Alex Morton is Head of Policy at the Centre for Policy Studies, and a former Special Adviser on housing to the then Prime Minister, David Cameron.
The Government is considering planning reform to drive housebuilding, so as to support home ownership and economic growth. This could be a key part of recovering from the Covid-19 crisis. It will be complex to deliver – ensuring that infrastructure is provided before new homes; that the welcome push by Robert Jenrick and others to improve new build design and quality works, as well as striking a balance between meeting housing need and listening to local views.
More importantly, change will take time. The first planning permissions delivered under any reforms aren’t likely to come through before late 2021, or nearly 18 months from now. This is a problem, because house building is facing imminent collapse.
Many sectors are in difficulty. But the housebuilding sector is different. Not just because of how quickly activity evaporates, but how long it takes to return. The housebuilding sector is very pro-cyclical. It tends to be hit hard by recessions – and the recession that seems likely to follow Covid-19 will not be an exception. Between 2007 and 2009, housing starts fell by 54 per cent. It took six years for the bottom of the market to be reached in terms of new build completions.
After both the early 1990s and the late 2000s recessions, it took over a decade to get close to previous peaks in terms of housing supply – despite, in the second case, planning reforms to get the UK building being introduced under George Osborne. The damage to supply chains, labour supply and the pipeline of land in the system takes a long time to fix.
The supply of homes is linked to the sales rates of new build homes, and the ability of the housebuilders to mark-up land from purchase as land with permission to sale as part of a finished home. In a downturn, when transactions fall and first-time buyers hold off from purchasing, there is a smaller market to sell into. On top of this, as house prices fall, the price of land falls – first reducing, then eliminating, the profit per home (since the land has already been bought at a higher price).
In a new report today published by the Centre for Policy Studies, Help to Build, we estimate that given the likely fall in the number of transactions and new first time buyers, as well as a shrinkage in the number of affordable Section 106 homes (which are largely paid for via a slice of the costs of other developments), housing supply is likely to fall by close to 80,000 homes this year and likely next – even with a fairly strong recovery and limited house price falls.
Some readers might think that the sector should welcome a shake-up, given the perennial complaints about the outsize profits of some housebuilders and issues around the quality of new builds. But it is always the small and medium sized housebuilders, and the small contractors who work in their supply chains, who suffer most – not the big players.
Britain’s larger housebuilders, having been through recessions before, have created a model that allows them to reduce output and wait for the storm to blow over. For example, they tend to limit their capital investment (e.g. in modern offsite construction) and the number of staff they employ directly, with only around one in five of those working on a large housebuilder site working directly for the firm.
In fact, data shows clearly that recessions and their aftermath tend to intensify the power of the large housebuilders and reduce the size of the rest of the sector.
This is why we are asking the Government to deliver, as a matter of urgency, a temporary stimulus package we call ‘Help to Build’. This would allow housebuilders to access grants up to a maximum of £25,000 (capped at a percentage of the ultimate value of the home, e.g. 15 per cent) for each new build property. This would be available to all housebuilders who signed up, delivered upon completion of a sale.
This incentive could be used to help potential buyers with a deposit, to support part-exchange purchases, or to convert the home into an affordable home for either rent or sale if a bulk-purchaser could be found. The only real restriction would be it could not support buy-to-let purchases.
With a goal of support averaging out at £20,000 per unit, you could cap the Government’s exposure at £3 billion – thereby supporting construction of 150,000 homes in the next year.
The crucial thing is that, in return for using this scheme to support sales, the housebuilder would agree to build homes based on a substantial percentage of their recent performance (e.g. 75 per cent). So if they built a thousand homes every six months over the last eighteen months, they would have to build 750 for each of the next six months. If they failed to comply with this across the board building out, they would have to pay the money back, with a small penalty.
This scheme effectively channels demand to new build supply. Housebuilders will simply sit tight and wait for the market to recover, even if that means laying off staff and collapsing supply chains. By using the Help to Build grant as an incentive – for example, offering people a substantial proportion of their deposit – those who are looking to buy would be more likely to buy a new build, enabling new build supply to continue.
Unlike other stimulus schemes, this must be strictly time-limited. If kept in the long run, this subsidy would go to push up land prices, meaning there would be no money left to incentivise the sale. But if swiftly instituted now, it should limit the likely collapse in housebuilding and lay the grounds for a strong recovery, stopping massive harm to SME housebuilders and those working in supply chains.
Unless Government acts, the evidence of the past is that it will take most of the 2020s just to get back to where we were in 2019 – and many who lose jobs in housebuilding or the supply chain may never return, making it even harder to meet our housing goals. Meanwhile the sector will be even more dominated by a handful of large housebuilders. In other words, not so much creative destruction as just lasting destruction.
In the last recession, we got things wrong. The Government prioritised propping up prices across the £7.4 trillion residential market, while housing supply fell very sharply and then remained low for a long time. This time, we need to prioritise supply – which in turn should help preserve the SME sector and the jobs within it.
Arguing for Government intervention and stimulus is not our usual habit at the Centre for Policy Studies. Indeed, we will be working on a suite of other reforms to liberalise the housing industry: to convert commercial to residential space, drive thoughtful planning reform, and stamp duty cuts to drive up transactions. But right now, we need Help to Build.