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 three million homes (2006-20)
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, Section 106 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 1980s. 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 Section 106 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, three
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 first 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; and
— 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 Section 106 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 paragraph 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 Section 106 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
Section 106 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
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