The fall guys – Part Two

Originally posted on July 28 on Inside Edge 2, my blog for Inside Housing

So does it really cost housing associations £150,000 to build what housebuilders can deliver for £90,000?

The first part of this blog examined last week’s Channel 4 News reportclaiming that: ‘Government plans to build more affordable homes are being frustrated by the poor performance of housing associations.’ I concluded that it made some legitimate points, especially on executive pay, but otherwise did not stand up to serious scrutiny.

This second part of the blog is devoted to what I think was the most serious charge:

‘According to private housebuilders, the cost of delivering a house is £90,000 but when you ask housing associations they say they have to spend £150,000 to deliver a home. Now they’ll tell you that the homes are better but is it justified that they build only two-thirds of what private housebuilders do with the same amount of money.’

This is the key fact (or factoid) in the report. It would not be a complete surprise if private housebuilders could deliver homes a bit cheaper than housing associations. They build in bigger volumes. Building homes and trading in land is what they do and they are not distracted by other considerations such as managing homes for tenants. And, as the report pointed out, housing association homes may also be bigger or built to a higher standard. Against that, housebuilders carry more risk and so take higher profit margins than the contractors who build homes for associations.

So some gap in costs would not be a surprise but how do you explain a gap this big? If you think about it in detail there are three possible explanations:

1. Housing associations really are massively inefficient and/or massively corrupt. But for this to be true Channel 4 News would have to have discovered something that has missed the combined scrutiny of the Homes and Communities Agency, DCLG and Treasury for years. The quest for ever-greater efficiency is what’s led to consolidation in the housebuilding sector and mergers among housing associations. There is a price to be paid for this in terms of capacity and diversity but maybe it’s worth paying if the difference in costs really is so great.
2. But for that to be true housebuilders would have to be complete muppets. Think about it: if they can build a house for £90,000 and sell it to a housing association for £150,000, that would represent a profit margin of four times the 15% or so they currently make. They would be missing out on a massive opportunity to make money with minimal risks. They could even sell the homes for £120,000 each, saving the taxpayer money but still doubling their return. But housebuilders are not muppets – they are experts at maximising their margins and profits.
3. So the remaining possibility is that the figures are wrong or that this is a bogus comparison.

Any simple comparison is bound to be questionable unless you know you are comparing like with like. A rigorous assessment would have to account for the type of homes that housebuilders and housing associations build, where they build them and what type of sites they are on. You would have to adjust for factors like these. But leaving those considerations aside does this even stand up as a rough comparison?

The £150,000 sounds right as a rough estimate for the average total cost of a new housing association home, including the construction and land costs associated with the scheme. It also tallies with the average total scheme cost in the 2011/2015 Affordable Homes Programme of £141,000 (table taken from a 2012 report by the National Audit Office with the first note making clear that this includes construction and land costs):

What’s interesting from a value-for-money perspective is not just that costs came down compared to the previous programme but also how they were financed. Just £20,000 per home came from grant, with the rest coming from debt supported by rent revenue and other funding such as sales receipts. The debate continues about the long-term value for money given that most of the homes were for higher ‘affordable’ rents that drive up the housing benefit bill but in the short term £20,000 per home looks like a pretty good deal for the taxpayer. It was certainly good enough to convince a Conservative-led DCLG under the coalition.

The £90,000 puzzled me much more since the report gave no source for the figure apart from it being ‘according to private housebuilders’. The latest ONS house price index puts the average price of a new home at £277,000 so if £90,000 really does represent the average all-in cost of building the home housebuilders must be even more profitable than everyone thought. Alternatively, if £90,000 really is the total cost, then presumably all those 200,000 starter homes at a 20 per cent discount that housebuilders are planning will sell for £72,000 each? Or pigs might fly.

So my best guess is that the £90,000 figure is a reference to the average selling price of an affordable home delivered by housebuilders through section 106 agreements. The latest annual reports of major housebuilders like Barratt and Persimmon put this at £100,000-£105,000 per home.

Exactly what this price reflects is hard to pin down. The key point is that section 106 is a planning obligation that means housebuilders are obliged to transfer the homes as affordable for the price that housing associations can pay. One view is that, broadly speaking, it represents the construction cost of the home and does not reflect the cost of the land or site infrastructure. But that is just a rule of thumb and the picture will vary from site to site: there may even be cases where the sale price is less than the construction cost.

If I’m right, the cost comparison that is at the heart of this investigation falls apart and with it the key allegation that housing associations are failing to build enough homes. [Since first posting this, the Home Builders Federation has confirmed that the £90,000 figure was taken ‘somewhat out of context’ and cannot be compared to the £150,000.]

This report has done nobody any favours: not housing associations whose reputation has been traduced on the flimsiest of evidence; not housebuilders who apparently sell homes for three times what it costs them to build; not even the family stuck in a run-down private rented home if the result is that fewer affordable homes get built. It doesn’t do much for the reputation of Channel 4 News either.

Except that it does serve the purposes of one group of people to let the factoids trump the facts like this. The political and media narrative is already established that social and affordable housing are part of the problem not the solution. The softening-up exercise justifies support for home ownership instead. Housing associations are the fall guys for the government’s own failures on housing.