1. Eleanor Goodman, 'Sales of new homes drop 15% in a year', Building, 25 January 2008, p 23
2. David Pretty, 'If Plan A fails...', Building, 25 January 2008, p 38
3. Roger Humber, quoted by Joey Gardiner, 'How bad can it get?', Building, 25 January 2008, p 36
4. James Heartfield, Who demolished the housing industry?, Spiked Online, 15 July 2008, posted on www.spiked-online.com
5. Communities and Local Government, Cost Analysis of The Code for Sustainable Homes - Final Report, London, CLG, 2008
6. James Heartfield, Green Capitalism - Manufacturing scarcity in an age of abundance, www.heartfield.org, 2008, p 91, with details of how to buy posted here
7. James Woudhuysen and Ian Abley, Why is construction so backward?, Chichester, Wiley-Academy, 2004, p 14
8. Kate Barker, Barker Review of Housing Supply: Final Report - Delivering stability: securing our future housing needs. London, HMSO, 2004, posted on www.hm-treasury.gov.uk
9. Kate Barker, Barker Review of Land Use Planning: Final Report - Recommendations. London, HMSO, 2006, posted on www.hm-treasury.gov.uk
10. Martin Pawley, Home Ownership, London, The Architectural Press, 1978, p 138
11. Francis Jones, National Statistics, Increase in income inequality - The effects of taxes and benefits on household income 2006/07, Newport, ONS, 25 June 2008, posted on www.statistics.gov.uk
12. James Heartfield, Let's Build! - Why we need five million new homes in the next 10 years. London, audacity, 2006
13. National Statistics, National Projections - UK population to rise to 65m by 2016, London, ONS, 23 October 2007, posted on www.statistics.gov.uk
14. Communities and Local Government, Rise in ageing population and people living alone drives household growth, London, CLG, 2007
15. Peter Hall, Ray Thomas, Harry Gracey and Roy Drewett, The Containment of Urban England, London, George Allen & Unwin, 1973
Volume 1: Urban and Metropolitan Growth Processes or Megalopolis Denied
Volume 2: The Planning System: Objectives, Operations, Impacts
16. Peter Hall, The Land Fetish, London, Town and Country Planning Association, 2005, available from www.tcpa.org.uk
17. Mike Davis, Dead Cities, New York, New Press, 2002
18. John Collins and Philip Moren, Good Practice Guide: Negotiating the Planning Maze, London, RIBA Publishing, 2006
19. Jim Cunningham, Council of Mortgage Lenders, Housing and Mortgage Market Forecasts: 2008, London, CML, May 2008, p 2, posted on www.cml.org.uk
We are witnessing a British built "housing crisis" that Government is powerless to resolve
Housing completions in Britain for 2008 may be reduced to about 100,000, or 50% of the number of houses and flats built in 2007. If this happens it will be substantially worse than Building reported at the start of the year, when it was recognised that sales of new homes were down 15% in the last three months of 2007. (1) Then it was unclear to David Pretty, the Chairman of the New Homes Marketing Board, if 2008 would require '... a throttling back of production.' (2) We know in July that we are witnessing an unprecedented retreat from new housing production in Britain. While the government and most of the popular and professional media meditate on whether the value of existing housing will fall anywhere between 5% and 35% before national house price inflation returns, the impact of the "slump" for builders of new housing is immediate and real. The composite graph below should help make the matter clear, though statistics abound:
As housing consultant Roger Humber estimated in January, '... it's quite the worst position we've been in since the nineties.' (3) It is worse than the late seventies and early eighties. Worse than the early seventies for speculative house building. Public house building declined from the late sixties to the early nineties, rallying once in the mid-seventies, with 50,000 fewer homes built by 1979 when Old Labour lost a general election for the last time. A further 50,000 fewer council homes were built by the early eighties under the Conservative administration of Margaret Thatcher, but that took 3 years of ideological conflict. With the idea of a "home owning democracy" established it took a decade and a half to build 40,000 less again, when New Labour gained power in 1997.
Practically all council housing was built in the commercial volume house building sector, but never has the housing sector of British construction reduced production by 100,000 units in a year. Charitable and partly government funded Housing Associations have successfully kept British middle class housing professionals in "worthy" employment for decades, inefficiently arranging the production of handfuls of homes. Prospects are so weak in 2008 for speculative house builders that the subsidised RSLs now look like a significant clientele for the construction industry. The speculative builders have been pleased to sell some otherwise unwanted stock to the RSLs, supposed to increase their annual output to 45,000.
Britain's speculative builders have never built more than 218,000 homes a year, which they achieved in 1964, when also building 155,500 additional houses and flats under various contracts with government, local authorities, and charities. The high point of British housing production was 1968 with 413,714 homes, the year after a record 192,247 council houses and flats were built. It had taken four decades for British housing production to fall and recover to 50% of the 1968 high, and this year we may see that hard won gradual increase in production cut in half again. That loss of industrial capacity will not be reversed so quickly. I will come back to the question of what will constitute "recovery", since production volume may not figure.
We need to be clear who is this "we" that we are concerned about? By talking about "builders" we can either be concerned with commercial developers and contractors who have made the lucrative but expensive winning of planning approvals their business, or with those they employ to build the homes they mark up and sell on into the existing housing market. There are large to small house builders, with the largest companies presenting themselves as "home builders", and there are those who actually do the building work, either on site or in a factory.
Personally, I am concerned about the professional employees being laid off, and the sub-contractors and trades men and women who, if they can find work, find that rates of pay are being slashed. These "builders" are the same as every other employee in Britain, who are reminded every pay-day that there is no connection between the cost of existing housing and income. A 5% market "correction", or a 35% "crash" will do nothing to change that predicament. It will reduce the prospects of anyone trading down at old age, or in a position of inheritance, but it will do little to enable children to set themselves up in homes of their own, whether rented or bought on a mortgage. Even the department of Communities and Local Government recognises that an average house or flat is valued at £220,000. This might fall by 35% to £143,000, which is still nowhere near "affordable". If the Nationwide Building Society is believed an average home cost £185,000, but no-one is seriously suggesting it will be valued at less that £120,000 by the time it inflates in price again.
Standing behind building workers in the queue for work to pay for unaffordable British housing are the former employees of merchants and manufacturers of construction materials and processed products. The impact of 50% fewer new homes to build annually means not only 50% fewer materials and products, but a further intensification of work at no better pay for those who feel lucky to be keeping a job. We all know that these "downturns" provide a painful but not unrewarding opportunity for employers in manufacturing, distribution, and the multitude of support sectors to consolidate their businesses. Most will come back stronger than ever. They will be ready for another period of growth in planning approved speculative development by "home builders". However it will take time for house builders to raise capacity to build 200,000 homes a year again, assuming they want to. Growth may not be a priority.
James Heartfield observes that with New Labour's general election victory in 1997 '... former radicals joined in the anti-growth chorus.' As Heartfield says, the '... Urban Task Force took on board the new environmentalist agenda, arguing that growth should be restricted to the cities.' The "build up, not out" mantra was adopted by a generation of local authority planners. After 1997 '... housebuilders were strangely happy with the arrangement that kept their business small.' (4) They grumbled about planning, but only grumbled. Business was good.
After 2001 private house builders did increase their production, but this was less dynamic than speculative growth in the eighties, and RSLs achieved less until 2004. 200,000 new homes were built in 2007, and that level of production was reached for the first time since the residential market was collapsed in 1988 to 1989, then by government restricting finance through punitive interest rates. This time government would like finance to flow again, but it does not follow that house builders will want to build much more new housing. When the existing housing market begins to inflate again it will be possible to '... make money selling few homes at inflated prices.' (4) The British planning system will be dominated by luxury "eco-home builders", with unit costs estimated by government to increase by up to £47,000 in meeting the Code for Sustainable Homes. The pre-condition to build any new housing. (5) Environmentalism is after all the ideology of residential property developers in retreat from industrial production. (6)
Many on the supply side of the construction industry will try to offset lower new house building with any growth they can find in the home extension, refurbishment, and repair markets. It is in these housing improvement and maintenance sectors that '... the dominion of small firms is most extensive,' and in construction, '... with small firms go modest pay packets.' (7) Construction has been set backward again.
People have held back from moving. They have not stopped having children or ageing. Britain's existing stock of homes will continue to dilapidate. However the make-do-and-mend market is not going to be strong enough to avoid a "shake out" of builders merchants or construction materials and product manufacturers. Householders will probably wait and see what happens in the existing housing market, and particularly so when finance is harder to come by in 2008 than in 2006.
There is no getting over the prospect of building 100,000 fewer homes this year as a direct result of a tightening of private housing finance. The so called "credit crunch" is partly beyond the British government's control, but also follows the explicit attempt, most influenced by Kate Barker in 2004, (8) and then again in 2006, (9) to take high inflation out of the existing housing market. The planning system was strengthened by Barker, because if people were able to build freely on the vast surplus of land available within easy travel distances across Britain existing house prices would be falling fast, reconnected to the costs of building, as they were in 1970 when old homes cost less than new ones.
New homes are not sold at 5% or 10% above their total cost to build, but into the existing housing market, where an average house or flat anywhere in Britain is valued at far more than the cost of producing it. It is in that mark up that the commercial "home builders", with the means to engage with the planning system, make their profits. It was Martin Pawley who located a shift in housing priorities in the early 1970s, as housing became more important as a financial transaction than as a useful place in which to live:
'The means by which home owners derive wealth from their dwellings developed over a number of years but were thrown into sharp relief by the events of the 1971-73 gazumping boom; at which time they became so universally obvious that the nature of demand for owner-occupied housing underwent a massive change as a result... the period began with a market in which new houses were worth more than existing houses and ended with existing houses worth more than new houses.' (10)
Housing a working population in twenty-first century British capitalism is a surprisingly volatile conundrum that government is powerless resolve.
In 2008 the sales of new housing have slumped because existing house prices are deflating, which in turn is a combined result of unaffordability becoming acute and finance being made harder to secure, even when interest rates are low. After an attempt to reduce house price inflation government is probably realising that house price deflation is a worse economic prospect. Government will have to re-encourage house price inflation, which will return with a vengeance to save the interests of British finance, and perhaps in time for the next general election. They can do something about finance, but less about household income.
After redistribution through taxes and benefits, the ratio between the top and bottom fifths of British households is reduced to four-to-one, (11) with average final income of only £52,400 at the top compared with a pitiful £14,400 at the bottom. Clearly a small minority of households earn substantially more. But what does that tell us about housing affordability?
There is an interesting measure of "affordability" based on household income promoted by Hugh Pavletich and Wendell Cox on their excellent website www.demographia.com. They take "affordability" to be achieved when average housing costs no more than three times average net household income. This could be sophisticated for each income quintile, but on the crude basis of an average for all households in Britain average houses and flats should be costing less than £85,000. Less than £90,000 if the redistributive tax and benefit system is ignored. That would still be "unaffordable" for 60% of British households. British housing only becomes affordable by the Demographia measure for the top 20% of households when houses and flats cost £156,000. However most locations within regions where the highest earning households live will be substantially more "exclusive" than this. It would be possible to interrogate these distinctions in great depth, but we all know that effort would show British housing market valuations to be disconnected from either gross or net household income by many times more than three.
For the average British house or flat to be valued at £90,000 requires a 51% "crash" in the existing housing market measured by the Nationwide Building Society, and 59% written off the value of all existing homes on the Communities and Local Government estimation. If we pitch "affordability" at £85,000 that would be between a 54% and 61% collapse in the existing housing market, which even the dreamers at www.housepricecrash.co.uk don't fantasise about. While family sized homes can easily be built for such a budget, leaving funds for a plot of land without hope of planning approval, utilities connections, and professional fees, land with benefit of planning approval is not affordable at those prices. There will be no catalysmic crash.
Britain's financial system needs the artificial scarcity in land that the planning system sustains to ensure that millions of existing homes with mortgages "secured" against them are valued at far more than it costs to build new ones. Built mostly by large "home builders" in the best commercial position to negotiate deals with landowners and planners.
Barker had publicly fantasised that affordability could be improved by increasing the annual number of new houses and flats by a few tens of thousands. While housing output had increased slowly from about 2002, those numerical gains in production have been wiped out. A gap of 140,000 may now have opened up in the British government's target of 240,000 "sustainable" homes a year by 2016. If the gap is larger or smaller, that target appears unachievable and irrelevant today.
The 240,000 target stands as an underestimate of the housing that should be built. We have argued for at least 500,000 each year, with 234,000 for new households and 266,000 for replacement of the most dilapidated stock. That was 234,000 net additions. (12) While government called for 240,000 net additions, they were silent on stock replacement through demolitions. This half a million of new and replacement housing a year would still be insufficient to reconnect household income with house prices, of course. That requires something more democratic in how land use is organised. However the 500,000 ambition is minimal, for as the Office for National Statistics recognise:
The UK population is projected to increase by 4.4 million by 2016. This increase is equivalent to an average annual rate of growth of 0.7 per cent. If past trends continue, the population will continue to grow, reaching 71 million by 2031. This is due to natural increase (more births than deaths) and because it is assumed there will be more immigrants than emigrants (a net inward flow of migrants). (13)
They caution that projections are uncertain, and become increasingly so the further they are carried forward. For Britain, excluding Northern Ireland, the population is currently approaching 60 million. By 2030, or thereabouts, Britain may be 69 million, approaching 70 million. Britain should be much larger with more net immigration, but that is another argument. Net immigration is good, and we don't have enough of it.
British average household size is 2.32 people and expected to fall to 2.11 by 2030 with a rise in single households as the largest factor. More than one third of one person households are over 65 years, reflecting an ageing population and an increasing average life expectancy, projected at 81.6 years for men and 85.2 years women. (14) In 2008 Britain needs nearly 26 million homes, and by 2030 will require just over 33 million. That is an increase of 7 million homes in 22 years, or 318,000 homes a year to meet population growth, allowing for some, but not enough net immigration. Substantially more than the 234,000 new households a year anticipated in Let's Build! in 2006. (12)
Similarly with the replacement of the existing stock. New housing should be capable of lasting 100 years, although much is structurally designed to last 60, with claddings and roofing designed for 30 years, and kitchens, bathrooms, and toilets lasting between 10 and 15 years. Ignoring the argument about whether there is an existing stock of 26 million homes today, and assuming they will last at least a century from when they were built, a 1% rate of replacement requires 260,000 homes a year. By 2030 a stock of 33 million homes would require 330,000 a year for 1% replacement. That is an average of 295,000 homes to replace the same number of dwellings ready for demolition. This is clearly a substantial underestimation of the need, but higher than 266,000 in Let's Build!. (12)
That would suggest aiming for yearly housing production of 613,000 between now and 2030, with 318,000 annual net additions after 295,000 demolitions. 240,000 net additions falls short as a target, and 100,000 is under by a factor of at least 6. Building this number would not collapse the existing property market, which is deflating due to the inadequacy of household incomes to afford the finance that is temporarily unobtainable. 600,000 homes a year cannot be built for under £90,000 in bricks and blocks at £800/m2 because if the required land were made commercially available through the planning system those homes would enter the existing housing market and be worth an average of £220,000.
There are no "home builders" about to sell new homes at far less than they are valued in the existing housing market. Why would they sell under market value? However it is the planning system maintaining an artificial scarcity in land that prevents the existing housing market from collapsing to restore a general housing affordability. It is the planning system that preserves the business model of "home builders", who will build 100,000 homes in 2009 and sell them for considerably more than they cost to build, on land worth far more with planning approval than the agricultural value of neighbouring land without any prospect of planning approval. It is the planning system that sustains housing unaffordability, supporting Britain's housing finance system, which needs the existing housing market to return to inflation.
The present conundrum for government is only sustained by the 1947 Town and Country Planning Act. That nationalised the development rights of freeholders in land. (15) In particular the development rights of Britain's farmers, state supported through the Second World War, and long subsidised since the 1948 Agricultural legislation that delayed the operation of the "planning system". Farmers remain unable to sell land for building to anyone. A lucrative professionalised effort misnamed as "planning" sustains a British "land fetish" today. (16) The "planning system" is imagined virtuous by environmentalists, (17) is not about to be challenged by self-serving architects or surveyors, all dependent on developers, (18) and supports inflation in the existing housing market. (10) Planners are keeping British financiers in the mortgage market, though that is not what planners understand their job to be.
The British finance sector is not about to collapse. About £1.2 trillion of mortgage lending "secured" against the estimated £4.0 trillion inflated but falling value of the existing housing stock is not about to be jeopardised. The Council of Mortgage Lenders are safe. They understand that '... although the demand for mortgages has fallen back since last summer, as consumer confidence has weakened and household budgets have been squeezed by rising food, fuel and tax bills, the reduced availability of funding has been the dominant factor behind the sharp fall in the number of mortgage approvals for house purchase.' (19) The CML expect a 7% deflation of the existing housing market this year.
Government will not choose to resolve the housing conundrum by getting rid of the 1947 Town and Country Planning Act, regardless of a 50% drop in new house building. The CML's membership and the Treasury need the CLG's planning system, and "home builders" are already familiar with selling an insufficient number of new homes at greatly marked up prices into an inflating existing housing market.
Of course the government faces no political threat from this "housing crisis" of 2007. There is no effective challenge to the denial of development rights. There are no groups of building industry workers demanding houses are built, or organising themselves to prevent rates of pay being cut. There are no serious demonstrations of families objecting to the unaffordability of a the dilapidating British housing stock, and the diminutive size of new "eco-homes" for a luxury market. Homeless people are not even aggressively begging in the streets where politicians and other higher earners live. Nothing much is happening.
Facing no challenge to the housing and planning policies of the department of Communities and Local Government, Caroline Flint is powerless during a dramatic phase in the long decline in new house building, and a "consolidation" of the construction products and materials manufacturing "supply chain".
Ian Abley 23.07.2008
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