Housebuilders' shares are tanking. Now is the time for the government to build a million homes

A screen showing a crashing stock market. Admittedly, it's from Nanjing, in 2007; but we liked the picture, so. Image: Getty.

Among the biggest losers in the stock market turmoil that has followed last week’s Brexit vote have been Britain’s housebuilders. Persimmon fell by a staggering 40 per cent on Friday morning, and closed the day 27.6 per cent down.

The scale of the selling reflects the building industry’s acute sensitivity to market sentiment, and the fragility of its business model, which is dependent on already-high demand being maintained indefinitely.

With a period of house price stagnation and even decline now highly likely, builders are in trouble. Having purchased several years’ supply of land in a rising market, they are now going to struggle to turn as big a profit on new home sales as buyers revise down what they are prepared to pay – or hold off buying altogether.

That is going to happen almost immediately – there is already anecdotal evidence of buyers reducing their offer price or pulling out of sales – in response to the sudden sense of economic uncertainty. But it will be very much intensified if there is an economic downturn, wages are squeezed and, eventually, interest rates go up to combat inflation.

That house prices may fall is not in itself a bad thing: many people, including myself, have been willing this for quite some time. House prices have been racing away from wages for much too long now, benefiting existing homeowners at the expense of future generations, and a correction is well overdue.

The difficulty is what comes next, which by now we know well: housebuilding output will fall as developers turn off the taps. This has been the construction cycle that has repeated over and over since the 1970s. Builders only build on any scale in a rising market. As soon as demand falls, and prices drop, build-out rates plummet while developers wait for confidence (meaning: prices) to return. The long-run trajectory of house prices is only ever upwards.


It is this cycle that has led us into the housing disaster that we find ourselves in 2016, with a shortage of homes, high housing costs, declining levels of home ownership and the rise of the rentier landlord.

Now is the moment, if ever there was one, for this cycle to be broken, finally and completely. For the government to introduce a package of counter-cyclical support for housebuilding that floods the market and holds prices down in perpetuity. Without it, the government’s ambition of building a million new homes by 2020 – which was always improbable and in any case insufficient – is now dead in the water.

The new policy should consist of a public sector building programme which, as a minimum, guarantees the building of 100,000 homes a year over and above the output of private builders. It will probably need to involve local authorities taking over the sites that developers have in the pipeline but may now become economically unviable.

The big housebuilders will have to reset their expectations of future price growth and probably take a hit on the landbanks they have already built. This will be hard on them, but no investment is risk free and the public interest must come first.

The public sector homes could be either made available for social housing, and the building costs recouped over the coming decades in rent (Capital Economics has modelled such a scenario). A cheaper, and therefore more politically palatable approach, could be to sell them into owner-occupation, with most of the costs recouped immediately and reinvested year after year; I calculated in a recent report that this could be achieved with a single upfront investment of £15-20bn. Realistically, we need a combination of social rent and owner-occupied housing – and so some hybrid of these two scenarios would probably be most appropriate.

This approach would not only begin to make inroads into the country’s housing shortage; it would also provide what should be a welcome fiscal stimulus as the economy enters a rocky period. There are expectations of a further cut in interest rates in the short term and possibly a new round of quantitative easing. But the levers of monetary policy have been worked almost to their limits already and the cost of borrowing is at a record low – 10-year gilts hitting less than 1 per cent this morning. The Treasury should take advantage while it can.

The government has a lot to contemplate right now. A housebuilding programme should not be seen as peripheral to the challenge of the coming months, but central to it.

Daniel Bentley is editorial director at the think tank Civitas. He tweets @danielbentley.

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Space for 8,000 new homes, most of them affordable... Why it's time to demolish Buckingham Palace

Get a lovely new housing estate, there. Image: Getty.

Scene: a council meeting.

Councillor 1: They say it’s going to cost £369m to repair and bring up to modern standards.

Councillor 2: £369m? Lambeth balked at paying just £14m to repair Cressingham Gardens. They said they’d rather knock it down and start again.

Councillor 1: Then we’re agreed? We knock Buckingham Palace down and build new housing there instead.

Obviously this would never happen. For a start, Buckingham Palace is Grade I listed, but… just imagine. Imagine if refurbishment costs were deemed disproportionate and, like many council estates before it, the palace was marked for “regeneration”.

State events transfer to Kensington Palace, St James’s and Windsor. The Crown Estate is persuaded, as good PR, to sell the land at a nominal fee to City Hall or a housing association. What could we build on roughly 21 hectares of land, within walking distance of transport and green space?

The area’s a conservation zone (Westminster Council’s Royal Parks conservation area, to be exact), so modernist towers are out. Pete Redman, a housing policy and research consultant at TradeRisks, calculates that the site could provide “parks, plazas, offices, cafes and 8,000 new dwellings without overlooking the top floor restaurant of the London Hilton Park Lane”.

Now, the Hilton is 100m tall, and we doubt Westminster’s planning committee would go anywhere near that. To get 8,000 homes, you need a density of 380 u/ha (units per hectare), which is pretty high, but still within the range permitted by City Hall, whose density matrix allows up to 405 u/ha (though they’d be one or two bedroom flats at this density) in an area with good public transport links. We can all agree that Buckingham Palace is excellently connected.

So what could the development look like? Lewisham Gateway is achieving a density of 350u/ha with blocks between eight and 25 storeys. On the other hand, Notting Hill Housing’s Micawber Street development manages the same density with mansion blocks and mews houses, no more than seven storeys high. It’s also a relatively small site, and so doesn’t take into account the impact of streets and public space.

Bermondsey Spa might be a better comparison. That achieves a density of 333u/ha over an area slightly larger than Lewisham Gateway (but still one-tenth of the Buckingham Palace site), with no buildings higher than 10 storeys.

The Buck House project seems perfect for the Create Streets model, which advocates terraced streets over multi-storey buildings. Director Nicholas Boys Smith, while not enthusiastic about bulldozing the palace, cites areas of London with existing high densities that we think of as being idyllic neighbourhoods: Pimlico (about 175u/ha) or Ladbroke Grove (about 230u/ha).


“You can get to very high densities with narrow streets and medium rise buildings,” he says. “Pimlico is four to six storeys, though of course the number of units depends on the size of the homes. The point is to develop a masterplan that sets the parameters of what’s acceptable first – how wide the streets are, types of open space, pedestrian only areas – before you get to the homes.”

Boys Smith goes on to talk about the importance of working collaboratively with the community before embarking on a design. In this scenario, there is no existing community – but it should be possible to identify potential future residents. Remember, in our fantasy the Crown Estate has been guilt-tripped into handing over the land for a song, which means it’s feasible for a housing association to develop the area and keep properties genuinely affordable.

Westminster Council estimates it needs an additional 5,600 social rented homes a year to meet demand. It has a waiting list of 5,500 households in immediate need, and knows of another 20,000 which can’t afford market rents. Even if we accepted a density level similar to Ladbroke Grove, that’s 4,830 homes where Buckingham Palace currently stands. A Bermondsey Spa-style density would generate nearly 7,000 homes.

There’s precedent for affordability, too. To take one example, the Peabody Trust is able to build genuinely affordable homes in part because local authorities give it land. In a Peabody development in Kensington and Chelsea, only 25 per cent of homes were sold on the open market. Similarly, 30 per cent of all L&Q’s new starts in 2016 were for commercial sale.

In other words, this development wouldn’t need to be all luxury flats with a few token affordable homes thrown in.

A kindly soul within City Hall did some rough and ready sums based on the figure of 8,000 homes, and reckoned that perhaps 1,500 would have to be sold to cover demolition and construction costs, which would leave around 80 per cent affordable. And putting the development in the hands of a housing association, financed through sales – at, let’s remember, Mayfair prices – should keep rents based on salaries rather than market rates.

Now, if we can just persuade Historic England to ditch that pesky Grade I listing. After all, the Queen actually prefers Windsor Castle…

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