Britain isn’t building enough. Demand outstrips new supply so the housing problem keeps getting worse.
More people are gravitating to London and the South East, which puts a strain on the area’s housing stock. London’s population hit a record high of 8.6 million this January and is expected to reach 10 million by 2030. The number of overseas non-residents buying London property keeps increasing. Frequently, they’re drawn in by the global reputation of London’s property market as a safe haven in which to invest both for capital growth and rental income, but in so doing they help drive up the cost of properties and exacerbate the shortage.
We’ve developed a culture of home ownership and the Government is lapping it up. In fairness, a booming construction industry means the economy is strong. Average London prices for new homes crashed through £600,000 recently, according to Rightmove. Right to Buy has been extended to housing association homes, the number of proposed housing zones expanded and we’ve seen the introduction of Help to Buy ISAs.
Even so, demand isn’t being met. 240,000 new homes are required each year but we haven’t built at that level since the 1930s. The Government has recognised that obtaining planning permission and bureaucracy have been particular hindrances for major housebuilders. That’s improving and there are further plans to streamline the planning process, including through the extension of permitted development rights and granting elected mayors tough powers over planning. An expert panel has been assembled to help put local plans in place.
Councils are also no longer building at the levels seen in the post-war years and, unfortunately, that slack isn’t being adequately taken up by housing associations or the private sector for various reasons. Social housing rents have generally increased at RPI plus half-a-percent a year. This stability has assisted housing associations’ long-term borrowing plans. However, from next year, social housing rents will reduce by 1% a year for 4 years at the same time as housing benefit is frozen. Social housing tenants on higher incomes will be caught by “Pay to Stay”. That means meeting the market rate, or a near market rate, for rents if they want to remain in their homes. Unfortunately, for councils and housing associations, that extra income will go direct to the Treasury. Their reduced income means that they are tasked with finding cost efficiencies. Nonetheless, it’s easy to conclude that this will set their new housebuilding efforts back further.
It’s important also to contrast the public and private housing sectors. For the former, social and intermediate housing must be affordable and, in a booming market such as ours, quick delivery is needed to minimise the effects of inflation on construction costs. But where the price of private sale homes is generally rising year on year, it may actually make sense for large housebuilders, who dominate the sector, not to build too quickly. A delay may mean the completed dwellings can sell for more. This can encourage landbanking, where useable development land is simply parked for future development.
A key factor in housebuilding is the shortage of suitable land. Using the green belt is political dynamite but when the country was last developing at the required levels all those decades ago, that attitude didn’t exist. Efforts are being made to repurpose brownfield sites for residential use, with 150,000 homes to be built on land currently owned by the Government within the next five years. It’s a drop in the ocean.
The commercial construction sector is performing very strongly and substantial resources have already been deployed on massive regeneration projects such as those at Battersea and the Royal Docks. Count the tower cranes while driving along London’s southern bank. We’re seeing shortages of bricks, cladding and curtain walling, for instance, and that’s helped drive construction costs up. Housebuilders are competing for a finite resource and that slows the speed at which we can build.
Then there’s the war for talent. The UK’s ability to source skilled construction workers from the rest of the European Union has been a boon for our buoyant construction industry and is perhaps ideal for what is generally a cyclical sector. Any brake on that free movement of workers could put a block on any housing growth. This shouldn’t, on the other hand, mask the industry’s ongoing struggles to attract talent domestically. The Construction Industry Training Board believes we need 224,000 new workers by 2019. Where are they to come from? In 2013, the apprenticeships scheme yielded only 8,030 construction graduates a year. We must also do more to retain older workers in the industry, many of whom are retiring with much still to offer.
Ultimately, a long-term solution may be to move away from the culture of home ownership. That won’t be easy but we may be able to look to the private sector to craft more appealing leasing alternatives such as shared dwellings and communal amenities. The Private Rented Sector model means that corporate landlords want to minimise the turnover of tenants for their properties. Large landlords have a chance to innovate by offering improved standards of property management, longer tenancies and fairer rent reviews. Residential yields have outperformed other property asset classes so it’s a sector primed to explode and it’s an idea that has worked well in Germany, France and the USA. Over here it could do with a kick-start, perhaps by relaxing the rules on REITs.
Francis Ho is Head of Construction at Olswang LLP