Transcript

Voiceover:

This is a podcast from the Bartlett Review, sharing new ideas and disruptive thinking for the built environment, brought to you by the Bartlett Faculty of the Built Environment at University College London. 

Chris Foye: 

The problem with the house building industry for a house builder is the more you build, the more you diminish your profit margins. 

Mike Raco: 

There's a whole range of areas in which planning regulation often introduced individually as regulations for very good reasons, for very laudable reasons, but maybe pull the process into different directions. 

Neal Hudson: 

The places where it's viable to deliver are the places where no one can afford to buy, and the places where people can afford to buy, it's not viable to deliver. 

Mike Raco: 

Hello, I'm Mike Raco, I'm Professor of Urban Governance and Development and Head of Department here at the Bartlett School of Planning. In this episode of the Bartlett Review podcast, we are picking up on some of the themes raised in the previous episode about the crisis in the UK housing industry, specifically around the lack of new homes. Our focus today is very much on the supply side of this situation and the drivers and barriers shaping housing development. Why aren't the nation's builders stepping up to deliver the government's target of 1.5 million new homes before the next general election in 2029? And what steps can be taken to address this, particularly for new affordable housing, which is where the shortage is most keenly felt.  

I'm very pleased to be joined today by two experts on the subject who will be able to shed light on why we are in this predicament and also give a fresh perspective on what needs to be. So let me introduce my colleague here at the Bartlett School of Planning, Dr Chris Foye who is an Associate Professor in Real Estate with a particular expertise in urban housing markets and politics. Welcome Chris, it's great to have you with us. 

 Chris Foye: 

Thanks. 

 Mike Raco: 

And we're also joined by Neal Hudson. Neal is the Director of Residential Analysts and the founder of Built Place. Neal is widely recognised as a leading expert on the UK housing market and keeps a close eye on market trends and the factors that underpin them. Neal, welcome to the Bartlett Review podcast. 

Neal Hudson: 

Hello. 

Mike Raco: 

So maybe I could start with you, Neal, to begin with an overview of the UK housing market and how big the housing shortage is in England? 

Neal Hudson: 

So there are lots of different estimates for how big the housing shortage is in England, ranging from the region of millions of homes. If you're comparing our housing to the likes of European countries, such as France, to some people would argue that there's no shortage at all. And actually, there's a lot of older people under-occupying housing. The reality is probably somewhere in between. It slightly depends on what it is that we actually expect from our housing market and the type of housing, the amount of space that we feel everyone needs. But I think the thing that is very clear at the moment is that housing delivery, new build housing is failing to meet even the basic levels that we need to be delivering. 

Mike Raco: 

So could you tell us what targets the government has introduced and why? 

Neal Hudson: 

So the government, in its great desire to finally win an election they set out a housing target to build 1.5 million homes over the period of the current parliament and just to be clear that's specifically in England and it also is counted against net additions so that includes not just new build completions but conversions, changes of uses and also demolitions although we don't actually demolish that much of our housing stock these days and so from where they were sat it immediately from the moment they first announced it looked like a very difficult target for them to achieve you certainly wouldn't have started from the point of the housing market that we have at the moment. The most likely outcome, if everything goes exactly as they'd hope, would be for them to actually hit the run rate of 300,000 homes per year by the end of this parliament, perhaps setting themselves up to hit 1.5 million in the next parliament if they were still in power. 

Mike Raco: 

Thank you. Do you think targets are helpful? 

 Neal Hudson: 

There are some uses of targets. They set out a broad, easily definable objective for people to measure themselves against, but they are also potentially dangerous. The problem is, a target is the process, it's not the actual outcome of what we're trying to achieve.  

What we are lacking from this government, and what we've lacked from previous governments as well, is an actual idea of what it is that the government hopes to achieve from building 1.5 million homes and from all of its other housing policies. We don't know what that looks like in particular, in terms of the availability, the affordability and the quality of the housing stocks that they hope to have at the end of this period. What is it that 1.5 million homes will achieve?  

The problem with using just housing supply is that all the academic evidence suggests that it takes a very long time for it to have an impact on affordability. And actually what it's better at doing is suppressing future house price rises than correcting for the mistakes of the last 25 years. So even if they were to hit the 1.5 million target, they're very unlikely to actually have an impact on affordability in the wider housing market that maybe some of their voters, and particularly those younger people who are stuck in the private rented sector, might like to see in terms of house prices. 

Mike Raco: 

So let's move on to the wider context. Chris, why has this situation arisen? What are the economic and political factors that shape the context that Neal was just describing? 

 Chris Foye: 

Okay, so I think there are two ways of diagnosing the housing crisis in the UK. The first is as a distributional problem. That is, you have a very skewed distribution of income and wealth. And as a result, you've got a very, very skewed distribution of housing. The way you address it from that perspective is you tax housing wealth and income, that is you redistribute the housing.  

For example, if you re-bounded council tax, that is re-valued properties, then you would incentivise people to move to smaller places. That's very difficult politically, for a variety of reasons. So what a lot of governments have focused on instead is to address it as a supply shortage issue. That is, the way you deal with this is to try and dramatically ramp up supply, and that's what the successive governments have sought to do in the main way that they've tried to address kind of the housing problem.  

Then the issue becomes well how do you actually generate housing supply at the levels you know for example 1.5 million and that we're talking about and of course there's various political issues with it. But another big issue, probably even more fundamental issue, is the fact that you're reliant on house builders, private house builders, who only build for profits and will only build for profit to actually deliver these new homes. 

Furthermore, that house building industry is highly oligopolistic. That is, there's a few companies who build most of the houses, and we know that they coordinate as well. They share pricing information. That was what the Competitions and Market Authority found. They are competing with each other in many ways, but they're also coordinating with each other in some ways too. What happens in a downturn, like we've seen recently, is the house builders just stop building. And they say to the local authority, those requirements that you asked us to meet as a condition of giving plan permission, for example, that affordable housing you asked to be provided we're not going to provide it anymore because if we provide that we won't make a profit so what we want you to do is we want you to reduce, those requirements and then we'll deliver new supply and this is what's happening in London where the Greater London Authority have recently agreed to reduce the affordable housing requirements that those house builders, have to provide. 

They are able to do that because they can just pause supplies. So what would happen in other markets, so for example, a car market, is you would get people completing, you know, a car manufacturer completing the products and they would have to sell them. Whereas with the house builders, they don't have to do that. They can just hold back. If the market holds up, then they get their 20% profit margin, you know, and they do very well. But if the market goes down, they have the power just to hold back and renegotiate the terms of the agreement and still protect their profit margins. That's why I would come to the conclusion that if you really want to address housing supply, the state needs to actually take a leading role and deliver housing supply itself or lead the delivery of housing supply. Otherwise it's always vulnerable to this same dynamic.  

 Mike Raco: 

Thank you before coming back to Neal maybe just to follow up on one point there Chris. What impact does the availability of land have on the delivery of housing? 

 Chris Foye: 

So I think that the availability of land is a significant issue. And we know that the volume house builders, so the volume house builders, I'm talking about Barrett, Red Row, I'm talking about Taylor Wimpey, I'm talking about Persimmon, they deliver maybe about 25% to a third, of new supply in any given year, usually in quite suburban areas. They are very happy about the new Labour government coming in and releasing more land, but the major constraint for them is housing demand so they see, post global financial crisis they are very very risk averse. Okay, so they don't... And what form is that risk aversion taken? Well, it's taken the form of getting rid of all debt, if they make profits, they send it back to the shareholders. They don't reinvest them.  

 Because the problem with the house building industry for a house builder is the more you build, the more you diminish your profit margins. If say if you've got one site, let's say on the edge of Birmingham, and you've got a certain amount of people who want to live there, who are willing to buy there. If you release all those homes at once or if you build lots and lots of homes, then you potentially reduce the price that you're able to charge. So what you want to do as a house builder is you want to kind of slowly release, that supply onto the market and not release too much of it because if you release too much of it, you're going to reduce the price and you're going to reduce your margins. 

So what they want to do, the house builders, therefore, is they don't want to build too many homes because if they build too many homes and they build them too quickly, then they're going to reduce the price that they're able to charge. And therefore, land is not the defining factor that it's often made out to be. So, for example, Barton Redrow recently merged. Up until they recently merged in 2022 they delivered between them 25,000 per year, now they've merged, and they're under the most ambitious of plans they are hoping to reach 22,000. That goes from a very, very tight planning system, very, very loose planning system, and they're still going to deliver less than what they were doing three, four years ago. 

 Mike Raco: 

Yeah Neil would you like to pick up on any of the points Chris has raised here. 

Neal Hudson: 

Yeah, so I like to sort of simplify my view of the house building market into three component parts. So if you want a home built, you need land, bricks, and money. And land is clearly essential. Planning is a large part of the land availability. On the brick side of thing that's my kind of simplification of the construction sector both the availability of construction materials and labour and the ability to actually build the homes. And that has been under severe pressure over the last few years. The inflationary pressures from across the globe have contributed to big rises in the cost of building homes, But the third one, and it's the one that I think right now is the most important one, is the money.  

And ultimately, if you want homes built, you need the money to be able to build the homes and you need the money for people to actually buy the homes, be they homeowners, investors, housing associations or others. And right now, the problem is, thanks to those inflationary pressures, we've seen a big increase in mortgage rates. So there's a lot of people out there that would love to buy a home, but they're simply unable to purchase one at current prices.  

Investors are much less likely to be interested in purchasing properties at the moment thanks to both previous stamp duty changes and other tax changes but also because of the higher rental yields that they'd be requiring to invest and there's generally a lack of money available for people to buy particularly following the end of the equity loan scheme. So what that means is that even if we do want to build a load of homes, there's not actually the people to buy them. 

 So I think right now the problem is effectively the prices that house builders and developers need to achieve in order to make their homes viable are at a level where there's just insufficient numbers of people.  

Now, historically, what would happen at this point in time is that the government and the housing association sector would step in with a lot of funding to convert these developments into affordable and private rental products. But the really key part of the market that's missing compared to previous market slowdowns and downturns is housing associations.  

Unfortunately, over the last decade or so, they were incentivized to become much more market-facing, much more in line with the market cycle. They were having to deliver private rental and shared ownership homes in order to then cross-subsidize the affordable homes that they were building. They've also been hard hit by the building safety crisis. And effectively, they're in a position now where they're unable to really readjust and help support demand through delivering more affordable homes. 

Mike Raco: 

Great, thank you. Chris, did you want to come back? 

 Chris Foye: 

Yeah, I just wanted to ask Neal what's viable, right, we can think about two different versions of viable. We can think about what's viable at the land. So let's say a house builder buys a piece of land in the anticipation of house prices staying where they are, in anticipation of the mortgage market staying where they are, and they buy that piece of land for quite a lot of money, way in excess of its agricultural value. And then suddenly the market declines or doesn't appreciate in the way they anticipated, as was happened, and therefore they can't build that out and make a profit. I think that's one definition of viability, a kind of maximalist definition, if you will.  

Another definition of viability is that once you stack up the cost of land, even at agricultural value, so you say if you just give a thousand pounds for a piece of land, right, and the build costs and the profit, then it's not viable. I think what Neil's talking about is that more maximalist version of viability, that is just basically at the land prices they pay for the house, the house builder is not viable for them to build or people to buy the house for the price that they, that makes it profitable for the house builder.  

My question for Neal, I mean, surely that's, do you not think that's a systematic problem with the industry that we're essentially relying on protecting house builders' margins when it's no longer profit margins in order to actually deliver that supply? And this is obviously very ambitious, but should we not be targeting that more minimalist definition of viability. So should we not say, should the local authority not be in a position to say, well, yeah, you paid too much for the land. Yeah if you could kind of elaborate on what definition of kind of viability you're thinking about, Neal, on whether you think it matters or not.  

Neal Hudson: 

So I think the reality in the market is there's probably a combination of, you know, a full range of spectrums between your two different forms of viability. Yes, there are developers who are unwilling to deliver homes because it's not meeting in a profit margin threshold. And because of the way that the current market works, they're quite happy to sit there. There are plenty of examples across the market where effectively you have what we'd call a negative land value where even once you account for everything and we've already seen profit margins squeezed by quite a lot over the last few years that there's not actually the viability to build the homes even if you had a zero land value and we have seen some evidence where when developers are going back in to make changes to their approved plans for developments they're actually also going in and trying to argue on the basis of viability that they can actually no longer deliver the homes that they agreed to deliver a year or a couple of years ago and so actually trying to negotiate that as well.  

So there's definitely an element of trying to make the most, but the reality is that a lot of house builders are taking lower profit margins and so there are real pressures in the market not least given the big rise in build costs that we've seen and so it it's a  challenge and ultimately you know it's everyone within it is acting within the house building system that we've got so yes I’d agree that effectively you know if we want a different outcome from it we probably need to think about what a different way of delivering new homes would be rather than trying to tinker around the edges of the existing system but that would take a certain amount of political willpower that I don't think we can expect from this government. 

Chris Foye: 

Could I just… Neal you said about negative land values, where do you think the negative land values are? Are you thinking kind of London or outside or…. 

Neal Hudson: 

So, I mean, generally, the viability, the ability for house builders to actually build homes was greater in the south of England because the prices were higher. And so that there was more margin within that for all of the costs involved, whereas in the north of England, you would potentially have negative land value. But the problem in the current market is you've got the reverse from a demand perspective where the people who can still afford to transact in the market are in the north of England, but the people who can't afford are in the south.  

So effectively, you've got this kind of slight catch-22 situation where the places where it's viable to deliver are the places where no one can afford to buy, and the places where people can afford to buy, it's not viable to deliver. So we have seen a lot of private-public partnerships happening in more regional markets where you've got local authorities and mayors working in partnership with private companies in order to take the land and make the project viable.  

 Mike Raco: 

Thank you both. Maybe, Neal, just to pick up on the point you made about a government being more purposeful and having a policy that is more robust, what could that look like? What kind of model could we imagine where delivery happens less through market mechanisms and more through other types, maybe of state-led provision or other types of provision that we can think of? 

Neal Hudson: 

In the first instance we're still waiting to actually learn what the current government's long-term housing strategy actually looks like we need to be understanding what the outcomes we're trying to achieve are, you know, there are lots of people who point to different places around the world as the potential solution to what we're trying to be and have in, you know, everywhere from Singapore to Texas. And really, there are a number of different options for how we go about it. But we need to understand what it is we're trying to achieve before we actually set out the process of getting there. 

 Mike Raco: 

Chris, any thoughts on what Neil just said? 

 Chris Foye: 

For me, the objective of government should be to build more housing in places where it's needed most and particularly focused on affordable housing. So if we take that as our kind of starting point, then I think the way the government needs to do it is to be more strategic in its planning. To have stronger powers on the land market and to be stronger in terms of assembling land and buying land at much lower values and then capturing that value itself, and then using it to build infrastructure  

If we look at kind of post-global financial crisis, one of the key drivers of, perhaps the key driver of the volume housebuilders, profitability, it was often deemed to be help to buy. That was very significant. But it was also a very uncompetitive land market. So they were able to go into the land market and buy big sites where very few other people could bid on them. And they were able to get them for relatively low values and therefore bring them through the planning system and in doing so, realise all that value uplift. And of course, if the government had been active in terms of buying land, they could have done that. They could have gone in, bought the land at low values. They could have borrowed cheaply back then, less so now, obviously. And they could have captured that value, and they could have delivered infrastructure, they could have delivered affordable housing using that value uplift. And they wouldn't have had to rely on the value of how they're supposed to do that. But they choose not to do that. And I think as a result, they're reliant on a highly oligopolistic, risk-averse private house building industry to deliver 1.5 million homes, which they're not going to do.  

For very good reasons, at least from the perspective of their shareholders. So, I think, to answer your question, I think you need a more active state in the land market.  

Mike Raco: 

Okay maybe I could turn to the issue of planning and what planning can do as a barrier or a driver to the processes we've been discussing. I mean clearly planning and regulation have an impact on the processes that we're looking at and there's been a lot written recently about the ways in which different regulators pull the housing delivery process into different directions. So as Neal mentioned earlier you have regulators dealing with questions around the quality and delivery of affordable housing social housing, you have questions about the rights of tenants and new laws and regulations around protecting tenants both in the private sector but also in the social rented sector, there are big discussions going on I know within the building sector around building safety regulations and the capacity of the building safety regulator to deliver outcomes, to deliver approvals to new projects.  

There's a whole range of areas in which planning regulation often introduced individually as regulations for very good reasons, for very laudable reasons, but maybe pull the process into different directions so that at the same time a developer has to think about affordable housing, social housing, market processes, land value they have to think about the wide range of things that planners require of them to think for example about environmental sustainability, to think about the energy use of buildings and other things. I just wonder this is a question to the two of you there's a lot of work going on at the moment in planning about what's called progressive deregulation. In other words, you might start to look at where there are some things that we think are maybe excessive or having a particularly big impact.  

Can you think of, from your own research and from your own knowledge, of any areas where some type of progressive deregulation might be helpful to get some of the processes around house building moving and moving forward?  

Neal Hudson: 

So, the process of development inevitably involves compromises at all different levels. And this is where I do think the government's 1.5 million target is not particularly helpful and potentially dangerous in the current system because they're clearly highly incentivized to tend towards making choices that focus on delivery and absolute unit numbers. When actually a lot of what we see from the regulatory environment is stuff that is actually quite important in ensuring the quality and safety of the homes that people are going to be living in and also things around environmental protections.  

 And so, there is a risk that in the government's short-term desire to increase house building numbers, they make compromises that are not necessarily constructive over the longer term. 

Mike Raco: 

Thank you, Chris. 

Chris Foye: 

I think you need to draw a distinction between viable regulation and non-viable regulation. So if, as we discussed previously, there are some geographies where land values are negative, that is, once you include the build cost, a profit margin, the cost of finance, and the land value is negative, then of course no one's going to build and so you need to reduce the affordable housing requirements or the state needs to step in and subsidize or do it itself. So I think there's that's kind of the unviable regulation aspect.  

Then there's the kind of viable regulation aspect where you've set the affordable housing target at 35% and the developers paid too much for the land and they say, well, we're not going to deliver on this regulation because if we do so, we'll compromise on our profit margins. And in that case, in my opinion, what the state should do is it should hold firm, you know, and it should say, well, in that case you're going to sell it on. I guess you're going to have to take a loss or, you know, you're going to have to deal with it because you're taking on the risk, you're getting the returns, but it means you have to see the downside. 

So I think for me, that's a really important distinction. Neal's thinking about it from a more politically pragmatic point of view about what can be kind of done within this government, I think. I suppose I'm thinking about it from a more kind of idealistic, perhaps like unrealistic perspective of what's ideal.  

 Mike Raco: 

Okay, so we've covered a range of topics and perhaps we could finish off with coming to the two of you and asking you, what is the one thing you would do , that would tackle the biggest problems facing the housing delivery process in England? Chris, maybe to you first and then to Neil. 

 Chris Foye: 

So we have a lot of pension wealth in the UK. What I would do, I think, is I would set up a bond, a government bond system, whereby you invest, you buy government bonds. So the government directly borrows from its own pensioners. The government then uses that money to buy land en masse around areas of high demand and areas of unaffordability particularly. It buys the land and it buys it at close current use value through tweaks in the regulation. And then it then divvies up that land, builds the infrastructure, and then either it sells off the land parcels to people to actually build themselves through custom building or through construction companies with low profit margins. 

So I think that for me, it's viable because with the monies the money there, it's It gets over our reliance on a kind of oligopolistic volume house building industry, who demands profit, understandably. And it also means you can target affordability, you can build homes that are sustainable in the areas where they're needed.  

Neal Hudson: 

I suspect the industry would like me to say some form of equity loan support for first-time buyers to help subsidize demand, but I think right now the thing that would probably be most useful is actually an affordable homes programme that meets the aspirations of the government's house building target.  

Now it's true that their affordable homes program funding is a big improvement on what has been offered over the last few parliaments and it will be an improvement given that it's very much focusing on socially rented homes but ultimately the number of homes that we actually expect to see delivered through the program is well below the needs of the program generally and also right now specifically given the underlying housing market conditions because ultimately during a period where market demand is suppressed, the best demand in order to actually get those homes built is affordable housing.  

Mike Raco: 

I think also within this, greater devolution. So a key part of the process of building more housing would be to have robust, proper devolution from central government to mayors and regional authorities or city authorities to take control of the housing delivery process, to be given more powers more resources to meet local demands, local needs but also to be innovative and to be given the resources to invest.  

So, for example where in England we've had new town development corporations working in the past many of the things that the new town development corporations did were about recycling surplus back into the public realm. And that was a very strong devolution agenda that enabled new town development corporations at the time, and now the local authorities who run those new towns, to take a more active and interventionist role, but sensitive to local conditions. That seems to me to be a very important part of what needs to be done.  

Well, thanks to Dr. Chris Foy from the Bartlett School of Planning and to Neal Hudson, the Director of Residential Analysts, for their time and expertise today. I really enjoyed hearing your thoughts on this subject and I hope our listeners have too. 

 Mike Raco: 

If this is a subject you're interested in, can I recommend the previous episode of the Bartlett Review podcast in which my colleague, Professor Priti Parikh, Dr. Stani Milcheva and Pete Gladwell from L&G gave a powerful overview and set of insights into the finances around the housing industry. Links to that podcast and a lot more information about the Bartlett faculty of the built environment is available via our website ucl.ac.uk forward slash Bartlett or you can find us on LinkedIn at the Bartlett UCL. So from me Professor Mike Raco thank you for listening and goodbye.