We need to be building at least 250,000 homes per year just to keep up with our growing, ageing and changing population. Disgracefully, there hasn’t been a single year in the last 25 when we’ve built more than 200,000. Last year we built just 110,000.
Is there any other area of public policy where we’ve failed so badly for so long? With such failure it’s no wonder that there’s a growing consensus that more radical action is needed.
Normally the focus of debate on housing supply is limited to the controversial and often combative process of getting more sites to achieve planning permission. But one piece of the puzzle that doesn’t get enough attention is our slow ‘build-out rates’- how quickly the homes on a site with planning permission are actually built.
In England, average build-out rates are much lower than in some other countries. We build-out new sites at a rule of thumb rate of around 50 homes per site per year, because this is the optimum rate for selling homes at the highest price. Build any faster and you’d need to discount the price in order to sell them all.
This isn’t about builders being greedy though. They need to sell the homes they build at the optimum price, because that’s the price they factored in when deciding how much to pay for the land in the first place. In a highly competitive land market, you need to pay more than everyone else for land which means making more optimistic forecasts of your sales prices (or about how cheaply you can build) than your competitors. Therefore once you’ve paid for the land, you have to build slowly and sell at the optimum price in order to justify your initial investment.
This back-to-front model of development based around paying as much as possible for land upfront constrains almost all of the ‘outputs’ in housing supply – price, quality, size – all for the sake of paying the maximum possible price to landowners to secure the site.
In some Northern European countries though, build-out rates of 550 homes per site per year are achieved: more than ten times faster than the rate we build. Given the development model I’ve described, how can this happen?
It’s a mix of things. First, the development model in these countries isn’t back-to-front. Land is brought into the system via zoning or a development corporation (or both) at a more reasonable price. This means builders’ hands aren’t tied by having spent so much on land and so they can focus on creating high quality homes that can sell competitively in higher volumes.
Second, the development process itself is split up. A master-developer will make a margin by designing the site, connecting plots with infrastructure and services (water, electricity) and then sell those plots to small house builders to build and sell a few homes each. By splitting the process, no one is incentivised to drip-feed homes to control the price.
Third, including a range of different tenures and prices allows faster build-out, because they’re not all being released into the same market. Social housing is particularly suitable for rapid build-out, as there’s plenty of demand for it (just look at council waiting lists), so there’s no problem of market saturation and no need to drip out supply.
In our major report with KPMG, we recommend a series of reforms that would allow us to do development in England a bit more like this model.
We also recommend incentivising faster build-out on existing sites through the tax system.
While splitting sites and changing the development process is the main game in town, a simple reform to speed up the rate homes are built-out would be to put a cost on keeping plots empty once planning permission is granted. With Europe Economics we looked at what would happen to building rates if councils could charge council tax on sites with planning permission equivalent to the homes that haven’t yet been built.
The answer, unsurprisingly, is that homes on the sites would be built faster. In the first years of the tax an additional 13,000 homes would be built on sites in England already with planning permission simply because it would be cheaper to build and sell at a slight discount than pay the tax. The tax also has the added bonus of incentivising those who are simply land trading rather than building to sell their sites to those who will build.
None of these policies is a silver bullet in itself and we do of course need many other policies to increase land supply, investment and link homes with infrastructure. However, speeding up the rate we actually build homes once planning and investment are in place is a crucial step to building the homes we need.