Can we rely on the big guys?

Results just in from the big house builders show that they are heading back to boom-times, with double digit profit rises across the board. But this financial health is not corresponding with a huge increase in the number of homes built. The large builders struggle to say when they could get building ramped up to 250,000 homes per year, which was never achieved in the boom years before 2007. What’s going on?

The big builders have been heavily supported by a government which thinks that solving demand for housing (by pumping up mortgage credit) will lead to a housing supply surge.

This theory has been backed up by a number of schemes such as NewBuy, FirstBuy and now Help to Buy which all focus on increasing the number of people who can get a mortgage.

We have consistently warned that focusing on increasing mortgage lending without significantly increasing the number of homes built in the short run will lead to rising prices. The latest results from the big house builders (below) do seem to suggest that rises in prices and profits are outstripping the increase in homes built. More data over the next year will test this hypothesis.

So why shouldn’t we expect all the extra mortgage lending to translate into a significant surge in private sector house building? Part of the reason is the nature of the house building market itself.

The house building market in England is dominated by a few big players who have very high market share. The market share of the ‘big guys’ has increased in recent years, especially since the recession.

Small and medium sized builders have been lost or bought up by the bigger players, leaving a market dominated by the largest.

Because the market is so concentrated, there is a lack of competitive pressure. Big house builders focus on a few sites where they can generate the highest ‘margin’ (profit) per home and face the lowest risks from rising and falling land prices. This is a natural strategy to take when so many builders went out of business in the recession after buying land at too high a price in the boom years. It also means the sector rarely innovates on quality or techniques to reduce cost. The housing minister was yesterday “urging” builders to be more innovative. In a properly functioning and competitive market you wouldn’t need a politician to beg companies to innovate.

Private house builders are not charities and so we shouldn’t expect them to produce as many homes as are needed. After all, their responsibility is to their shareholders and on those terms, they are performing very well indeed.

What we need to question, though, is whether we can rely on a concentrated and risk averse private market to solve the housing shortage just by feeding it more and more consumer credit. I’d argue that the evidence of recent years is quite clear – pumping up mortgages to entice the ‘big guys’ to build more homes won’t meet the scale of the challenge we face.

We need more competition, more innovation and a more dynamic house builder market as part of a broader mix of solutions to the housing shortage.

 

*Top 10 house builders who have published results up to June 2013. These are the latest published results and therefore most likely to reflect the impact of government interventions.

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One Comment
  1. Companies that don’t innovate will eventually be caught out. At the moment there’s no incentive for change because they can sell all their units as supply outstrips demand and there is little choice in the market. However, who would want to buy from a company that doesn’t provide you with the best value for your money? These big companies are in a dangerous position because they have such a big market share that there is little room for growth. With increasing opportunities for self and custom builders, this market will surely grow at their expense. Plus people are also increasingly after more sustainable and energy efficient homes, which they cannot deliver without considerable upgrading of skills, processes and quality.

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