Warning of 'lost decade' for UK house-building
Government 'subsidising stagnation' unless state support for the construction industry is turned into new house-building
Britain risks another 'lost decade' of house-building unless the government demands more of developers, according to a new report published today by the think tank IPPR. It argues that the construction industry has for too long prioritised trading land over building homes and that - as with the banks - the government's housing strategy gives support and guarantees to the developers but does not make sufficient demands of them in return. The outcome could be further subsidised stagnation in UK house-building.
The only way to end the UK's chronic housing crisis is to build many more homes. IPPR analysis has shown that England faces a shortfall of 750,000 homes by 2025 - we need to build 250,000 new homes every year to close this gap, but the latest figures show construction of new homes fell below 100,000 in the 12 months to September 2011, the lowest level since the First World War.
IPPR's new report argues that reforming the construction industry would help tackle our growing housing crisis as well as boost economic growth without requiring the government to spend more money. The report recommends the following radical reforms:
- Land should be 'de-risked' by splitting the development process into two separate parts - the trading of land and the building of houses - much as casino banking activity is to be firewalled from banks' retail operations.
- All land ownership and sales should be registered with the Land Registry, with serious penalties for those who fail to comply.
- Strict conditions should be applied to public land release, requiring rapid construction of homes and lower profit margins. A fifth of this land should be earmarked for self-build, and all of it should be supplied through a fairer system of 'joint venture partnerships'.
- Financially unviable builders producing sub-par numbers of new homes should be allowed to go to the wall, and government should act as a clearing house for their land banks.
- The promised community land auction pilots should start.
- The government should be actively exploring the prospect of modern garden cities.
Nick Pearce, IPPR Director, said:
"Our construction industry has for too long prioritised trading land over building homes. This has to change.
"The government's new Housing Strategy does not make sufficient demands of the house-builders. Instead, it offers them public land, money and guarantees without a serious 'quid pro quo'.
"The government must demand more bang for the taxpayer's buck - if it doesn't, the result will be subsidised stagnation and another lost decade of house-building. It is now time for development industry reform to become an integral part of housing policy."
Notes to Editors
IPPR's new report - 'We Must Fix It: delivering reform of the building sector to meet the UK's housing and economic challenges' - is available from:
The state of the UK house-building sector:
- Britain's big house-builders have a proven track record of being largely unresponsive to increasing demand, especially when compared with their international counterparts. The sector also lacks economic resilience and is still reeling from the credit crunch. The major house-builders, amid their many mergers and acquisitions, bought up large land banks at high prices during the boom. As the housing market and land prices collapsed in the wake of the crash, Britain's big builders found both their cash flow and their balance sheets in crisis. As a result, with their asset values and share prices tumbling, land written down and banking covenants broken, new homes did not get built: housing completions last year sank to the lowest level for a century. Yet forbearance on the part of over-exposed banks, reluctant to realise asset prices at current market values, has kept otherwise moribund building firms alive.
What happened in previous recessions:
- The historical experience of past recessions contrasts with any current optimism for a strong supply-side response from the building sector. The past two British house-building recessions, starting in 1973 and 1989, resulted in 'lost decades' for housing output. In both recessions, the response of the sector was to focus not on expanding output, but on the twin tasks of rebuilding profitability and managing losses and reducing output. Previous recessionary shocks have also resulted not in innovation and sectoral improvement, but in stagnation and consolidation over a lengthy period:
- After the 1973 slump, the sector saw a continued slow deterioration of output throughout the decade, reaching a low of 118,590 in 1981 - 13 years from the market peak.
- In the 1990s there was also a decade of stagnant output at recessionary levels, with levels of completions in 2001 still at 26% below the 1988 peak. Output only recovered to higher levels with the emergence of the 2004 boom - and never returned to 1988 levels.
If we duck reform now, this time around could be even worse:
- This time around, the state of the sector and the wider macro-economic picture are, if anything, considerably worse than in the wake of the 1990 recession. The fall in UK private housing market completions and starts since the crash has been much steeper than in any previous post-war recession. The 2008-2010 UK loss in residential output has been among the highest in the developed world - worse than the USA, Spain, Portugal and the Euro Area, and only 'beaten' by Ireland and Greece.
Previous and current government intervention makes stagnation more - not less - likely:
- Previous and current government intervention makes another lost decade of market stagnation more likely. Government intervention since 2007 has been high in cash terms. However it has been poorly conceived, captured disproportionately by the major house-builders and focused on short term concerns at the expense of sectoral reform. Government intervention has stopped any 'creative destruction' in the building sector. Its effect has been to prevent the realisation of losses and release of cheaper land that is critical for facilitating new market entrants and delivering cheaper housing. Rather than 'leveraging up' government investment, the current approach 'deleverages down' the impact of government subsidy by allowing it to cushion financial weakness among existing larger players at the cost of under -performance. Larger firms benefit from being seen as 'too big to fail', but smaller firms and possible new market entrants have become increasingly frozen out of access to credit and government support packages:
- Of the £213 million spent on HomeBuy Direct between 2008 and 2011, 64% went to the four largest house-builders; 84% went to the largest twelve.
- FirstBuy, the government's current flagship First Time Buyer programme, sees over 50% of the £169 million of 2011 government allocations go to the top four largest building companies. Taylor Wimpey, Barratts and Persimmon alone captured over £80 million - or 47% of available funding. Approaching 75% of allocated FirstBuy funding went to just the top 15 UK builders.
The scale of housing need:
In its previous report, The Good, the Bad and the Ugly: Housing Demand 2025, IPPR used the Government's own projections for household growth to show that England will be 750,000 homes short of what it needs by 2025. The worst supply and demand mismatches will be in London, the South East, East of England and Yorkshire and Humberside. In these regions demand is projected to be substantially higher than net additions to the housing stock.
- London faces a housing gap of 325,000 homes
- Yorkshire and Humberside faces a housing gap of 151,000 homes
- East of England faces a housing gap of 132,000 homes
- South East of England faces a housing gap of 77,000 homes
- East Midlands faces a housing gap of 66,000 homes
- West Midlands faces a housing gap of 28,000 homes
- North East of England faces a housing gap of 16,000 homes
- South West of England faces a housing gap of 7,000 homes
The North West of England is the only region where supply could meet demand, with 40,000 extra homes compared to the number of households, due to the high rate of unoccupied premises at present.
Tim Finch: 07595 920 899 / [email protected]
Richard Darlington: 07525 481 602 / [email protected]