Published: 9 Jan 2017 by Pete Jefferys

The forthcoming White Paper is a huge opportunity to tackle the dysfunctional  housebuilding system. Following Shelter’s recommendations for bold reform would show that the government means business.

The government is due to publish a long awaited White Paper on housebuilding in the next few weeks. There is clearly an intense debate within Whitehall about how bold any reform should be – and some reports are suggesting that earlier plans for radical reform are being watered down to prevent a backlash from those resistant to change. Other sources suggest that Ministers are gearing up to take some tough decisions and take on vested interests.

On behalf of the millions of people struggling to afford a home, or whose housing choices are severely limited or non-existent, we hope that the latter reports are correct. But if the government is indeed prepared for a fight, it’s vital that it picks the right one.

Too often reform feels tough and painful at the time but doesn’t actually make homes more affordable for local people. For example, the process of securing the National Planning Policy Framework (NPPF) was scarring for many of those involved and that experience makes some cautious about further reform. But since its implementation five years ago housing has in fact become much less affordable, not more so, while actual housebuilding remains too low – and way below the level of planning permissions being granted.

So how should the government expend its political capital to make sure reform delivers good enough results to be worth the inevitable pain? Or to put it another way, what are the most important barriers and vested interests to increasing supply that need to be tackled?

I’d argue that the most important vested interests to take on are landowners. Currently the housebuilding system strains itself to offer landowners the best possible deal, as competing developers bid up the price they pay for land at the expense of the quality and affordability of homes. The more they pay for the land, the less value there is to support infrastructure, affordable homes or innovation.

This land price trap also stifles the total quantity of housebuilding. Because developers have to pay so much for land upfront, they can only build and sell homes at a pace which doesn’t flood the local market with homes and cause prices to fall.

To see this in practice, just look at how the relative pace of building falls as site sizes get larger (below). This suggests that developers are eking out supply, to be no more than the number of extra homes the local sales market can absorb without lowering prices. Larger sites do sell more homes per year than smaller ones, but not nearly proportionately so. The build rate flatlines once a site reaches a certain size, so that a site of 2,000 plots actually completes as many homes per year site of only 500 plots.

Average build rate per 100 plots, by size of site [1]

This trend – like developers’ growing land banks – is a symptom of a dysfunctional housebuilding market, not the cause of it. Speculative developers are simply making sure that their projects are profitable. But the overall effect of this is a system that depends on keeping prices up, not pushing them down.

Pick the right fight

Whenever the housing shortage is debated, there are strong calls to focus on councils who are dragging their heals in granting planning permissions. In many parts of the country this is right and more planning permissions should be given to properly reflect assessed need. However, we shouldn’t expect a fight over abstract planning targets to make the difference on its own. Developers will keep building at a rate which protects prices and therefore their margins. There are already far more permissions granted annually than homes started. To build enough homes, especially types of homes which are locally affordable and popular, a different approach is needed.

The government should instead promote models of housebuilding which strike a fairer balance between the price paid to landowners and the benefits for local communities. These models would include creating and supporting strong Development Corporations to buy land at lower values (closer to its existing use value) and get homes built to a high quality, at lower prices and at a much faster pace. This is similar to the model used to build the early garden cities, the model villages of the 19th Century, the post-war New Towns. This approach is still used occasionally today – where landowners choose to prioritise quality and long term returns instead of maximum up-front land price. The challenge to government is to make these exceptions into the rule for housing development.

Choosing this route of reform will deliver results, but means facing up to the vested interests of landowners who are doing very well out of the current model. This includes the major speculative developers, who are significant landowners in their own right. No one is pretending that this route will be easy – but it least will be heading in the right direction.

The government has an opportunity with the White Paper to introduce much needed reforms; it is vital that they take it.

You can read more about our proposed approach to reforming housebuilding in this short memo we submitted to government in advance of their White Paper.

[1] Build out rates are based on a Shelter interpretation of data from NLP, Start to Finish, November 2016. The approximate build out rate per year is calculated by taking the actual build out rate per year (NLP data) and comparing it to the mid-point for each size category of site. For 2,000 units plus we assume a mid-point of 4,000 units – the actual range ran from 2,200 to 15,000.