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.

Want more of this stuff? Follow CityMetric on Twitter or Facebook.

 
 
 
 

What other British cities can learn from the Tyne & Wear Metro

A Metro train at Monument. Image: Callum Cape/Wikipedia.

Ask any person on the street what they know about Newcastle, and they’ll list a few things. They’ll mention the accent; they’ll mention the football; they’ll mention brown ale and Sting and Greggs. They might even mention coal or shipbuilding, and then the conversation will inevitably turn political, and you’ll wish you hadn’t stopped to ask someone about Newcastle at all.

They won’t, however, mention the Tyne and Wear Metro, because they haven’t probably heard of it – which is a shame, because the Metro is one of the best things the north-east has to offer.

Two main issues plague suburban trains. One is frequency. Suburban rail networks often run on poor frequency; to take Birmingham for an example, most of its trains operate at 30-minute intervals.

The other is simplicity. Using Birmingham again, the entire system is built around New Street, leading to a very simple network. Actually, that’s not quite true: if you’re coming from Leamington Spa, Warwick, Stourbridge, Solihull or a host of other major minor (minor major?) towns, you don’t actually connect to New Street – no, you don’t even connect to the ENTIRE SYSTEM BUILT AROUND NEW STREET except at Smethwick Galton Bridge, miles away in the western suburbs, where the physical tracks don’t even connect – they pass over each other. Plus, what on earth is the blue line to Walsall doing?

An ageing map of the West Midlands rail network: click any of the images in this article to expand them. Image: Transport for the West Midlands/Centro.

But Newcastle has long been a hub of railway activity. Tragically, the north-east has fewer active railway lines than any other region of the UK. Less tragically, this is because Tyne and Wear has the Metro.


The Metro was formed in 1980 from a somewhat eccentric collection of railways, including freight-only lines, part of the old Tyneside Electrics route, underground tunnelling through the city centre, track-sharing on the National Rail route to Sunderland, and lines closed after the Beeching axe fell in the early 1960s.

From this random group of railway lines, the Metro has managed to produce a very simple network of two lines. Both take a somewhat circuitous route, the Yellow line especially, because it’s literally a circle for much of its route; but they get to most of the major population centres. And frequency is excellent – a basic 5 trains an hour, with 10 tph on the inner core, increasing at peak times (my local station sees 17 tph each way in the morning peak).

Fares are simple, too: there are only three zones, and they’re generally good value, whilst the Metro has been a national leader in pay-as-you-go technology (PAYG), with a tap-in, tap-out system. The Metro also shares many characteristics of European light rail systems – for example, it uses the metric system (although this will doubtless revert to miles and chains post-Brexit, whilst fares will be paid in shillings).

 

The Metro network. Image: Nexus.

Perhaps most importantly, the Metro has been the British pioneer for the Karlsruhe model, in which light rail trains share tracks with mainline services. This began in 2002 with the extension to Sunderland, and, with new bi-mode trains coming in the next ten years, the Metro could expand further around the northeast. The Sheffield Supertram also recently adopted this model with its expansion to Rotherham; other cities, like Manchester, are considering similar moves.

However, these cities aren’t considering what the Metro has done best – amalgamated local lines to allow people to get around a city easily. Most cities’ rail services are focused on those commuters who travel in from outside, instead of allowing travel within a city; there’s no coherent system of corridors allowing residents to travel within the limits of a city.

The Metro doesn’t only offer lessons to big cities. Oxford, for example, currently has dire public transport, focused on busy buses which share the same congested roads as private vehicles; the city currently has only two rail stations near the centre (red dots).

Image: Google.

But it doesn’t need to be this way. For a start, Oxford is a fairly lateral city, featuring lots of north-south movements, along broadly the same route the railway line follows. So, using some existing infrastructure and reinstating other parts, Oxford’s public transport could be drastically improved. With limited engineering work, new stations could be built on the current track (blue dots on the map below; with more extensive work, the Cowley branch could be reinstated, too (orange dots). Electrify this new six-station route and, hey presto, Oxford has a functioning metro system; the short length of the route also means that few trains would be necessary for a fequent service.

Image: Google.

Next up: Leeds. West Yorkshire is a densely populated area with a large number of railway lines. Perfect! I hear you cry. Imperfect! I cry in return. Waaaaaah! Cry the people of Leeds, who, after two cancelled rapid transit schemes, have had enough of imaginative public transport projects.

Here’s a map of West Yorkshire:

Image: Google.

Here’s a map of West Yorkshire’s railway network:

 ​

Image: West Yorkshire Metro.

The problem is that all of the lines go to major towns, places like Dewsbury, Halifax or Castleford, which need a mainline connection due to their size. Options for a metro service are limited.

But that’s not to say they’re non-existent. For example, the Leeds-Bradford Interchange line passes through densely populated areas; and anyway, Bradford Interchange is a terminus, so it’s poorly suited to service as a through station, as it’s currently being used.

Image: Google.

With several extra stops, this line could be converted to a higher frequency light rail operation. It would then enter an underground section just before Holbeck; trains from Halifax could now reach Leeds via the Dewsbury line. The underground section would pass underneath Leeds station, therefore freeing up capacity at the mainline station, potentially simplifying the track layout as well.

 

Image: Google.

Then you have the lines from Dewsbury and Wakefield, which nearly touch here:

Image: Google.

By building a chord, services from Morley northwards could run into Leeds via the Wakefield line, leaving the Dewsbury line north of Morley open for light rail operation, probably with an interchange at the aforementioned station.

Image: Google.

The Leeds-Micklefield section of the Leeds-York line could also be put into metro service, by building a chord west of Woodlesford over the River Aire and connecting at Neville Hill Depot (this would involve running services from York and Selby via Castleford instead):

The path of the proposed chord, in white. Image: Google.

With a section of underground track in Leeds city centre, and an underground line into the north-east of Leeds – an area completely unserved by rail transport at present – the overall map could look like this, with the pink and yellow dots representing different lines:

Et voila! Image: Google.

Leeds would then have a light-rail based public transport system, with potential for expansion using the Karlsruhe model. It wouldn’t even be too expensive, as it mainly uses existing infrastructure. (Okay, the northeastern tunnel would be pricey, but would deliver huge benefits for the area.)

Why aren’t more cities doing this? Local council leaders often talk about introducing “metro-style services” – but they avoid committing to real metro projects because they’re more expensive than piecemeal improvements to the local rail system, and they’re often more complex to deliver (with the lack of space in modern-day city centres, real metro systems need tunnels).

But metro systems can provide huge benefits to cities, with more stops, a joined-up network, and simpler fares. More cities should follow the example of the Tyne and Wear Metro.