Can planning alone sort out the housing shortage?

I have been wondering for some time whether there is something other than increasing the supply of planning permissions which is needed to address the housing shortage and affordability. The Government has pledged to construct 1,000,000 houses during the life of this Parliament, by 2020 therefore. They also pledge 200,000 Starter Homes in the same period. That sounds positive, but Governments do not actually build houses any more. That is almost exclusively the function of the private sector.

The Government also points to the rise in numbers of dwellings granted permission last year (242,000 in the year to June 2015) and 170,690 net additional dwellings in 2014-15, a rise of 25% over the previous year. These are significant rises. But there is some way to go to reach the target of 200,000 per annum. In addition, house price inflation is running at 10% p.a. (for the year to October 2015 – see the FT on 5th November quoting the Halifax/Savills survey released on 29th October), and estate agents routinely announce, trumpet even, that there are nine buyers chasing each dwelling for sale in some areas. Housing is becoming less and less affordable. Between the first quarter of 1989 and the third quarter of 2015 first time buyer house prices in the UK as a whole have risen from 3.8 times average wages to 5.1 times. In London they have risen from 5.6 times to 9.6 times (source, Nationwide). The problem even applies to the new Starter Homes initiative. A couple, both on an average salary would struggle to buy one in 90% of all council areas in the South-East according to Savills’ research quoted by Anne Ashworth in The Times yesterday.

What has triggered my thinking is observing the way large housing sites are actually built and sold. Whilst there are sites with permission for sometimes thousands of houses, not all the houses come forward at the same time. Now of course there are practical construction reasons why the developments are phased. One can’t have too many developers at work simultaneously – there would be clashes between machinery, deliveries and construction programmes. In addition, the on-site infrastructure needs to be installed, and to keep up front costs under control that will be phased as well. The BBC Today programme however ran a piece on 3rd November 2015 pointing out that at Ebbsfleet there has been a planning permission for 15,000 dwellings for some years yet since construction began in 2007 only 350 dwellings have been built. (See this link for further details.) Now the banking crisis has of course intervened, but even so this is a remarkably slow rate of delivery, explained by the industry by reference to the cost of site preparation. That is odd, as the site preparation costs would normally have been estimated and allowed for in the original proposal.

Recently, figures about the decline of the small and medium sized house-builder have been getting some publicity. The Lyons Housing Review highlighted that whilst in the 1980s there were 10,000 active SME builders who between the delivered about 57% of housing, in 2013 there were only 2,800, producing 27%. Matthew Parris, writing in The Times on 14th November championed small housebuilders. Having first observed that “We face a crisis on housing. We need a lot more, fast. And something seems to be blocking what you might call the elasticity of the housebuilding industry’s response to a huge and compelling increase in demand. Demand soars, need screams, profit beckons, but supply still creeps. There appears to be a stickiness in the system. The latest figures show housebuilding substantially up. Good. But it needs to soar.” He went on to suggest that the small housebuilders have a role to play in doing smaller developments which, he said, do not attract the volume housebuilders as their business models demand the economies of scale offered by large sites. Parris attributes the decline in SME builders to their credit having dried up and his suggestion is for Government credit guarantees to be offered.

But I wonder if there is another way in which housebuilders, small and large, could help to increase supply, rate of build and affordability, namely by being more numerous. 75% of new housing is delivered by the volume housebuilders. That is between six and ten companies, depending on where you go for your definition. Which is a very small number of players controlling their delivery. The trick in marketing new houses is of course to bring them onto the market at slightly less than the rate of demand. If the rate of delivery exceeds demand, prices will fall. But with only ten major players in the market, there is not so much competition. One way to increase competition would be to split up the current volume housebuilders into smaller entities. If there were more players, there would be more competition, which normally drives down prices in a combination of more supply and more players competing for purchasers.

Whilst the Government is doubtless very reluctant to see house prices drop, the current rate of increase is highly problematic. Furthermore, the increased numbers of houses being permitted does not seem to be addressing the issue. The Office of Fair Trading studied the industry in 2008 (Homebuilding in the UK: A market study, September 2008, Office of Fair Trading) and concluded there was little evidence of competition problems or ability to restrict prices. Whilst I would not argue against granting more permissions, the problem is moving to getting those permissions built out, and it would seem sensible to review the OFT’s 2008 conclusion. A review of the competitiveness of the new housing market by the newly established Competition and Markets Authority would be the first step.