A colleague from the University of Sheffield, Dr Sarah Payne, researches volume housebuilders and the planning system. Understandably, she was getting very exercised on Twitter about the UK Government's repeated claims over the past fortnight of planning as a barrier to growth. So, I invited her to write her first academic blog entry on the topic. So, over to Sarah, and some proper planning:
However, it is not the premise upon which these reforms are based that is my focus. To me that’s just politics (but then again I am rather cynical). It’s the implications of these reforms, the potential outcomes and the ideological message they convey that I’m interested in. That’s because since the Coalition came to power, they have in my view failed to properly understand the nature of the beast – that the structure of housing provision is broken - and in particular, the dynamic processes through which homes are (not) being delivered. To really understand the problems we face would be to view the planning system as just one piece of the jigsaw. So the Coalition’s focus on the planning system as a means of explaining the mess we’re in is troubling me beyond words. Not only does it discredit a system that is necessary and has worked well (look outside the window, planning most likely helped deliver the good things you see) but it takes the focus of attention away from a myriad of other pressing issues that require policy intervention. More serious than this though, it places the responsibility and accountability of the problem in the hands of planners and developers. Yes, planners and developers are part of that jigsaw and are the engines of growth, but they are not the complete picture, they are not in the driving seat. We still need someone to steer and direct that growth.
Whilst it was hard not to write this blog last week, fresh from reading No10’s announcement and viewing the various opinions, comments and rants from my Twitter followers, I wanted to take a step back and reflect on what this meant for housebuilding in England and in particular, what further questions these reforms raised over the existing structure of housing provision. I didn’t want to let my utter dismay at the Coalition failing again to understand the structural problems of speculative housebuilding delivery get in the way. But alas, I wake up yesterday morning to the Daily Telegraph and the Policy Exchange pitting developers against greenbelt-located rural dwellers in a way that reads more like a cock and bull story than a solution to our housing crisis. So, I want to focus my efforts on housebuilders – the planning systems biggest and most litigious customer. They are here to stay. So we need to find ways of working with them. That is my premise.
Housebuilders have long had to fight their reputation as bulldozing, money grabbing, environment-hating, greedy, bullying developers. Yes, they do make money from developing land. But, that’s the nature of speculative business activity in a neo-liberal era and it’s a fundamental part of any system relying on the private sector to deliver the majority of new homes. That said, there is scope to better capture the price inflation that occurs during the development process, but more of that later. For now, we need to accept that last week’s reforms intended to stimulate growth are not going to deliver the necessary volume of housebuilding required because they do not address the underlying problems. Indeed, introducing policies that will deliver 75,000 new market homes, ‘up to’ 15,000 new affordable homes, 5,000 homes for rent and 5,000 empty homes back to use is not a reform. Add those totals together and that’s what we need to build each and every year. At least. To deliver such a step change will require asking more fundamental questions such as: can we rely on private housebuilders to deliver the majority of new homes anymore?; is the proven boom bust nature of speculative housebuilding too risky as a means of housing our population any more?; what profits should housebuilders be making during the development process?; should we disconnect land speculation and land trading from the building of houses?; should we increase the tax that landowners pay when they reap the benefits of gaining residential planning permission on their site (it’s not just the housebuilders who benefit)? Without asking these kinds of questions, how can any reforms that the Coalition introduce be more than elastoplast housing policy stuck on to an ever widening fissure?
So, what exactly are these structural problems and how can a better understanding of them help us get out of this housing crisis? Well, first of all, I don’t have the answers. If I did, I’d be on a train down to CLG right now to pester them until they listened to me. But if we consider the way housing and planning policy has been formulated alongside the highly risky nature of the speculative residential development process, it might just help us better understand the underlying issues.
Let’s take a look at the way policy has been formulated and its impact on the planning system. Economists have long been the favoured advisors to Government on all things housebuilding and land supply. And, whilst I am not saying their contributions have not been useful, I am saying that it has focused the minds of policy makers, their advisors and housing ministers on seeing the planning system as a blockage, slowing down the development process, being highly inefficient and impinging on Mr Rational Economic Housebuilder from delivering the amount of new homes needed. It has focused their minds on quantifiable outcomes and not behavioural processes. Using this logic, if the planning system allocated more land for development, then we would see an increase in the number of new homes built. Wrong. This leads me onto my second point – our need to understand the processes by which speculative housebuilders operate and in particular the nature of risk.
Speculative housebuilding is a highly risky and innately volatile enterprise. Financially, housebuilders’ success is dependent on the performance of land, finance and housing markets. Falls in house prices and land prices or rises in interest rates can significantly erode profit margins and land values. In a rising market, the opposite is true. But we are not in a rising market. Success is also dependent on housebuilders gaining planning permission and selling the houses they build at the price necessary to secure a viable return on investment. Let’s take a hypothetical ‘fag packet’ scenario to illustrate this. In an unstable housing market, Developer A agrees to pay Landowner B £860,000 for a site with the potential for 59 houses. That land value is dependent on the houses being sold for an average value of £156,000 and is a net figure minus all the costs associated with development including profit, S106, remediation, build costs, transactions costs and so on. If house prices decrease by 5%, the land value drops to £555,000 as all the other costs remain constant. See a 10% drop and the land value goes down to £250,000. That’s not too bad if you haven’t already handed over the cash to the landowner as you can rejig your deal to account for that depreciation. Now imagine you’ve already done the deal and paid the landowner £860,000 but the market dives and the sales value of the houses you are trying (and I emphasise that) to sell falls by 10%. What happens to that loss of £610,000? It comes off the bottom line. But the developer has not just borrowed £860,000 to pay the landowner for the land, he’s borrowed upwards of £6,500,000 to fund the entire development process and this needs to be paid back to the funder by way of selling the newly built houses to generate that return. And that needs to be done sooner rather than later because the funder is charging interest on that £6,500,000, around £200,000 to be precise over the 2 years it will take to build and sell all the houses. And that calculation is based on a relatively low interest rate of 5.96%. Now, you can imagine the number of possible risks in any speculative residential development scenario in an unstable economic and policy environment – house prices go down, interest rates increase, mortgage access becomes limited reducing your target market, planning policy changes, homes take longer to sell etc. All this risk has to be factored into the development process before a spade hits the ground, before planning permission is granted, before the land has any value, before the deal is done. Add to that the fact that the development process can take yonks – anywhere from 18 months to 10 years. So, understanding how developers negate and manage risk is the key to understanding how and why they operate the way they do. More importantly, it presents the opportunity for policy makers to deliver solutions that work with the grain of the industry. It also helps us better appreciate why housebuilders don’t just roll up their sleeves and build more homes as David Cameron so wishes.
The big speculative housebuilders are, financially, fairly well placed to get building again. But, they are quite rightly being very cautious about the prevailingly volatile land, finance and housing markets, as businesses would. They are probably questioning, daily, whether house prices will continue to bounce around, go up or go down and wondering how to factor that risk into their appraisals, land offers, purchase agreements and cash flows to negate it as best they can. Before any of that however, housebuilders have got to find land that they know, with a fairly good level of certainty, will get planning permission and given the utter flux of housing and planning policy that is currently governing their business activities, this is an equally uncertain enterprise.
We’ve recently see housebuilders dragged through the press and criticised for hoarding developable land in their land banks and building profits not houses. But, to blame housebuilders without an appropriate understanding of their development process is, quite frankly, misguided. It’s easy and avoids looking at the real structural problems of housing provision in England. That there isn’t enough land being released for development or at the appropriate rate to accommodate the necessary growth. That there isn’t strategic regional planning policy on housebuilding guiding development to the right places. That landowners are being unrealistic in the value they expect for their land. That greater environmental performance, better design and better quality houses are needed from speculative housebuilder, not just more homes. That there is a serious issue of mortgage finance access. That housing delivery is at the mercy of macroeconomic health.
The recent suggestions of alternative models of housebuilding have been an interesting read. We’ve seen discussions on self build, increasing public sector provision, joint ventures and stimulating the private rental sector. But, my argument is this – they are not going to deliver the volume of new homes necessary. So what’s the solution? We need to work with the grain of the speculative housebuilding industry to better understand its wider ‘institutional’ constraints, the nature of its risks and the reasons why houses are not being delivered. In doing so, we need to use effective regulatory measures through housing and planning policy to stimulate growth and build capacity in the industry to accelerate the pace of housebuilding in the right locations. For me, this means a return to regional planning and regional housing targets to provide much needed direction and accountability. It also means greenfield release (I didn’t say greenbelt) to provide more land supply and more certainty. And this doesn’t mean building houses in areas shown in the pictures used regularly by the Daily Telegraph to fuel its ‘hands off our land’ campaign. It means targeted urban extensions alongside integrated transport corridors. Green wedges, as they're known.
It also might mean looking at different ways of financing new home purchase, increasing the tax landowners pay when selling land for residential development and increasing the tax developers pay when purchasing land for residential development. Tax breaks could incentivise better design, greater environmental performance and better quality in housebuilding. Carrots and Sticks.
Being at the mercy of market processes requires effective state intervention that suitably penetrates the development process to achieve the desired outcomes. But we’ve got to understand that process before we can make effective changes. In a neo-liberal era, the extent to which the state should intervene in the market can be a highly contentious debate. But its one that needs to exist. We need brave thinking that doesn’t simply discredit developers as greedy bulldozers, but that understands the processes they operate within and seeks to regulate and stimulate change within that context.
Having worked for a housebuilder during the credit crunch, I know all too well the financial pressures they face. But I’ve also experienced the good side of development. We got residential planning consent on a commercially allocated brownfield site that was highly inefficient and terribly contaminated. The site was so constrained that the only viable re-use was to build houses to generate enough capital to pay for ground remediation and existing business to relocate to more efficient premises within the Borough. It was a difficult process. The Local Planning Authority resisted our proposal and asked for nearly 50 financial appraisals to cost various scenarios and their viability implications. But it was worth it. I believed that what we were doing was the best solution for all – the site, the local residents, the existing business, the landscape, the access, the Borough, the developer, even the resident badgers! And this is what interests me most about housebuilding and planning. It’s not just about building homes, it’s about facilitating change in the right locations steeped with social, economic and environment purpose. It can work. It does work. But, to do this we need a planning system that regulates and facilitates, that is respected and not discredited. We need volume housebuilders to deliver homes. But we need to understand where the risks are in that process in order to help direct development to the right locations.
