Asking for more on new homes

We will build more,’ the major housebuilders are promising housing minister Mark Prisk. And they will – but strictly on their own terms.

Final results from Barratt published this week show that its completions rose by 6.3 per cent to 13,663 in the year to the end of June. The fact that the country’s biggest housebuilder is building more homes has to be good news. Even better, it is planning 45,000 over the next three years and it believes 16,000 completions are achievable in the year to June 2016.

But forget any notion that there has been any change in the strategy it and the other major housebuilders have followed since the credit crunch of managing their land carefully, minimising costs and maximising margins. That 6 per cent increase in completions was matched by increases of 30 per cent in operating profits and 74 per cent in pre-tax profits before exceptional items. Shareholders will also benefit as the company pays a dividend for the first time since 2008.

To put those completions in context, even if Barratt achieves 16,000 homes by 2016 that will still be less than the 18,588 it built in 2008.  Given that 2008 saw more completions in England (171,000) than at any time since the late 1990s that underlines yet again there is no chance of meeting the requirement of 245,000 homes a year confirmed by research for the TCPA this week. If all builders’ completions increase at the same rate as Barratt is planning over the next three years, the total for England will increase from 107,000 in 2012/13 to around 125,000 by 2015/16. There is some evidence suggesting the recovery may be stronger than that but a huge shortfall seems set to continue.

Bear in mind too that the three years from now until 2016 represent the best imaginable circumstances for the industry: confidence is recovering; interest rates are likely to stay at a record low; and the government will be providing £15.5 billion of support through Help to Buy on top of all the other subsidies and cuts in red tape it has offered housebuilders.

None of which is a particular criticism of Barratt. I have singled it out purely because it is the biggest and best-known housebuilder. According to their recent half-year results, completions were up 7 per cent at Persimmon and 2 per cent at Taylor Wimpey while their pre-tax profits rose 40 per cent and 42 per cent respectively. All of them have a responsibility to their shareholders to maximise returns and they know from bitter recent experience that expanding too fast could lead to serious problems further down the line (especially once Help to Buy is wound down).

But it does beg some important questions about the government’s strategy. As I’ve blogged several times before, it has seemed intent on giving the major firms everything they wanted without asking for any quid pro quo. Extrapolating from the HBF’s own figures, I estimated that the relaxation of affordable housing requirements and cuts in red tape were worth up to £60,000 per plot. And that is before even considering the impact of £15.5 billion worth of Help to Buy equity loans and mortgage guarantees.  In complete contrast, housing associations competing for a share of a much smaller pot of subsidy are told that they had to offer ‘something for something’.

If Help to Buy really is going to lead to a 30 per cent increase in housing starts, as George Osborne claimed this week, there are few signs of that coming from the major housebuilders. Barratt says it saw a ‘step change’ in demand for new homes and a strong sales performance in the last three months of the year following the launch of the equity loan scheme in April. In the ten weeks since this accounting year ended on 30 June, Help to Buy has accounted for 29 per cent of total reservations. It adds that: ‘Net pricing has firmed in the financial year to date as we have been able to reduce our sales incentives compared to the same period last year by approximately 150 to 200 basis points.’ My rough translation of that is that Help to Buy has enabled it to reduce the sales incentives it was already offering to customers with a direct boost to its profit margins.

Things might be better if there was more competition. Instead the big housebuilders and their traditional business model continue to dominate the market and there are good reasons to think that they may even increase their market share in the next few years because they have emerged from recession in a stronger position than smaller firms. As for new entrants, this month has already seen some bad news with the withdrawal from the market of the Swedish construction company Skanska.

In its home country, Skanska has been involved in some of the most innovative regeneration schemes in Europe, such as Hammarby in Stockholm. A senior manager I interviewed in 2007 was hopeful that it could use the same innovative and methods to build homes in the UK with less on-site labour and less waste. In the event, it appears to have been more of a niche player at the top end of the market, but even so its reasons for pulling out make depressing reading for anyone hoping for more competition – or many more homes – any time soon. According to Building magazine, Skanska found that it could achieve a better return on capital investment in infrastructure and commercial developments, and that you needed a long land bank to make housebuilding work. ‘The one thing with housebuilding is that it ties up a lot of capital and you need to turn that over quite quickly to get the returns,’ said its chief executive.

As they told the minister, the major housebuilders ‘will build more homes’ but they could hardly do otherwise given the billions of pounds worth of investment, subsidies, deregulation and guarantees that the government has made available and the ‘step change’ of Help to Buy. To build anything like enough homes, the government needs to look elsewhere.

The government has made limited moves to encourage Build to Rent institutional investment in the private rented sector and offer guarantees to housing associations but there is much more it could do. It could look at new ways of assembling land for new towns and other big developments, as advocated in a report for the RTPI this week. The constraints of austerity may have ruled out much direct investment in affordable housing but it could have granted the modest borrowing freedoms that local authorities of all political complexions were pleading for in the spending review. It could have come up with ways to use quantitative easing to build homes for rent and later sale rather than inflate asset prices (something similar was proposed in the Green New Deal this week). It could de-risk the market for new entrants by offering them public land on preferential terms. It could reform and expand shared ownership (as advocated last week by Shelter). It could do more to help community land trusts and other community-led housing initiatives.

Above all it needs to stop assuming that what is good for housebuilders is good for housebuilding.

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4 Comments on “Asking for more on new homes”

  1. Ex-housebuilder from York says:

    Stop hyping the growth in profits against growth in completions, it’s a flawed comparison without context.

    Barratt’s pre-tax profit after exceptionals (you must factor these in for the true picture) for the year to 30th June 2013 was 4%. Their long-term pre-credit crunch average for the 17 years from 1992-2008 is 11.2%.

    Worse still, returns on equity for 2013 was 3.4%, compared with the long-term 17 year average of 22.2%.

    Barratt built and sold 97,756 homes in the last 7 years (’07-’13) and made a net loss of £86.4m.

    Private housebuilders exist to build private housing, NOT social housing.

    Stop treating them as if they are part charity or part-nationalised.

    Let them do their business.

    The housing shortage is not their fault or their problem any more than it is your’s or anyone else’s – it’s the responsibility of government.

    Roll back regulatory burden. Tax capital gains on land and use the receipts to fund social housing. Get off the backs of private housebuilders and allow the free market to operate unemcumbered.

  2. Jimmy Davis says:

    It does feel depressing that every year new homes built never seem to meet demand. Governments of all colours have not really done enough. Hopefully this will change soon

  3. Matthew Laverack says:

    Jules you do not know what you are talking about.
    As an architect and builder I do.

    There is no Law preventing you or anyone else setting up as a housebuilder.

    If you think that more houses should be built and there are big profits to be made then you try it. See how long you last.

    You will soon find out just how difficult it has to become to operate in this industry.

    Since 1979 the burdens heaped upon builders in the form of excessive regulations and “blackmail” planning obligations have effectively strangled the industry to death. It was all getting too much in the boom years. The financial crisis did not cause the downturn; it just brought it all to a halt much quicker than would otherwise have been the case.

    Today the big firms are again recording profits but these are minuscule compared to turnover and investment. The smaller firms who do not enjoy economies of scale or repeat designs are mostly crippled. Many have been completely wiped out – permanently.

    The reason that private housebuilders do not proceed with projects despite an enormous shortage of supply is simply because it is not worth their while. And it is not worth their while because of all the government demands still placed upon them.

    The talk of housebuilders being given everything they want is utterly ridiculous. There needs to be a complete sweeping away of 106 demands which are little more than legalised theft and also a ditching of impractical and illogical sustainability building codes.

    There will be no national economic recovery until housebuilders go back to work big style and that will never happen until government really does get off the industry’s back.

    Oh and before all you pinkos bleat on about the lack of affordable housing just remember this – it is just as much your responsibility to fund it as anyone else – and the more profits housebuilders make the more tax they pay to fund welfare – including subsidised social housing.

    If the government wants affordable housing in private schemes it should buy them from the builder at the proper rate instead of trying to steal them with legislation.

    There is an old saying – some people try to rob you with a fountain pen. These days the government robs you with a planning instrument.

    The result has been disasterous. Private firms cannot be forced to build against their will. They will never build large volumes again until the whole rotten system is dismantled and they are again left alone to do their job – build houses for sale on an open free market.

  4. John Jones says:

    House builders are deliberately limiting supply to secure higher prices and higher profits for their shareholders. It is time that the tax payer got something in return for the “help to profit” state schemes. We must have a Windfall Tax on excessive house builder profits not more help and relaxation of rules!

    Councils should build council houses using the money they have from Right to Buy receipts.
    They should be given to married working families, not unemployable single mothers on benefits.
    Thirty years ago, for every £100 we spent on housing,£80 was invested in building new housing and £20 was spent on housing benefit. Today, for every £100 we spend on housing, just £5 is invested in bricks and mortar and £95 goes on housing benefit.

    Build to Rent is just another example of the government using taxpayers money to help private investors get rich at the same time they cut grants to housing associations to build affordable new homes under the guise of austerity!


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