From the 1960s and all through the 1970s, the UK built more than 250,000 homes a year. Such a sustained period of high-level house building was only accomplished due to a combined effort from both local authorities and the private sector. At the 1968 peak, around half of all homes were built by the private sector whilst the other half by local authorities. Today, the figures make for very different reading. Construction Products Association economist Amandeep Bahra provides some explanation.
Recent data by the NHBC showed that 137,427 homes were built in Great Britain in 2015, 72 per cent of which were built by the private sector and 28 per cent by local authorities and housing associations. Compare these figures to the ones stated in the introduction, and it is clear there’s been a significant shift in balance.
Looking ahead, the CPA forecasts housing completions in Great Britain to grow 4 per cent in 2016 and 3.7 per cent in 2017, primarily due to private sector building, whilst public sector building on the contrary is expected to remain flat. By the end of the decade, we still do not expect the number of dwellings built per year to exceed 200,000; instead, we anticipate 167,000 units on average to be completed each year between 2016 and 2019. This may come as no surprise, but surely with house prices high, demand for housing robust (and supported by government initiatives) and profit margins for developers high, economic theory would have anticipated new firms entering the market and soaking up the monopoly profits. In what we’d call a ‘perfect, efficient market’, higher house prices should naturally translate into an increase in the number of homes built. In reality, however, this hasn’t happened. So, what has caused such unresponsive behaviour?
In the private sector, planning permission is usually regarded as a major barrier. Once land is purchased, planning permission may be secured, but with conditions attached to it which often result in lengthy negotiations. It would be unfair to say that the complexity of the planning system has not been challenged, however.
Successive governments have embarked on a package of planning reforms, under the National Planning Policy Framework, in order to speed up the supply of housing. Other measures include permitted development rights, which allow conversions from commercial properties into residential without the need for full planning permission, and automatic permission in principle on suitable brownfield sites.
Recent data from the Department for Communities and Local Government (DCLG) reported that 253,000 homes were granted planning permission in the year to December 2015; 5 per cent higher than in the year to December 2014. But a look into the completions figures shows that a gap exists between when planning permissions are granted and new homes are built. Let’s not omit the fact that not all homes with approvals reach that stage – a proportion never gets built. In 2015, 110,620 homes were completed by the private sector compared with a figure of 92,750 in 2014. The Select Committee on National Policy for the Built Environment highlighted in its report ‘Building Better Places’ that Section 106 planning obligations slow down commencement of building with planning permission. This is again one possible explanation, among several others, which sheds light on the factors preventing homes from being built after planning approval has been achieved.
Low availability of land
Lack of available land is regarded as a major long-term constraint, limiting the number of homes being delivered. In the Autumn Statement and Spending Review 2015, the government announced the release of £4.5 billion worth of public sector land for 160,000 homes. Public sector land is only part of the solution, though. Private developers and landowners are deemed to be slowing the delivery of homes, by ‘sitting on land’, in order to keep profit margins intact.
Based on data from DCLG, as of 31 March 2015 approximately 13 per cent of land area in England is designated as Green Belt. Between 2013/14 and 2014/15, there was a 0.1 per cent decrease in Green Belt, and although it offers an opportunity, it is politically seen as a last resort – so, it is unlikely be an easy solution.
During the 2008 recession, several thousand workers left the construction industry. Even though recent figures have pointed towards growth in employment, a massive skills gap still remains. According to our Construction Trade Survey, in 2015 Q4 half of main contractors reported difficulties in recruiting on-site trades, such as bricklayers, carpenters and plasterers. This situation was prevalent throughout 2015. A shortage of skilled workers against a background of rising demand has applied upward pressure on wages and labour costs.
The effects of planning permission, skills shortages and lack of small plots were felt dearly in the smaller end of the market, putting pressure on the ability of the small and medium-sized (SME) sector to deliver when it is already experiencing shrinking market size. According to the HBF, the number of SME businesses building up to 100 units per year has declined by 78 per cent since 1988. Availability of finance is still also cited as a major concern in the SME sector. A number of measures by the government have been put in place to support SMEs, including a £1 billion Builders’ Finance Fund to restart and speed up small building projects that were stalled by the economic slowdown. The fund will be available until 2020/21.
Public sector barriers
Undoubtedly, the involvement of the public sector in house building has been eroded. Even if they wish to continue building, their ability to do so is weighed down by a range of constraints, such as lack of funding and lower rental revenue streams, which reduces their ability to borrow.
In the July Budget 2015, the government announced a 1.0 per cent cut in social rents per year for four years from April 2016 and extended the Right to Buy to housing association tenants. This, alongside cuts to housing benefits, suggests lower future revenue income for both housing associations and local authorities.
With so many barriers on the supply-side, it’s no wonder that the housing market is so inefficient. And with these issues likely to persist in the medium-term, there are questions whether the government’s target of one million homes by 2020 – 200,000 per year – will be met, even with the involvement of both the private and public sectors. With all of this in mind, the CPA envisages a maximum of 175,000 units completed in 2019.