Building the case

Originally posted on October 19 on my blog for Inside Housing

Sometimes powerful arguments for a change of direction in housing policy come from unexpected places.

The Farmer Review of the UK Construction Labour Model is a case in point. Before your eyes glaze over at the title, bear with me because it has profound implications not just for the way we build homes but also the sort of housing we build and who we build them for.

Subtitled Modernise or Die, the report was commissioned last year from the Construction Leadership Council by housing minister Brandon Lewis and skills minister Nick Boles. By the time it was published this week, both had moved on, but the policy context had also shifted on its axis.

Back then, the Treasury and George Osborne dominated housing policy and everything was about home ownership and Help to Buy. Now other departments have much more influence, we have a housing minister calling for a balanced approach to tenure and attention has turned to modern methods of construction for new homes.

The Farmer Review is about modernising the construction industry but the focus is squarely on its ability to deliver the government’s ambitions for housebuilding. The conclusions are pretty unambiguous and they chime completely with what many people in housing have been arguing for years. I made a similar post-Brexit case for social housing last month.

First, construction faces a skills crisis so great that muddling through is no longer an option. If we assume reduced reliance on migrant labour after Brexit, it cannot deliver the number of new homes we need. The government’s million homes ambition will require an extra 120,000 building workers and another 620,000 will be needed to replace those due to retire in the next 10 years.

Second, the solution to the problems of skills shortages, low productivity and poor quality that have dogged the industry for years is a shift to more prefabrication. That will require long-term investment in modern methods of construction or what Farmer calls ‘pre-manufacturing’.

Third, the current business model of building homes for sale cannot support this shift: investment in pre-manufacturing plants requires scale and certainty not pro-cyclical demand dependent on the state of the market. As the review puts it, the construction industry sees housebuilding as ‘the sector most at risk of “boom and bust” due to a strong alignment with the housing for sale market’.

Fourth, that scale and certainty can only come from the institutional investment in the private rented sector via build to let or public investment in social housing via housing associations and local authorities. But investment without innovation in construction will exacerbate the skills shortages we already have.

Put like that, you can see how the future of the construction industry and the future of housing policy are linked. And, seen from a construction perspective, increased reliance on the ‘for sale’ model even in social housing is dangerous.

‘As the social housing sector has changed its model to private sale-led cross subsidy and surplus generation in response to a series of policy changes, there is now less opportunity, in the event of a private market correction, to create a “soft landing” through a social housing build programme. This is a real risk to housing delivery in the UK due to the potential for even greater cyclicality than seen previously.’

‘Government has a strategic choice to make about the future role of grant funded social housing, which has historically been used as a counter-cyclical demand tool. This also brings into question the role that may be played by direct delivery measures across all tenures either at a central, regional or local government level.’

Build to let also presents opportunities for acyclical investment at scale and the link with pre-manufacturing is already evident in Legal & General’s investment in the largest modular construction factory in the world in Yorkshire.

If innovation in construction comes from the rented sectors it may eventually influence the models of the rest of the hosuebuilding industry. However, the report concludes that it is ‘unlikely that large scale innovation will start in the volume housebuilder market’.

The report is published at a time when the government is already moving in the same direction. The previous obsession with home ownership has been toned down in favour of a balance of different tenures and the £5 billion loan and guarantee funds announced (and reannounced) at the Conservative conference include specific support for new methods of construction and build to let.

The big question is whether the government is really prepared for the implications of such a shift. It’s true that homes for sale can also use new methods of construction – but they do not offer certainty to offsite manufacturers and blocks of apartments also rely on forward funding via sales to buy to let and overseas investors.

The temptation will be to rely mostly on build to let as a way to deliver more homes without a direct cost to government that could also offer better, more secure homes to tenants.

Social housing will require investment upfront and increased borrowing but that will be justified in terms of construction innovation as well as housing need. And, as John Perry argues, it can also offer a route to home ownership via the right to buy or rent to buy.

So far, so good, but there are some caveats. Some have quibbled with some of the data used in report: for example, the government’s ‘ambition’ of a million homes is not very ambitious at all because it is based on the net supply of homes.

And we’ve been here before. First, no matter how pre-manufactured they are, something else is needed for homes too. If I had a fiver for each time someone’s called for homes to be built using modern methods of construction I’d be doing very nicely. As John Prescott discovered with his £60,000 house competition, the cost of construction is minor next to the cost of the land it occupies.

That’s perhaps why so much emphasis is being put on public land in the latest government programmes. However, public land is a finite resource and so far ministers have shown little inclination to take the obvious next step: the acquisition of agricultural land at or close to existing use value to create more of it. New towns or urban extensions led by development agencies or local authorities could finance the infrastructure from the value uplift and offer plots to builders as in many other European countries.

Second, prefabrication is not in itself a panacea. In the 1960s big construction companies sold the government a vision of homes that could be built quickly and cheaply using new system building techniques imported from Scandinavia. But prefabricated components still need to be assembled properly on site. That dream became a nightmare at Ronan Point.

However, in making the case for innovation in construction this report makes an equally powerful one for housing and tenure diversity and it does not come from one of the usual suspects. If the government is serious about housing that works for everyone it should take heed.

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