Friday, 14 September 2012

Housing and planning - a week later, but has the dust settled?

You might well have noticed that, although I'm based in a planning school, I don't talk about the planning system very much on this blog. That is basically because my research interests are not really about the planning system as it has been set up in the UK - the system of development plans and development management to ensure new development is in line with those development plans. Thanks to my doctoral research, I approach planning from a more abstracted level - that planning covers, and is informed by, wider research about policy administration and analysis and urban sociology and geography. My planning is about any policy that has an interaction with place. This is not that I don't find planning very interesting (I do, as it brings a lot of the issues I'm interested in into stark relief) but it's not my central research focus.

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:

In England last week, we saw the announcement of a number of planning and housing reforms which the UK Government said would boost the economy, slash unnecessary red tape across the planning system and provide support for businesses, first time buyers and developers. The main premise underpinning these reforms is that the planning system is slowing down housebuilding and holding us back from much needed economic growth. David Cameron says he is serious about rolling up his sleeves and doing all he can (insert using the construction industry here) to kick-start the economy.

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.


  1. Congratulations Sarah. I agree the media and political and think tank debates mostly pit the wrong antagonists against each other and the challenge is to understand the structural craziness of the whole system. I don't however agree that we have to find a way to work with the "house builders". Instead we need to develop a new system in which the rewards go to those who do the best developments (design, quality, value for money, environmental performance) not to those who are best at buying and selling in the speculative and bubbly land/house markets. It would be good to discuss this because I'm working on that end of it.

    I do suggest you join the Planners Network A group of us there are writing a manifesto for a critical re-think of it all. Some bits of it on my blog as well and - with Bob Colenutt - on

    Anyway best wishes. Michael Edwards, UCL

    1. Michael, thanks for responding positively to the blog and for your interesting comments regarding the development of a new system which rewards those who do the best developments. The obvious lack of commitment by housebuilders to involve themselves in better design, environmental performance, corporate social responsibility should most definitely be a policy priority and its a central theme of my research interests. These issues are extraneous to housebuilders as a) they are not reflective in the profits they make, and b) the current 'system' allows them to 'get away with' not doing it. Some tough times ahead for planners and housebuilders I think.

      Thanks for the suggestion of joining the Planners Network, I see from the website that my colleague Andy Inch is involved so I will have a chat with him in the first instance.

      And yes, discussing these issues with you would be fab, I'll certainly be getting in touch.

      Kind regards, Sarah Payne, Sheffield.

    2. Thanks, Sarah. Saved it, for future reference!

      Yes, (as per recent response to a relevant Jules Birch post): in a nutshell the business model of the private housebuilding industry needs to be realigned from land speculation to house construction.

      Similar case in greater detail (as I m sure that you are aware, but report deserves wider publicity) was made in ippr report ‘We must fix it’ by Matt Griffith (recent trading updates by Galliford Try and Barratts underscore the case made there.

      Have a look at:

      for a model that aims to deflate land prices and hence costs and new house prices directly.

  2. This is a really good and thoughtful blog.
    Key highlights for me are that
    1. Planning represents only one component of the housing jigsaw and the governments preoccupation consequently leads to disintegrated thinking.
    2. Rather than the planning system being broke the structure of housing provision is broken
    3. That the daily telegraph and policy exchange debates tend to polarise the debate in a way that is unhelpful.
    4. That there is not enough explicit understanding of risk element in house building; my view is that planners too need to experiment more to help us learn about new ways of doing things.
    5. Need more diverse approaches to delivering housing but I still maintain that more focus is needed on ensuring we deliver the infrastructure that goes with them and which creates sustainable communities.
    6. We need to look at housing from a regional perspective except that has been abolished and there is no strategic planning authority that can easily step into the breach. I do wonder if we should champion LEPS more; although not perfect they do provide the only current body that may take such a view and a recent spatial planning event between greater Birmingham and Solihull and Worcester LEPS identified an appetite for this.

    At the heart of my work on the rural urban fringe is the need for a more constructive dialogue. Boundaries need to be crossed and the sectoral fix overcome. In doing that we all have to put our pre-conceptions in a box and start that dialogue.

    Enjoyed reading this very much

    1. Alister, thanks for your thoughtful and interesting comments on the blog. I am delighted to read your interpretation and see the extent to which you've applied my comments to the broader debates concerning spatial planning. Your comments on LEPS are particularly interesting and I wonder whether there is mileage in LEPs being a 'replacement' for the loss of regional planning. I do feel that regional planning is the necessary spatial scale at which housebuilding, green infrastructure and grey infrastructure should be coordinated and managed. I think your comments on constructive dialogue are at the heart of it all - for your work and for mine. Communication breeds trust and trust is key to encouraging and stimulating change in a risky work.

      Its going to be a fascinating few years for planning and housebuilding.

      Best wishes, Sarah, Sheffield.

  3. Sarah
    This is one of the best analyses I've read of our current housing crisis. Well done. It's easy to blame the house builders, but as you point out they are acting rationally in an irrational world (I can feel a blog coming on!) - perhaps what we need is a nationalisation programme for house builders or setting up a national not-for-profit house builder who could develop public land for market or affordable housing without worrying about shareholders and profits. Ultimately, this is all about land, as you say. We simply must release more land as a country to restore some level of balance to our crazy housing market.

  4. This is going well and I can see scope for some cooperative work here! Just 2 more comments at this stage:
    (i) Agree with you (cf Alister above) on importance of infrastructure. But it's not hard to pay for once you take the land development profit out;
    (ii) Not happy with this approach to LEPS: better than no cross-border mechanism perhaps but they are too technocratic / undemocratic to be able to impose the will of needy areas on the resistance of nimby areas, aren't they?

  5. Sarah
    I thought this was a very interesting analysis. From a housing policy perspective though, another major factor that has to be taken into account is the decline in homeownership and its implications. I think we are far from understanding how permanent this recent trend is and how it will bottom out. Similarly, the extraordinary growth in private renting has so far been at the expense of both the owner-occupied and (through right to buy) the social sectors. Is this growth sustainable and how can we turn it into investment in new housing rather than conversion of existing stock? One of the characteristics of the current development market is that it is stuck in the old model of inexorable growth in homeownership, and presumably developers simply assume that the current situation is a temporary blip. But is it?

    I also think that you dismiss social housing too quickly. There is tremendous potential for social landlords to invest, for example local authorities (since this year's move to self-financing) have potential to finance at least 200k additional homes.

    John Perry

  6. John,

    Thanks for your interesting comments. Like you, I view the growth in private renting as symptomatic of the underlying problem and very worrying that the Government seems to see it as one solution to the housing crisis. It's clear that the British population aspire to homeownership, its an innate part of the pscyhe and is coupled with the desire to live in semi-detached and detached properties in relatively rural areas. As you point out, this is having a serious knock on effect to those more vulnerable, such as those in the social sector and the first time buyers. The opportunity for the Government (and LA's) to invest in social and lower cost housing is ripe - LA's have land and so the risk of trading it is removed from the development process.

    I'm not too sure whether developers view this as a temporary blip, I'd love to be a fly on the wall in board meetings where strategic business decisions are made with banks and CEO's. I think developers are canny - they know the risks and I think they even know that we will not see a repeat of the 2000-2007 boom because there is simply not effective demand. Suppressed demand yes, but not effective demand. Hence they are being very cautious and as Colin Wiles mentions above, acting rationally in an irrational world. See Colin's contribution to the debate here:

    I think Local Authorities have the chance (and responsibility) to drive social housing investment by allocating land for social housing development. Maybe they could employ private developers to build on licence with an agreed profit. That way, land is not traded and the risk greatly reduced.

    Best wishes,

    Sarah Payne, Sheffield.

  7. An impressive post, I just gave this to a colleague who is doing a little analysis on this topic. And he is very happy and thanking me for finding it. But all thanks to you for writing in such simple words. Big thumb up for this blog post!

  8. Hi James, thanks for the positive comments (and apologies for the delay in responding!). I'm glad you gained some value from it! Best wishes, Sarah

  9. HI,This is excellent, thank you very much.There were a couple that I had not seen before which I will try out.Thanks for adding this.

    Angela West

  10. Sarah,

    Good to see the whole system being considered and not, as too usually happens, only one part being considered in isolation. About the only big ommission seemed to be a more active role for the public sector/government but you then touched on this in one of your responses.

  11. Sarah - I have just come across your perspicacious post by a roundabout route. You are right to highlight the tendency to attack and tinker with the planning system which means that the true issues are missed. The Labour Party has now reignited the debate on land banking. You may be interested in my own recent blogpost - here I hope you will make a submission to the Lyons inquiry.

    David Brock