The housing market is in desperate need of reform. As both the government and the opposition have rightly acknowledged, Britain needs to build more, better quality homes. The political will is clear to see – but in order to address the supply shortage, politicians must take on the handful of big developers which dominate the market.
Currently, there are a very small number ‘volume builders’, such as Barratt, Taylor Wimpey and Persimmon, which the government relies on to deliver the bulk of new homes in England. These companies are typically financed by private equity, which essentially means money is only raised for developments on the promise of very good returns to investors; these have averaged out at around 20 per cent of late.
While this model works well in stable economic times, it naturally faces two problems. First and fundamentally, it is very sensitive to cyclical changes in the economy. Any uncertainty in the political and economic outlook can hit firms’ share prices and reduce investment, and thus cut output sharply. Immediately after the EU referendum result, for example, the share price of the three largest housebuilders plummeted 40 per cent.
Analysis by Homes for the North, the alliance of the biggest housing associations in the North of England, reveals that in every recession the UK has seen an immediate lost of investment in volume building, and by extension, a sudden drop in housing numbers. In the recession of 2008-10, for example, output by the volume builders fell a staggering 59 per cent.
The second problem is that these operators tend to focus on relatively high-value properties in desirable areas, in order to get the quick-buck returns investors want. There is a real lack of building in less well-off areas, even where demand is high. This quite simply damages the government’s plans to boost construction and growth across the country, especially in regions outside London, where it is needed most.
The present economic and political outlook creates real challenges on these fronts. Not only do we have the political instability inherent in a hung parliament, but we are entering uncharted political territory in terms of Brexit, which has, in the eyes of many commentators, heightened the risk outlook. The Office of Budgetary Responsibility’s latest Fiscal Risk Report, published in July, predicts the risk of recession to now be as high as 50 per cent.
Faced with this, it is essential that the government implements a countercyclical strategy to ensure housing numbers are not negatively impacted by any future downturn.
Housing associations can play a vital role in this new approach, as the sector is remarkably resilient to economic cycles. When the volume builders’ numbers fell 59 per cent in the last recession, housing association output fell only 3 per cent. The reason is a different business model based not on equity and the need for quick returns, but a debt-financed, longer-term approach to building homes where they are needed. This model delivers consistently, reliably, and crucially, counter-cyclically.
The 19 member organisations of Homes for the North, for example, already expect to deliver nearly 15,000 new homes over the next 3 years. But that figure – and the building plans of other housing associations – could expand radically if the policy framework was right.
One of the biggest issues reflects the fact that housing associations are not regular market developers, and are bound by quite strict regulations, including what rents they charge. Government says it will review the situation in 2020 – but this is too late and uncertain. The most efficient housing associations must be allowed to strike flexible rent agreements now in order to raise finance for building new homes.
Then there are other measures that could help bring the sector into the market, such as using some of the £3bn Home Building Fund to address market failure in regions outside the South East, where housing is desperately needed, but developers shun because high returns on equity are not available. We should also have regional build targets, not just a national one, which will focus the minds of metro mayors and other decision-makers on the job of encouraging a diversity of developers to meet those targets.
If politicians shy away from this, recent history suggests the target to see 1.5m new homes built by 2022 will fall seriously short. That means older people struggle to downsize. First time buyers will not get a foot on the property ladder. Not enough private rented accommodation will come onto the market to meet increasing demand. The consequences are worrying indeed.
Mark Henderson is chair of Homes for the North.