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.
Originally published on March 13 on my blog for Inside Housing.
So, with unintentional irony, the inquiry into why it takes so long to get new homes built is itself taking longer than expected.
For all the advance speculation and ministerial statements in the last few days, the Letwin Review of build-out rates was not published alongside today’s Spring Statement.
Instead the former Conservative Cabinet minister published a four-page letter offering housing secretary Sajid Javid an interim update on the work of the inquiry focusing on what is happening on large sites operated by large housebuilders.
A ‘draft analysis’ will follow by the end of June offering a description of the problem and its causes but final recommendations will only be made in time for the Budget in November.
In truth, expectations that Letwin would be able to offer instant solutions within a few months were always likely to be dashed – not that this stopped ministers from pre-empting it with warnings to housebuilders to ‘do their duty’ in the planning announcements last week.
Perhaps significantly, the draft update has only one mention of the supposedly crucial issue of ‘land banks’, the nefarious practice by which housebuilders allegedly hoard land with planning permission until they can make the most money.
However, Letwin rejects most of their usual excuses too – everything from shortages of labour, materials and capital to problems with transport infrastructure, utility connections and constrained logistics on site.
He argues instead that the ‘fundamental driver of build out rates once detailed planning permission is granted for large sites appears to be the “absorption rate”.’
This is ‘the rate at which newly constructed homes can be sold into (or are believed to be sold successfully into) the local market without materially disturbing the market price’.