Variety the key to faster build out, says Letwin

Originally published on June 25 on my blog for Inside Housing. 

For all the headlines about Spitfire production and the wartime spirit, Sir Oliver Letwin’s draft analysis of build-out rates on large housebuilding sites focuses on one key factor above all others – and it’s one that could have huge implications for housing as a whole.

After visits to 15 different sites and discussions with people throughout the industry, he focuses forensically on the ‘absorption rate’ – the rate at which housebuilders can sell newly built homes in a local market without reducing the local market price.

This is not a surprise – it was also his focus in the interim update he produced in March – but he seems even more convinced of its importance now.

In his draft analysis, this is what underpins everything from the valuation model used in the RICS red book to the residual land value model that housebuilders use to calculate how much they will pay for land.

As he puts it:

‘We have heard from everyone we have talked to in the industry about these processes that, in all of these forms of land sale, the starting point of all participants is the residual value calculation. And that residual value calculation always starts with the assumed open market value of new homes in the local area – which is always fundamentally driven by the prices of comparable second-hand homes in the local area, and hence by the assumption that the number of new homes built in any given year in that area will not be large enough to put downward pressure on the price of second-hand homes in the area.’

In other words, anyone hoping that an increase in housebuilding for sale on large sites will reduce house prices will come away disappointed since the entire model is designed to ensure that this does not happen.

The median build-out rate on the 15 sites included in his investigation was 15.5 years from the moment when the housebuilder gets implementable planning consent – meaning that 6.5% of each site was built out each year.

Letwin’s focus is firmly on this part of the pipeline. If that seems not to address housebuilders’ concerns about the time it takes to get planning in the first place, he does not see this as a serious issue – but equally he dismisses most of the landbanking case made against them.

However, this focus on build-out also means that he does not look into the murky world of what happens to sites and land before they get to planning.

His focus lies instead on the possible explanations for slow build-out rates. From transport infrastructure to land remediation, problems with utilities to limited availability of capital, he finds that they are important considerations but not fundamental to the rate at which homes get built on large sites.

Materials shortages are also not seen as a problem because imports will fill any gap in the short term, investment in domestic production will follow demand and modern methods of construction can reduce dependence on products like bricks.

Concerns about skilled labour will be solved by increasing rates of pay in housebuilding to draw in labour from elsewhere in the construction industry, he believes, except in the key trade of bricklaying.

This is where those Spitfires come as Letwin comes across a bit like Lord Beaverbrook (the newspaper tycoon who eventually organised aircraft production during World War Two) when he says that government and major housebuilders must work together on ‘a five-year “flash” programme of pure on-the-job training’.

Some of this analysis seems a bit airy. For example, it’s odd but in keeping with the wartime headlines that he does not mention Brexit and the potential loss of the 10% of the housebuilding workforce (25% in London) that comes from ‘the continent’ or the ageing of the existing workforce.

Equally, as the Farmer review found last year, modern methods of construction and investment in prefabrication factories require a certainty of demand that comes from development for rent rather than sale.

But that’s where we come back to the implications of his review for the rest of housing.

It’s too early yet to expect policy recommendations – those will only come in the final report in the Autumn and will be subject to lobbying from interested parties – but if he follows the implications of his analysis they should be interesting.

Because if housebuilders will not build homes faster on large sites, where will the extra homes come from the reach the government’s target of 300,000 a year?

Letwin says the work done since March ‘has done nothing to alter my view that the homogeneity of the types and tenures of the homes on offer in these sites, and the limits on the rate at which the market will absorb such homogenous products, are the fundamental drivers of the slow rate of build out. Indeed, our further work has reinforced this view.’

He rejects the option of packaging large sites into smaller ones on the basis that it could reduce the number of sites coming forward even if it increases the speed of building on them.

‘This cannot be a question of “either/or”, he says. ‘We will continue to need more new housing bothon smaller and on large sites.’

Instead he looks at the potential for product differentiation on large sites – or building other than just for open market sale.

He was told that demand for social rented housing is ‘virtually unlimited’ and that the market for it is ‘separate from the price-constrained market for open market sales of family-sized homes’.

Similarly, he finds there are also separate markets for private rented homes, affordable rented homes, specialist homes for groups like students, nurses and pensioners and homes for custom build and self-build.

There might even be scope for homes with designs that diverge from the homogenous standard housebuilder product: ‘it seems extraordinarily likely that the presence of more variety in these aesthetic characteristics would create more, separate markets than can be created within the high degree of uniformity that characterises many (though not all) of the large sites that we have visited’.

All that leads him to conclude that ‘if either the major housebuilders themselves, or others were to offer much more housing of varying types, designs and tenures’ then overall absorption rates and build-out rates could be accelerated.

The policy levers required will be considered in his final report and Sir Oliver says they must not damage the economics of individual sites or the financial sustainability of major housebuilders. We must not ‘throw the baby out with the bathwater’.

However, he says it is clear from the work already done that ‘to obtain more rapid building out of the largest sites, we need more variety within those sites’.

Which begs the big question of who will provide that variety if the big housebuilders do not. The potential for housing organisations with experience of building different types of housing for different tenures is equally clear.