. Allowing prices to collapse would have caused mass negative equity and repos, triggered the collapse of some big housebuilders and caused an even bigger banking crisis even if falling prices were exactly what people priced out the market needed. Seen from 2012 though, with prices still propped up and housebuilding stuck at record lows, it’s a completely different story with house prices stuck at unaffordable levels, a new boom in buy to let on the back of them and anyone young without parental support priced out and paying extortionate rents. And all the while we’re told it’s social housing that is ‘subsidised’.

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