Test 15 March, 2018

Housing: tough questions, simple answers

The Government is right to identify a problem with the housing market. In fact, government is right to label it “broken” as it so starkly did in last year’s white paper. Demand has outstripped supply for years, resulting in the average home costing seven times the average wage in 2010 – up from 3.5 times in 1997. In the 1990s, low and middle-income workers had to save 5 percent of earnings for three years to afford a deposit on their first property. Today they need to save for 24 years.

In any market economy, however, alarm bells should ring when people argue that the reason for undersupply is that suppliers don’t want to supply. This is what Mrs May did on Monday. The Prime Minister called for developers to “do their duty for Britain” and accused developers of land banking (holding on to land to exploit its rising value). Last year, Sajid Javid accused“big developers” of having a “stranglehold” on supply.

It is true that building is slow. The most widely cited figure for land with planning permission not built on is 423,000 houses in 2016-17 (from the LGA). The LGA identifies that it takes 40 months from schemes receiving planning permission to starting building. In the 40 months to March 2017, Ministry of Housing, Communities and Local Government data show that 1.2 million permissions were granted, meaning that 30 per cent of the snapshot of 423,000 were unbuilt.

This is no smoking gun for land banking, however, as numerous studies have concluded.[1]

The slow building rates are in part due to the planning permission regime. “Outline planning permission” is one of two types of planning permission granted, but this requires further agreements between developers and local authorities before houses can be built. This is reflected in the LGA figures, which therefore do not reflect the multi-stage permission process that may be stopping land with planning permission from being immediately built on.

Another reason for slow building may be that a ‘land promoter’ has secured planning permission before selling it to a developer that may need to change permission to suit its needs. (This is also a reflection of the risks and costs associated with securing planning permission.).  In all, MHCLG suggested in 2015 that 15 to 20 per cent of permissions are changed, which will in part be due to the relationship between land promoters and developers.

MHCLG also suggested that 10 to 20 per cent of land with planning permission is not built on at all. This, according to NLP, a planning consultancy, could be due to a host of reasons, from inability to get finance to complications stemming from planning permission.

What’s more, the economics of land banking do not stack up.

Developers show profits to investors and shareholders based on return on a return on capital employed (ROCE) measure. ROCE is mainly based on hard earnings – that is, cash income. Assets (that is, the land the houses are built on) not sold by developers will decrease ROCE because they are not cash income.

Furthermore, developers typically buy land from a ‘land promoter’ (which takes the investment risk by speculating on whether the land will get planning permission), so developers do not benefit from the land increasing in value which happens when planning permission is granted.

Costs of building houses on land thereafter means that developers are incentivised to sell quickly. And NLP has found that land prices have not risen quickly enough to deliver a good rate of return – with UK urban and greenfield land outside of London still more than 20 per cent below 2007 levels.

This suggests that not only are the incentives not present for developers to bank land, but regulations restrict this uneconomical practice. To solve these problems, government should look to create more liberal market conditions – rather than bashing developers and offering central sticks. How government might do this will be the subject of a forthcoming blog.

[1] These are: The Barker Review of Housing Supply (2004); The Callcutt Review of Housebuilding Delivery (2007); The Office for Fairtrading Home Builders in the UK (2008); Savills Strategic Development Sites (2011); Molior Report on Barriers to Housing Development in London (2012); Savills analysis of planning pipeline data (2014).