Planning and the Major House Builder ‘Benefit Junkies’

The planning systems in the UK don’t make development happen. Plans do not deliver infrastructure, or serviced sites or affordable housing subsidy (to name just a few fundamental flaws in the system). Basically plans do little more than curb the worst negative impacts of the market on the planet and society (still a really valuable contribution).

In current market circumstances where there is a fundamental market failure in the financial markets, planning is almost completely emasculated.

In this context, if we wanted to boost house building for example, in order to deliver growth (and homes), what would we do?

Despite some Government rhetoric the answer has little to do with planning.

Government, in particular Grant Shapps, recognises this and the big push at the moment is to underwrite mortgages in an effort to get banks and building societies lending again in greater numbers with deposits less than an average of 20%. The new, Government underwritten scheme, due to launch next month, has been branded NewBuy. It’s there already on a major housebuilder website near you.

So what will be the impact of NewBuy on the housing market?

NewBuy is likely to increase the attractiveness of new build homes (it is not available on second hand) as it will enable purchasers without large deposits to buy. But these purchasers live somewhere at the moment, in rented accommodation, in smaller homes, with parents or sharing.

Those who own their existing home will have to sell to someone who will need a large deposit and these chains will inevitably slow the impact of NewBuy. Some forecasters are suggesting that NewBuy will only be used on around 15% of new home purchases (currently running at about 100,000 pa).

We have sites where 50% of purchasers are currently cash buyers (without mortgages) but even so 15% appears low as there doesn’t appear to be much incentive not to take the NewBuy option if it is available (it is not available on properties over £500,000) other perhaps than to go for the previous (rationed) scheme (FirstBuy – where the purchaser has a 5% deposit but only borrows 75% of the value with Government and the builder providing a loan for the balance).

Those moving from rented will make homes available for others but it is possible that NewBuy may put a dent in the current resurgence of Buy to Let if the recent shift away from owner occupation is temporarily reversed. NewBuy should increase the proportion of owner occupation in new build developments (which in the boom, in apartment buildings, was averaging less than 50% in many places).

Those currently living with families who take up NewBuy will probably just be skipping the rental step and this will further diminish the demand for Buy to Let rentals.

If, as Capital Economics suggest, NewBuy simply uses up a fixed pot of available mortgage capital then its impact will be primarily market distorting although it may have a positive short term impact on house building numbers and therefore on growth which is probably Government’s main objective. The outcome will depend in large part on the view the FSA takes on the capital banks will be required to put aside for this lending.

The economics of this was one of the issues raised in a recent report on quoted housebuilders from Collins Stewart Hawkpoint (CSH) who initiated their coverage of the house building sector with a fascinating analysis.

One great quote from the CSH report on the subject of NewBuy and government shared equity schemes is ‘It could be argued that these serial quick fixes have made major housebuilders over-reliant on state aid. Among our industry sources are smaller private builders. A director of one complained that his company and others are largely frozen out of the main schemes and complained that the aid packages are turning some of the majors into what he described as “benefit junkies”.’

The NewBuy local builder discrimination controversy jumped to another level this week when it became clear that the scheme managers, JLT, were refusing (in England) to make application forms available to small builders.

Government has passed the contact details of the small builders that have asked it for information to the HBF and asked HBF to manage the communications with them. One person close to the situation commented that this is a bit like asking the fox to look after the chickens! HBF’s latest communication is much less detailed than the information being made available directly to the smaller local builders in Scotland.

With a prospective launch date of 12^th March and with currently only the top 20 or so builders able to apply to join the scheme it does look like the Government is giving the large house builders a valuable opportunity to mop up the market demand while the smaller local builder is discriminated against. This after, as CSH suggests, the last Government baled some of them out at the height of the recession.

Small, local builders are a surprisingly large group. There appear to be about 18,000 of them and they produce more than half of the homes built in the UK so it does seem counter productive to freeze them out of the market and potentially threaten them with bankruptcy as they see their cash flow disappear as purchasers rationally turn to the big builders offering the 95% mortgages underwritten by the Government.

As might be imagined, they are not happy as illustrated by a couple of quotes from members of the Local Developers Forum: who described the scheme as ‘fundamentally unfair against the previously outlined principles of the scheme being open to small residential developers’ and ‘it seems extremely unfair that smaller housebuilders are left to try and catch up with the process at the end while the bigger ones get a head start’.

CSH raised a number of big question marks over the large quoted housebuilders and raised some interesting issues for planners.

They identified the black hole in house builders’ accounts created by the current lack of a ‘mark to market’ requirement on housebuilders land banks (which probably also applies to their equity share loans) that has been discussed here previously and that results in flattered balance sheets. This was one of the factors underlying the bearish CSH attitude to house builders’ shares.

On the planning front their bombshell view is that there is no housing shortage. This view is based on a careful analysis of the DCLG supply figures which are heavily dependent on an assumption of falling household size. This is assumed to be a driver but CSH suggest that it is an outcome from building more houses and making mortgage finance readily available. They also point out that household size in the UK is at the EU average and the suggestion is that it could just as easily start to increase due to the mortgage shortage (indeed there is some evidence that this is already happening).

CSH suggest that house builders deliberately peddle the housing shortage line to help ramp up the political pressure to get land with planning permission (they have certainly achieved that under successive governments) and, perhaps more importantly, to convince investors of the underlying investment story in the housebuilding industry.

Interestingly CSH advocate short land banks from an investment perspective and point out that the shortest land banks (with planning permission) of the builders they looked at are 3.6 and 3.7 years. The average is 5.3 years.

This seems to chime both with the National Trust and CPRE arguments on the NPPF and with local authority five year local plan housing land allocations.

Although CSH don’t cover it in depth, there is a similar issue with affordable housing waiting lists. Subsidised housing is outside the market and therefore does not adjust to effective demand as quickly as market housing. It is also in almost infinite demand (for the economists – I know this isn’t theoretically correct but for practical purposes bear with me) because almost everyone would prefer to pay much less for their home if they could.

If you have children and want or need a bigger subsidised home you put your name on the waiting list. The vast majority of people on waiting lists are not homeless. There are also large numbers of under occupied subsidised homes. Something that would help is for people whose kids have left home to move to somewhere smaller and release homes for people having kids. It is also probably true in most places that the impact of Right to Buy has resulted in a real shortage of larger sized subsidised homes but this is a much smaller scale of problem (though still acute) than adding up waiting lists would suggest.

CSH also identified the entry into the market of contractors like Bouygues and Skanska. This was something encouraged by the HCA in their setting up of the Delivery Partner Panels although the original idea that contractors would build for sale to housing associations and to Build to Rent Private Rented Sector funds hasn’t yet really been tested. The original idea, that the big housebuilders’ balance sheets were constrained and that by building in this way on public land (with contractor margins of say 3% compared with 20% for developers) larger numbers of lower cost homes could be built, still seems sound.

CSH also noted that commercial real estate firms were increasingly involving themselves in residential and this trend seems to be continuing although at lower levels because these developers primarily have competitive advantage on large scale apartment buildings in urban areas where the volume builders’ box building supply chain scale economics are less pronounced.

CSH didn’t really touch on the reduction in competition from the debt funded small urban developers. This, now zombie, group crashed and burned spectacularly in 2008/9 when HBoS melted down and their return seems unlikely in the short term (CSH are still worried about problems from the eurozone). However if the eurozone problems recede then as mortgage availability improves so, presumably, will debt funded competition.

So planning may not have the answers to achieving growth through increasing housing supply but Government intervention in the markets also looks to be problematic.

It’s going to be an ‘interesting’ few months, for the ‘benefit junkie’ large house builders, for their smaller, local competitors, for the economy and for the planning system.