Toby Lloyd
Toby Lloyd

By Toby Lloyd

Speculative housebuilding is not enough

On Dispatches last night Liam Halligan highlighted the limitations of the speculative housebuilder model – and Sajid Javid promised to break open the closed market. Bold interventions are needed to enable new types of builder to increase output – we can’t expect the speculative developers to do it all on their own.

Last night there was an excellent Dispatches on Channel 4 looking at private market housebuilding. The presenter Liam Halligan asked why the big speculative developers are not increasing their levels of building as fast as their planning permissions are increasing. Given the shortage of housing, are they holding back supply to maximise their prices?

You can watch the full programme and his conclusions here (at least until 7 December):

picture1http://www.channel4.com/programmes/dispatches/on-demand/63544-001

The debate about whether housebuilders landbank or not is an old one, and not particularly illuminating: in short, it depends on what you mean by landbanking….

But it should prompt us to ask is whether speculative housebuilding could build us enough homes and the right type of homes on its own. After all, it’s never done so yet. This is because speculative house-builders sell into a local market dominated by sales in the second hand-market – and cannot risk undermining prices in that local market by releasing too many homes at once.

As David Thomas of Barratt Homes put it succinctly at a recent Parliamentary hearing:

“…we are clearly not incentivised to sell at below market price. That is not the basis on which we bought the land.”

For speculative housebuilders, the nature of their business is managing various risks: planning risk, development risk, macroeconomic risk. But chief among these is the risk that they will invest their capital into the land market and then fail to get a return on it. In other words the risk that they will buy a piece of land based on a hoped-for future selling price for their ‘units’ and then not be able to sell at that price. This is a huge structural barrier to them ever building as many homes as are needed.

It is of course also a barrier to them building homes which are locally affordable. Almost by definition the homes they build will be sold at a market sustaining price, not a market undermining price. The only situation where they could lower local prices is where they get hubristic and accidentally build too much – in which case, they face ruin and capital will flee from future development in response (i.e. Ireland and Spain in the 2000s).

A mixed housing economy

Even in the 1930s when market housebuilding peaked, and which is often cited by those who want to rip up modern greenbelts, a quarter of all new homes were built by councils. That compares to less than 1% over the last two decades.

What mattered about this council commissioned housebuilding was not particularly that it was providing homes with council tenancies: in those days council rents were often higher than private rents. What mattered was that it ensured a mixed economy of housebuilding – there was more than one business model for building homes, which co-existed successfully.

Now we do not have a mixed economy of housing supply. Councils are almost non-existent as builders, and increasingly housing associations are forced to develop on the speculative model themselves, as the previous grant funded model has disappeared.

What we must do is slowly reintroduce a mixed housing economy.

In modern Britain this will not look like the council house building of the 1950s, with mono-tenure estates often built to a low quality, and neither does it have to.

It can include self-builders, councils, housing associations, community builders, SME builders, development corporations and co-operatives. We should be flinging open the development market to a range and diversity of builders and business models. In modern Germany, Austria and France a huge proportion of homes are built by custom builders in collaboration with a local SME.

But what is abundantly clear is that the big, speculative housebuilders cannot do it alone, and that it’s unfair to expect them to. We need a more diverse housing system, one that allows for much more variety of players, products and business models. That means supporting SMEs and councils to come back, and getting custom builders, institutional investors and other innovators to enter the market. And it means diversifying the range of homes built as well. Homes built for the private sale market cannot meet the desperate need for genuinely affordable homes – which is obvious. But neither can speculative building for the private sale market alone meet the overall numbers that the government wants and the nation needs.

The lesson of history is very clear: to build enough homes, we need government policy to support a hefty chunk of non-market, affordable homes as well.

One Response to Speculative housebuilding is not enough

  1. Helen Howie says:

    Custom builders and SME builders need small sites, but the planning system squeezes out these types of site by having tightly defined settlement boundaries. The planning system is set up for releasing large housing sites, which it allocates in Local Plans, but hopeless at allowing incremental growth around the edges of our towns and villages. Last December 2015 the Government tentatively proposed a more relaxed approach to small sites in “sustainable locations” on the edge of towns and villages. We need Government to follow through and amend the National Planning Policy Framework to make this a reality.