It is no longer enough to leave housebuilding to the market

Rewriting development rules

July 08, 2016
Housing in London ©Anthony Devlin/PA Wire/Press Association Images
Housing in London ©Anthony Devlin/PA Wire/Press Association Images
Read more: Is the London housing crisis Boris Johnson's fault?

Everything has changed in the aftermath of the Brexit vote and in housing, where stakes are high and confidence counts for so much, the apprehension is running deep. Housebuilders’ shares have taken a battering in anticipation of the trouble ahead. Given the exorbitant cost of housing measured against incomes in 2016, a fall in prices should be welcome. But it will need to be accompanied by a strategy for maintaining—and increasing—housebuilding output which will otherwise go into decline.

This is especially critical given that completions—155,000 in 2014/15—already lag well behind the circa 250,000 new homes that are needed each year just to keep up with household formation. This shortfall cannot so easily be blamed on a shortage of developable land anymore. Planning permissions are being granted in ever greater numbers and, for 2015, reached 261,644. The latest update for the Home Builders Federation showed that in the first quarter of 2016 they continued to grow year-on-year. The trouble is the painfully slow rate of development. There is always going to be a lag between that initial permission and completion, but permissioned units have been increasing more rapidly than completions since 2011.

The problem is, for all that housebuilders protest they have nothing to gain from sitting on land that they have already bought, they also have nothing to gain from building out plots as quickly as they physically can. In many places, if they were to do that, they would in fact have much to lose—if they flood the market then prices will fall and the developer will not be able to turn a profit on the land he/she bought. It is because we allow private housebuilders to determine the pace of delivery in this way that homes are built and released into the market only at such a rate that current prices are, in ordinary economic circumstances, maintained. This, in turn, is why homes are never built in sufficient quantities for prices to come down.

If we are ever going to ensure that housing is plentiful and cheap we are going to have to re-write the rules of the game and take away from developers that power to dictate the rate of housebuilding. There are two principal ways in which this might be achieved, and it would be optimal to use both at the same time. First, use publicly-funded direct commissioning to drive a much faster rate of construction that builds through the likely fall in prices when otherwise output would drop. Second, enforce housebuilding rates on private schemes by introducing “use-it-or-lose-it” clauses in planning consents; this would effectively mean build-out rates would be imposed by local planning authorities.

Unfortunately, up to now, the government has shown little interest in either approach. The first is deemed too expensive. The second would upset housebuilders no end and landed interests even more; the housing minister, Brandon Lewis, recently set his face against it, arguing that “it encourages developers not to go for planning permission.” This is a common objection to this idea, but it is one that presupposes that developers and landowners should always have a free hand to dispose of their holdings as they see fit.

This rather gets to the nub of the dilemma in housing policy: how far are we prepared to encroach on the rights and liberties of private landowners, who control the vast majority of the land on which we would like to build homes, to serve the wider public good? The answer seems to be, not far at all. The consensus on housebuilding since the 1980s has been that housebuilding should, by and large, be left to the market.

The same forces have come to bear too, even though they were never meant to, on the amount of affordable housing that is built as a condition of private developments being given the go-ahead. In London, last year, it was just 13 per cent. The new mayor of London, Sadiq Khan, has a “long-term strategic target” of increasing that proportion to 50 per cent.

But he’s going to have quite a fight on his hands. The reason for that very low percentage last year is that developers, fighting over each other for a piece of residential land, bid each other up until providing affordable housing as part of their scheme becomes less and less viable. They then go to the local planning authority and say “this is all the affordable housing we can afford to provide, do you want this scheme built or not?” The biggest beneficiary, ultimately, is the landowner.

There are signs that Khan’s new deputy mayor for housing, James Murray, may disrupt this dynamic. He is famed for having taken a much tougher line in Islington, where he was the executive member for housing until May, by knocking back a higher-than-average number of planning applications from developers who did not offer enough affordable homes.

At his first appearance before the Greater London Assembly’s housing committee last month, he floated the idea of providing more watertight planning rules rules upfront—with no wriggle room later for developers—that would mean that “affordable housing requirements get embedded in land values.”

“If developers could go to landowners and say, ‘Look, there is a really clear expectation of what we need to deliver on that site in terms of affordable [homes] and on that basis we can only pay you this for the land,” it would be a more clear way for developers to negotiate with the landowners, knowing what affordable housing they then have to provide,” Murray told the committee.

The concept is an intriguing one, because it begins to reshape the relationship between planning authority, developer and landowner in a way that puts the public interest ahead of the private interests. The same principle is required to accelerate the pace of development, and is precisely what “use-it-or-lose-it” planning clauses could achieve. Were non-negotiable build-out rates to be imposed in advance, developers would only be able to bid for land at the value it will be worth when houses are rushed out into the market at—necessarily—cut-price.

The question is whether Murray, should he embark on such an approach, has the mettle to follow through on the implicit threat and what powers he would have to enforce such a vision. In a worst-case scenario, a stand-off between planners and developers could ensue that means even fewer homes are built than before. This is the counter-threat that emanates from developers whenever such ideas are mooted.

Overcoming that response may require a much more interventionist role by the state, probably involving the compulsory purchase of land from recalcitrant landowners and commissioning builders directly to construct homes at the desired rate. Another incursion into the rights and liberties of the private landowner therefore and most unlikely to be countenanced by the present government. But these are ideas that need greater consideration nonetheless. It is no longer enough to simply leave housebuilding to the market. Until the market is made to play by different rules, it will not deliver homes in the quantities the country needs them.