Will it take more than fixing the planning system to improve housing supply?

[Originally posted on Liberal Democrat Voice, 18/11/11, under a slightly different title]

It is a truth universally acknowledged that Britain has a housing problem. There are problems of shortage and, consequently, access and affordability.

There are three principal mechanisms for dealing with significant housing shortage and indirectly reducing the affordability problems that go with it: (1) You can reduce the number of households needing to be housed; (2) You can increase the number of properties available; and (3) You can improve the utilization of the existing stock of properties.

You can try to do something on all three fronts. A couple of weeks ago LibDemVoice co-editor Mark Pack identified six options, covering all three of these mechanisms. The options differ in their desirability and political feasibility.

Government efforts to increase supply have so far focused on the planning reforms ushered in by the Localism Act, while the New Homes Bonus is intended to incentivise communities to welcome such development. Whether the planning reforms will deliver is still open to question. On the day the Localism Bill was signed into law the Federation of Master Builders warned that top-down targets may need to be re-introduced if sufficient supply is to be secured. They are, it appears, expecting localism to equal NIMBYism.

One issue that has received limited attention in the debate so far is the construction industry. Developers and the Government are happy to point the finger at planners being the major barrier to new build. But planning is at best facilitative. Designating land for residential development doesn’t, in itself, get properties built.

A recent report by the IPPR floated the idea that reforming the construction industry was part of the solution to Britain’s problems with housing supply. A follow-up report making an extended case for reform is due soon.

The last four decades have witnessed steady concentration in the construction industry through merger and acquisition. And merged companies have, almost without exception, reduced output. The proportion of production accounted for by volume builders (and latterly so-called super builders) progressively increased. Many of these large builders suffered badly in the economic downturn: they have been forced into major balance sheet writedowns on the value of their assets, usually land for development bought at over-inflated prices.

The structure of the construction industry in the UK is distinctive in the way it unifies land acquisition, site preparation and construction within single firms — the speculative builders. These are separable activities that are separate in other countries. The industry is also distinctive in having a relatively small community and self-build sector.

Some commentators think this structure signals competition problems. A particular concern is in the acquisition and banking of land equivalent to several years’ future development. Individual builders can have market power in particular localities. For example, in their representation to the 2007 Callcutt Review of Housebuilding Delivery the Chartered Institute of Housing stated that:

We have some concerns that landbanking for profit (rather than to ensure a smooth supply of land as development opportunities arise) and purchase of options on land … have a negative impact on both land supply and land price: restricting supply and reinforcing fluctuations in the housing market.

Others disagree. They argue that the whole practice of landbanking is simply a strategy to manage risk in the face of a cumbersome planning system. In fact, some have attributed the distinctive structure of the entire industry to the existence of the planning system. The Government’s Localism proposals, if they not only increase land supply but also speed the planning approval process, may lead to new organisational forms being sustainable in the ecology of the construction industry.

The more recent enquiry into industry practices by the Office of Fair Trading did not find clear evidence of anti-competitive practices. But there are other concerns.

The market volatility the industry faces — again attributed by many to the planning system — requires production flexibility, which takes the form of extensive subcontracting, which has resulted in a tradition of standardisation and low technology production methods. This can lead to quality concerns. The OFT sought to change the regulatory structures to enhance quality, but without in the first instance being strongly interventionist.

Smaller and medium-sized housebuilders continue to play a key role in new housing supply. Smaller builders are valuable because they are often interested in developing smaller parcels of land. But the sector is small by international standards. And it is suffering badly as a result of the credit crunch.

The recent housing report by the CBI recommended that the Government needed to ensure that funds were flowing to SMEs in housebuilding under Project Merlin. The absence of a strong community and self-build sector in the UK is also identified as a problem. This is a sector that plays a much bigger role in housing supply in other countries.

It is also a sector that will typically deliver higher quality. One reason for this is that community builders retain a stake in the development after completion. They have an incentive to build to last. Speculative builders typically do not. During the downturn some speculative builders have experimented with schemes whereby they retain an interest in a site over the longer term. This is an area in which, if quality concerns are to be addressed, there may be scope for novel solutions.

Smaller builders can suffer from difficulties in accessing development land, particular in localities where it has been banked or optioned by large developers. One possibility is to change the tax treatment of land to discourage extensive landbanking. LVT could help, but it could be some more targeted incentive for large developers to pass land on to smaller builders.

Seeking to improve housing supply raises complex questions. Here we’re scratched the surface. The key point is to ensure that debate is wide-ranging and we’re willing to seek improvements wherever they can be found in development process.

Image: © photoclicks – Fotolia.com

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2 replies »

  1. Very interesting, thank you, though I think it’s important to remember that affordability isn’t only about supply and demand. Policies like the old liberal commitment to land value taxation get too little attention, so it’s interesting to see you link it to land banking, but it can also be part of a set of policies that disrupt the housing market and stop land and property being the focus of so much unproductive speculative investment.

    Smaller builders are not only held back by the land banking practices of bigger companies, but also simply the absurd cost of land in many parts of the country, and the preference of the HCA et al to go in for huge monolithic regeneration projects rather than parcelling land out to a variety of consortia.

  2. @Tom – Thanks for your comment. I agree with your points about dealing with speculation and that there are other issues also facing smaller builders. You are right, of course. Overall, the story is more complicated than my post suggests. That is one of the problems with the blogging format – it doesn’t work so well if the argument needs to be developed in several thousand words (although I have been known to try!).

    Many of the problems we face in housing are interconnected in complex ways. I have come to the conclusion that it probably requires writing a book to do justice to the situation and come up with a more nuanced argument. At the moment I’ve only got as far as about 4,000 words!!