The UK housing shortage is now acute and the Government is floating schemes to try to encourage more house building. But the lack of mortgage finance and banks’ unwillingness to lend to small builders is stalling the market.
Housing policy has always been a bone of contention between the political parties.
When Labour’s shadow housing minister Jack Dromey accused housing minister Grant Shapps of putting a spin on housing figures in June this year, Shapps retaliated with the claim that no-one has done more to destroy our nation’s homes since the Luftwaffe bombs of World War II than the Labour Government.
Yet in the coalition’s first year of power, the number of new homes built in England increased by only 6% from 103,300 in 2010 to 109,020 in 2011, according to housing charity Shelter.
Overall, new build remains significantly lower than the 119,070 units recorded in 2009, the year before the coalition Government took office. The 2011 figure, of 109,020 also compares poorly with the 2001-2010 average of 142,000, and apart from 2010 is the lowest annual total of any year since 1946 – the end of World War II.
Housing is not always going to grab the headlines in the same way as political policies around immigration and bankers’ bonuses, which is perhaps why the coalition has failed to make any headway in mending what many now dub Britain’s broken housing market.
But the coalition’s lack of progress is surprising given that not a week seems to go by without Shapps launching a new housing scheme. His efforts however appear to be failing when the coalition’s house building statistics are taken into account.
So what is stalling the housing market and why despite their best efforts do politicians seem incapable of fixing it?
Hangover from the Thatcher years
It might not be the top of Prime Minster David Cameron’s agenda but the housing crisis in the UK is not something that can be swept under the carpet. The number of households in England is projected to grow to 27.5 million in 2033, compared to 26.3 million in 2011, according to the Office for National Statistics, showing that the need to build more houses has never been greater
“House building is currently at such low levels that the gap between what is needed and what is being built is completely out of step,” says Shelter’s chief executive Campbell Robb.
“Research shows that in order to meet demand, we need to build at a rate of 242,000 new homes a year, whereas last quarter only 21,540 new homes were started. This represents a 24% drop on the same quarter last year, even though the demand shows no sign of slowing down.”
It is not just new homes for first-time buyers that are needed. The UK is also suffering from a shortage of social rented housing, due mainly to house building over several decades failing to keep up with demand.
“The shortage of housing contributes to keeping prices high, which has lead to a situation where a whole generation is struggling to make it even onto the bottom rung of the housing ladder,” says Robb.
“Many people have no choice other than to rent, which has an impact on some of life’s most important decisions such as when to start a family. We desperately need more homes so that young people today have a chance of firstly getting a roof over their heads, and secondly at a price they can afford.”
Large amounts of social housing stock were sold off under former Prime Minister Margaret Thatcher’s Right to Buy scheme in the 1980s, which is partly to blame for a lack of social housing now.
Although the scheme allowed some one million tenants to buy their council house, local authorities were restricted on spending the money and could not use it to replenish their housing stock.
This, coupled with a greater number of single person households, a population which is living longer and increased levels of immigration means the UK has a chronic housing shortage.
“Over a sustained period of the time the number of planning consents has not kept up with demand,” says house building Taylor Wimpey’s director of land and planning Peter Andrew.
The Localism Act, which came into effect in March this year went some way in trying to restore local housing by taking the power from central government and handing it back to local authorities and communities – giving them the freedom and flexibility to achieve their own housing ambitions.
This was accompanied by the National Planning Policy Framework, which encourages development of brown field sites and offers councils guidelines on sustainable development.
“With the Localism Bill and the NPPF it puts a bit more of the decision making at local level. It’s still early days though and we will have to wait to see over time whether they deliver more planning consents,” says Andrew.
As part of the coalition’s Autumn statement last year, Cameron pledged to get ‘Get Britain Building’ and introduced a £400m fund to take forward stalled building projects.
It is hoped that about 450,000 mainly affordable homes will be built by 2015, many of them on publicly-owned brown field sites.
Other parts of the government’s strategy include empty properties being brought back into use and new providers being encouraged to enter the social housing market.
To try and undo some of the work that his predecessor Thatcher did, Cameron announced a scheme whereby although tenants of social housing will have the right to buy their home – for half the market price – the money will then be used to build more affordable housing, with the government pledging to build a new home for every home sold off in this way.
Yet many still feel this is not enough and the government needs to dig deeper if it is to make any substantial inroads into the housing crisis.
“Unless the government wishes to embark on a publically funded mass house building programme it needs to significantly reduce the burden on private house building,” says the Federation of Master Builders policy manager Peter O’Connell.
“The burden is extensive so there is plenty of room for reductions. The Government needs to start by not making the situation any worse with new legislation.
“At a local level it needs to reduce the cost of making a planning application, stop imposing unnecessary additional design codes, suspend the Community Infrastructure Levy, tackle the misuse of planning conditions, increase the land supply with implementable permissions coming out of the planning system and publically make the case for more housing,” he says.
Banks to blame again
Some would argue though that no matter what new measures the Government introduces, they are futile without the issue of a lack of mortgage finance being addressed.
A Government-commissioned report by Sir Adrian Montague, chairman of private equity firm 3i, recently recommended that requirements for builders to include a quota of affordable homes in new housing developments should be waived – known as Section 106 agreements.
This he argues would allow developers to create more properties for the private rental sector, which could be funded by institutional investors.
The move however was not greeted with open arms by the building industry and many felt the government is still failing to recognise the main cause of a lack of new homes – mortgage finance.
“Councils across the country agree that there simply aren’t enough new homes being built. We desperately need more housing and we need a mixture that includes private, social, affordable and rental properties,” says Mike Jones, chairman of the Local Government Association’s Environment and Housing Board.
“But crucially, Government needs to address the lack of liquidity in the finance market and limited availability of mortgages which are the real obstacles standing in the way of a resurgence in new house building and helping people to secure finance to purchase a home.”
David Ritchie, chief executive of Bovis Homes Group, feels the move could have a negative impact on the housing sector.
He argues that even though social housing sells at a lower price it is a guaranteed sale, whereas if builders have to allocate more of their houses to the private sector they may take more effort to sell.
“With mortgage finance being constrained it could take longer for sites to be developed,” he says. “If the proposal was to become a policy, we need to know how the banks are going to support a higher level of private housing.”
He argues that in the short-term it could be bad if the government does not encourage the banks to lend more to private purchasers.
Lenders are in the firing line for dampening demand for properties by failing to lend to borrowers with a deposit of 5% or less.
“The biggest post recession issue affecting house building is quite simply a lack of mortgage finance,” says Andrew.
“The overall number of mortgages that are being written is radically down. At the moment house builders’ output is driven by mortgage availability. Housing output will continue to be limited until such time as lending becomes more palatable. The Government needs to find a way of encouraging the banks to lend more money to first-time buyers at higher LTVs and rates that are affordable,” he says.
The government has recognised this is a problem and in a bid to tackle it introduced the NewBuy scheme in March 2012, which Andrew says is a step in the right direction Under NewBuy, lenders offer 95% LTV mortgages for new-build properties against a mortgage indemnity guarantee funded jointly by house builders and the Government.
The scheme was designed to give 100,000 people a boost onto the housing ladder butthe latest figures show that in the first three months of its launch only 600 people have reserved new homes through the scheme.
Persimmon, the UK’s largest house builder, revealed in its 2012 half year results that it has sold just 220 properties through NewBuy.
Despite reporting a 65% increase in pre-tax profits to £98.7m for the twelve months up to June 2012, its chairman warned that its growth would be hindered by the mortgage market.
“We anticipate continued firm underlying demand for new homes but this will remain constrained by the low level of mortgage availability,” said Persimmon’s chairman Nicholas Wrigley.
It is not just the mortgage lending aspect that is holding back the building business in terms of development; banks also have also been less than generous when it comes to lending to smaller developers.
“In order to build more houses, smaller house builders need to come back into the market but it is virtually impossible for some of the smaller developers to obtain finance from the banks, says Andrew.
“For the bigger builders like ourselves it is less of an issue as we have credit facilities in place.”
One way to boost the house building market is through self-build and in May this year Shapps announced plans to encourage more self-build developments.
He pledged £30m to fund short-term finance for self-build projects, allowing self-build groups to bid for a slice of the cash to part fund land acquisition and early development costs, with money being repaid on completion of the project.
He also earmarked several large sites owned by the Government which could be specifically designated to self-builders. Collectively, the sites should provide plots for more than 100 custom built homes.
“In every other developed nation half of the houses are self-built”, says the National Self Build Association’s head Ted Stevens.
“Self-build doesn’t mean people lay the bricks themselves but they hire a builder or architect who designs the house for them.”
“The big hurdle in the UK is land, there are lumps of land available but they are the bits nobody wants. If you want decent land it is very hard to get and expensive,” says Stevens.
“The housing minister has been very supportive of self-build but if we are going to see something radical on the housing front and something that leads to economic growth, we need a massive house building programme that will create jobs for builders,” he says.
One way of achieving this would be for the government to make available land for free to self-builders initially for two years and for the builder to pay them back when they get a mortgage and have completed the property.
“The Government has a scheme called Build Now Pay Later, which helps building companies buy sites and when the houses have been paid for they pay them back,” says Stevens. “If it can do that for the big builders why can’t it do that for self-builders?”
One of the biggest supporters of self-build has been the building societies sector, with a number of smaller societies offering self-build mortgages, yet several of the larger societies and most of the big banks do not lend to self-builders.
“The mortgage application process is done in a very automated way,” says Stevens. “With a self-build mortgage you are given the money in stages. If the banks have had a big clearout of some staff I suspect they can’t find a way of automating a self-build application.
But it’s not beyond the wit of man to get around this and I would like to see the big banks get into self-build as it is the one area of the housing market that is growing at the moment,” he says.
The housing crisis is not going to be solved overnight and one solution alone is not going to be its remedy. What is apparent though is that the market will not start to gather pace again until more people are eager to buy the properties that developers build and this will not happen until lenders ease up on their mortgage criteria.
“Development is a complex process and a development proposal can fall or fail for a wide range of reasons. However put very crudely its pounds and planning,” says O’Connell.
“The sharp tightening of credit conditions has restricted the availability of mortgage finance to buyers and development finance to house builders. This combined with a planning system that is just as complex, expensive, unpredictable and adversarial as ever, has produced a situation where development is no longer a viable business in many parts of the country,” he says.
Stewart Baseley, executive chairman of the Home Builders Federation
The country is experiencing an acute housing crisis. To meet demand we should be building around 240,000 homes a year in England yet we are currently building just over 100,000, the lowest level since the 1920’s.
The implications of this are stark. There are nearly five million people on local authority waiting lists – whilst first-time buyer numbers have plummeted.
There are a number of significant constraints on supply. In the short term a crucial one is mortgage availability. For the past few year people have been unable to afford the deposits required by lenders to secure a mortgage, and if people can’t buy, builders can’t build.
The NewBuy mortgage indemnity scheme will help. This scheme, paid for by builders and guaranteed by Government, allows the purchasers of new build homes to secure a 95% mortgage. It protects lenders against any potential losses and should increase lending to first-time buyers and second steppers unable to move on as they have insufficient equity in their current homes. Launched in March we are already it seeing it bear fruit, but more needs to be done.
The industry is hoping that the Funding for Lending scheme will see more funds made available for home buyers to kick start the market and is pressing Government to find effective ways of increasing lending generally.
Planning is a longer term issue. For decades not enough developable land has come through the planning system. A new localism based system was introduced in March that gives a lot more power to local authorities.
With that power comes a responsibility to assess local housing need and then identify land for housing to meet that need. Government must ensure local authorities are taking their responsibilities to house their local communities very seriously if the new system is, as intended, to deliver more land for housing.
Government also needs to meet its commitment to reduce the so called burden of regulation.
Over the last couple of decades there has been an increasing expectation that housing construction can support a wish list of regulatory costs and requirements to the point where many sites are now simply not viable to build upon.
House building sites have to meet obligations on providing reduced carbon homes, and affordable housing, as well as making contributions towards local infrastructure and a range of other costs. All of these can be seen as important in their own right but , but added together are unaffordable and are preventing many developments from going ahead, creating huge knock-on social and economic effects.
The benefits of introducing policies to boost housing supply are clear, and something HBF has been impressing on members of this Government since well before the election.
As well as the social benefits, increasing supply to anywhere near the number of homes we know the country needs would give the economy a huge boost. Every home built creates 1.5 full time jobs plus at least the same again in the supply chain. Sites are ready to go and builders are ready to build. With the economy experiencing ongoing difficulties, building our way towards recovery seems an opportunity Government can’t miss.
Paul Hunt, managing director of Phoebus Software
A new report from the right wing think tank Policy Exchange urges councils and housing associations to sell off their most valuable housing stock, since more than a fifth of council house tenants in England are living in homes worth more than the average privately-owned home.
It is hoped the move could help revive the economy by creating thousands of construction jobs while reducing council house waiting lists. Its proposal urges councils to sell off housing in expensive areas in order to reinvest in cheaper properties elsewhere.
The Policy Exchange’s report, Ending Expensive Social Tenancies, claimed selling council homes in such areas would generate enough money to build 80,000 to 170,000 more properties.
The think tank has provoked mixed reactions all round and it is clear to me that there is more than one problem with its report. Not only will it cause ghettoisation, as social housing tenants are forced out of central areas, but it will also rule out much of London as an option for rehousing.
The report defines expensive properties as those costing more than the regional average e.g. North West, South East, but in London, areas which were traditionally thought of as cheaper, such as Hackney or Tower Hamlets, are now vastly more expensive than they were just a few years ago.
This means that even some of the less desirable homes in these types of locations would be at risk of being sold, with tenants probably being forced out of London altogether.
Undoubtedly many of the properties being sold off in the best postcodes such as Kensington and Chelsea would be picked off by foreign investors looking for a safe haven for their cash, which might deliver a good price to the landlord but would do little to protect the social diversity of our capital city, instead either sitting empty for much of the year or being let to city workers for sky high rents.
During the 1970s many councils took advantage of low prices to buy rows of terraced houses in areas such as Kensington, Chelsea and Islington, which are now under threat. But it’s important to remember that housing associations also borrow against the value of their portfolios, which enables them to build affordable housing elsewhere.
The value of these portfolios are serving a purpose, rather than just sitting there doing nothing, by helping to secure the position of housing associations and enabling them to continue to secure funding for new affordable housing. Housing associations already sweat their assets and the last thing they want to do is get rid of the most valuable of them.
Notting Hill Housing Trust is an excellent example of this. The trust bought properties in Notting Hill in the 1960s to protect poor people from greedy landlords, but as the property grew massively in value, the balance sheet of the Trust strengthened and became the foundation for hundreds of millions of pounds of prudential borrowing for more social homes elsewhere.
It is simply not necessary to sell the homes to use their value for new housebuilding.
Raymond Connor, chief executive, Buildstore Financial Services
Over the last two years, self-build housing has been attracting the attention of both local and national government and its potential as a mainstream housing supply route is finally being recognised.
The UK has enjoyed a thriving self-build market for well over a decade – at its peak delivering around 17,000 new homes – and it is a model that is now being discussed by politicians, local authorities, planners and other housing providers in the light of the diminishing volume house building sector and the demand for new homes.
The house building market has revealed a second quarter of low output, with new homes built in 2012 at a three-year low. The latest figures from Communities and Local Government show that from Q2 2011 to Q2 2012 there have been 99,230 new housing starts, compared with 108,330 in the previous year.
In Q2 there were 21,540 new housing starts, down 10% from the 23,820 in Q1 2012 and down 24% on the 28,330 in Q1 2011.
It will take a long time for that this sector to regain its dominant position, if ever, so alternative housing procurement routes must be identified and explored, in order to meet the demand for new housing.
Self-build can and should be a major contributor to new housing stock. Not only can people get a new home at a lower price but self-build also delivers a higher design and build quality, more energy efficient homes and it can be used across all housing tenures, including shared-equity.
Principally, finding suitable land and securing funds are some of the main barriers holding back self-build, although these have traditionally always been the biggest hurdles in the UK self-build sector.
However, the situation is improving with more lenders attracted to the self-build lending market and changes to the planning system, which should make it easier for people to get access to land and build the home they want.
The Government has already taken steps to help self-build, most notably through the changes to the National Planning Policy Framework, which now places an obligation on local authorities to meet local demand for self-build housing. The public sector land release policy is also helping to free up more plots for self builders.
We would like to work with lenders to offer more practical, competitive products in the self- build market. The mutual sector has been very supportive of self-build housing, and we’d like to see that continue with more funding and the development of new lending products.
With the backing of the UK Government and support from industry groups and providers, the self-build housing market is evolving and the opportunities for it to become a major route for new housing are widening. Not only is the individual independent market performing well, but this year two local authority-backed Custom Build schemes have been launched and there is growing interest from community groups, landowners and developers to create larger self build schemes to provide housing at all levels.