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Memorandum from Bovis Homes (CRED 18)

 

Summary

· The current housing market downturn in UK, originally triggered by spin off consequences resulting from the sub-prime housing market problems in the US, has now reached unprecedented depths in terms of price and volume reductions and requires decisive Government intervention to halt, and then reverse, the downward spiral of falling mortgage finance, output reductions, house price falls causing sharply falling land values and declining consumer confidence.

· Significantly reduced volume output by the house building industry is a direct consequence of the market downturn; no industry can afford to carry excessive stock - quite simply UK housebuilding is a market based industry and no housebuilder will continue to build what they cannot sell. Volume reductions, if perpetuated over anything other than the short term, will mean the Government housing targets of 240,000 net additional completions by 2016, leading to an additional 3 million homes (2006-2020) will not be met - industry capacity is being stripped out which it will not be a 'quick fix' to recover.

· Housing target delivery delays will cause significant direct and indirect costs to the wider economy; it threatens to undermine the achievement of other public policy objectives, such as the provision of affordable housing, and will exacerbate social issues arising there from.

· UK housing market problems can be distinguished from US housing market problems - in the latter case there was well documented evidence of over supply - in UK the reverse is true - there has been clear evidence (Barker review, etc) for a number of years of housing under supply, partly responsible for the extended period of house price inflation which ended in 2007, and which led to the upwards revision of Government housing targets (see above). Failure to unblock housing delivery issues urgently will only ensure that underlying unmet demand becomes pent up; in turn threatening another 'boom' period of rapid house price inflation as cyclical market recovery occurs.

· Government housing package measures announced in September are welcomed but, in view of a continuing deterioration in the housing market and in the economy generally since then, they should be extended and supplemented by new policy initiatives. It is now the case that falling house prices, leading to widely reported significant land value reductions from a 2007 peak, has seriously undermined the viability of many planned and approved major residential development schemes, to an extent that means they cannot be implemented. Chief amongst required new policy initiatives therefore is that Government (and local authorities) must urgently reduce the costs and regulatory burden placed upon the industry. It must undertake a major reassessment and scaling back of all aspects of policy and regulation which add to costs and which are ultimately not transferable to house purchasers - typically such costs include affordable housing provision, code for sustainable homes requirements, S106 revenue contributions to education, healthcare, recreation, public transport, community infrastructure, etc - and which therefore have to be recovered against land values. This issue is now a major delivery blockage as falling house prices which has led to sharply reduced land values, in many instances, no longer permit schemes to proceed, regardless of marketability considerations.

Housing market conditions

1. The housing market downturn is without precedent. Mortgage approvals for house purchase have already fallen 75% in under two years, compared to less than 60% reduction in the last housing market downturn in the late 1980's. Similarly, house prices fell 13% in the whole of the last downturn, whereas they have already fallen by 14% with almost all experts predicting further falls into 2009

2. New homes account for approximately 10% of total housing market transactions, so the fortunes of the new home sector are largely determined by the market as a whole.

3. RSL's are also heavily dependent on the fortunes of the housing and mortgage markets; a substantial majority of affordable housing is delivered through S106 agreements on private housing sites, so the flow of affordable housing has been hit by the downturn in market house building.

Housing targets

4. The Government's target for England is 240,000 net additions to the housing stock per year by 2016, 3 million additional homes between 2006 and 2020. Housing targets reflect long term demographic changes - as a society we are living longer, population is increasing, household size is falling - by and large such changes are unaffected by credit crunch issues. Indeed emerging demographic information strongly suggests that the Government targets will need upwards revision.

5. House building numbers in England are set to fall steeply, possibly below 100,000 per year, over the next couple of years. Private and affordable housing numbers will fall. It is increasingly unrealistic to expect that any recovery in the housing market will permit the above housing targets to be achieved in the anticipated timescales. Target timescales should thus be revised, but not the targets themselves. The plan making system introduced in 2004, at regional level via RSS's, let alone local level via LDF's, already fails to plan for the currently required target of 240,000. Any attempt to cite the current market downturn as an opportunity to revise targets downwards should be firmly resisted; there is clear evidence that sustained failure over the past decade and longer to supply housing to meet accepted demand has exacerbated house price inflation, eroding affordability and denying access to the housing ladder by increasing proportions of 1st time buyers.

Credit crunch

6. The housing industry has to achieve two essential requirements:

• a competitive profit margin and return on capital from development, so that investors are willing to invest in house building companies;

• residual land values sufficient (a) to exceed any current or alternative use value and (b) to persuade land owners to sell their land to residential developers.

7. The credit crunch has seriously damaged both profit margins and land values.

8. Government should intervene to arrest this vicious downward spiral. Because the mortgage famine, which lies at the root of the housing crisis, is being driven primarily by an unprecedented crisis of confidence among banks and investors, it can only be solved by Government intervention. If funding is restored, and consumer confidence returns effective demand would stabilise and begin to lift housing transactions, which would in turn put a floor under prices, and so begin a spiral of recovery which would lift private house building and affordable housing provision.

9. Whilst the housing industry is experiencing unprecedented high levels of cancellations and declining net reservations, site visitors numbers have fallen far less dramatically. This is evidence that underlying demand remains quite strong, but is being more than offset by mortgage finance issues and eroding consumer confidence.

10. Falling demand has caused all national housebuilders to cut back severely on house building. The industry simply cannot afford to build properties it is unable to sell as this would lead to a prohibitively costly build up of unsold stock and work in progress. Many have stopped building on live sites, and not started many potential new sites.

11. The fall in volumes has been accompanied by falling new home prices. Although developers are able to mitigate the impact to some extent through extremely tight cost controls such reduced margins are unsustainable for any length of time.

12. Falling volumes and falling prices have also resulted in sharply reduced land values. In consequence many planned and approved major residential development schemes are no longer viable.

13. The Government should take urgent steps to minimise the fall in house building for a number of reasons. It will reduce the shortfall of housing delivery against already announced housing targets; it will help retain skills capacity within the industry; finally, the greater the downturn in house building, the greater the direct and indirect costs to the wider economy.

Current Government housing package

14. A viable home building industry is essential. UK's need for very large numbers of additional homes over the next decade or more is a fact that must be addressed by any government. Therefore it is critically important for economic and social reasons that the industry's capacity to build homes is preserved as much as possible. The more capacity that is lost, the more the economic and social damage that will be done by housing shortages in the future.

15. The Government has already announced a range of measures to help the housing market, including a number targeted at new home building generally welcomed by the industry.

16. The measures of direct benefit to private home builders have been:

• An additional £100 million to expand the Open Market Homebuy scheme for purchases of new build properties

• £200 million Housing Corporation funding for RSL's to buy stock units from home builders

• £300 million for a new HomeBuy Direct scheme

Further measures

17. Reduced house building has impacted upon delivery of affordable housing to an extent that the CLG's existing Affordable Housing targets are not likely to be met and its three-year programme funds will not be fully spent. Therefore additional funding from later in the CLG's three-year programme could be brought forward to assist house builders and social housing providers deliver additional housing numbers. Future funds targeted at private housing may also begin to boost housing numbers. At present, the industry's priority is to reduce unsold stock levels. Once these are reduced, the focus of new measures should shift to helping house builders continue building on sites that would otherwise stop production, or start sites that would not otherwise start. It needs to be emphasized that social housing does not recover land value. Housing Corporation grant levels currently only permit construction costs to be recovered. Thus, without a change to grant funding rules, once the current developer stock overhang is sold no social house building will take place where land value is not recovered.

18. Government has a number of other policy aspirations which involve new housing, including affordable housing, community infrastructure, climate change, and lifetime homes. The policy and regulatory costs imposed on residential development by these policies have increased substantially in recent years, and are set to increase even more dramatically by 2016. These costs, which in the main are not recoverable by way of increased selling prices, pose a major threat to the viability of many, if not most, housing developments. If not reassessed, these costs will make it impossible to achieve the Government's housing targets.

19. .Affordable Housing - 58% of affordable housing in 2006-07 was delivered through S106 agreements on private housing sites, up from 31% in 2001-02. Even where Housing Corporation grant is available, there is still a very substantial element of 'subsidy' out of land value. Affordable Housing contributions are a pure cost to development as they do not in any way enhance the sales value of the open-market dwellings on a site. Land value recovery (see para.17 above) should be permitted via Housing Corporation grant to permit social housing to continue being provided.

20. Community Infrastructure -as well as affordable housing, many local planning authorities typically require housebuilders to meet a range of other demands through a S106 agreement over and above what is strictly necessary to enable the development to go ahead such as contributions and/or provision of public open space, education, transport and highways, community works and leisure, health facilities, etc. Such contributions/provision does not provide a direct benefit to home buyers on a particular site and they will usually not result in any increase in sales values. Therefore they too are a direct cost on the development, to be funded out of the land value.

21. Climate Change - the costs of achieving the Government's zero-carbon target by 2016 will be substantial. Research for CLG and EP estimated that the cost of achieving the energy requirements of Code Level 5 (zero carbon is Level 6) would be between £19,000 per plot for an apartment to £25,000 for a detached house. Home buyers will pay only a modest premium for such dwellings, a view supported by research. Therefore most of the additional cost will have to come out of land values.

22. Lifetime Homes - the Government has indicated it will consider imposing Lifetime Homes standards on new housing some time after 2010. This would add directly to housing costs. It is unlikely these standards will bring any sales price premium, so the additional cost and reduced development value will have to come out of land values.

23. Cost constraints of this sort are frustrating the delivery of schemes now. Government should show decisive leadership and announce that, pending a full scale review and scaling back of the policy and other regulatory burden which is adversely impacting upon housing delivery, currently 'blocked' schemes should expect to receive/negotiate (on a site by site basis), reduced S106 requirements for 'off-site' contributions. By reducing such non-essential costs in this way, the current blockage can be removed thus allowing scheme viability to be restored. This measure coupled with other measures already announced and which are capable of extension, can provide a short term boost to housing delivery.

October 2008