Memorandum by the Federation of Master
Builders (CRED 46)
SUMMARY
— The recent tightening in the availability
and cost of credit to those wishing to move onto or up the property
ladder has brought the housing market to crisis point.
— The collapse of the market has resulted
in a massive fall in the production of housing at a time when
the need for housing is still increasing.
— This has resulted in a significant
contraction in the size and delivery capability of the industry
which seems set to continue.
— This brings into serious doubt, the
attainability of government housing targets.
— The key problem is that increasing
numbers of people cannot afford to buy a home, despite their aspiration
to do so.
— The long term cause of this gap between
aspiration and affordability is that government policy has made
housing too expensive to build.
— FMB calls on the Government to drastically
increase the supply of land available for development, to ease
land prices and enable developers to pass on the savings to customers,
thus making housing more affordable.
— FMB calls on the Government to drastically
reduce the number scope and cost of site specific contributions,
to enable developers to pass on the savings to customers, thus
making housing more affordable.
— FMB calls on the Government to abandon
the counterproductive Community Infrastructure Levy.
— FMB calls on the Government to reduce
VAT from 17.5% to 5% on all repairs and maintenance work to existing
homes to stimulate eco friendly improvements.
INTRODUCTION
1. We are writing in response to the House
of Commons Communities and Local Government Committee's call for
evidence examining the Government's response to the effect of
the "Credit Crunch" on its housing policies.
2. The Federation of Master Builders (FMB)
is the largest employers' body for small and medium sized firms
in the construction industry, and with over 13,000 members is
the recognised voice of small and medium sized builders. The FMB
is committed to promoting excellent standards in craftsmanship,
and assisting builders to improve levels of building performance
and customer service. The FMB biannual survey of its mass membership
conducted in 2007 revealed that 32% of respondents engage in house
building as part of their overall business activity. If reflected
across the 13,000 members, this would suggest that the FMB has
somewhere in the region of 4,160 SMEs that engage in housebuilding
either as their primary business activity or part of the overall
suite of services they offer. With the current difficulties being
experienced by the major housebuilders, it is more important than
ever to have a healthy SME housebuilding sector in the construction
industry.
3. Housing is a fundamentally important
issue because of its profound impact on our lives, education,
health, the economy, and pride in our communities. Failing to
address housing problems merely undermines other important social,
economic and environmental objectives which affect us all. Having
a decent home is a basic human right but one that is sadly denied
today to more than 90,000 homeless households stuck in temporary
accommodation, and to the 1.6 million on a council house waiting
lists awaiting a permanent home.
4. The simple fact is that housing demand
continues to outstrip supply. Britain has moved from an average
of four people per household after 1945, to just over two today.
Households today are much smaller on average because of later
marriage, more family breakdown, fewer children, later childbirth
and people living longer. In its July 2007 Green Paper Homes
for the future: more affordable, more sustainable, the department
for Communities and Local Government recognised that "while
the housing stock is growing by 185,000 a year, the number of
households is projected to grow at 223,000 a year, many of them
people living alone". The Government's proposed solution
was to increase the annual rate of construction to 240,000 units
per annum by 2016, and to maintain it for the four years to 2020.
5. The recent tightening in the availability
and cost of credit to those wishing to move onto or up the property
ladder has brought the housing market to crisis point. Long term
problems with supply caused by the planning system, and the inflationary
pressures on house prices created by ever rising build specifications
and production costs have been exposed by the shuddering halt
in the supply of finance to private buyers created by the US sub-prime
mortgage market collapse. As a result, far from the annual rate
of production being ratcheted up from 185,000 units pa to 240,000
pa, production has collapsed, possibly to as few as 90,000 units
for 2008.
6. As finance becomes increasingly difficult
to secure so housing becomes unaffordable to ever more people.
This effectively shrinks the market for housing for private purchase
despite the underlying demand for housing remaining high. This
forces developers to scale back provision of housing as they cannot
afford to create homes for which there are no buyers. This in
turn reduces the number of projects from which contributions to
social and affordable housing provision can be sought. If private
individuals cannot afford to buy, homebuilders cannot afford to
build for that sector of the market, and the current model of
delivery where private buyers finance a considerable able proportion
of social and affordable housing, begins to collapse. If the Government
wants to achieve its targets it must address the affordability
issue.
7. The remainder of our evidence is divided
into three sections, reflecting the areas of interest outlined
in the Select Committee's call for evidence. They are as follows:
— the effects of the credit crunch
on the prospects for achievement of the Government's housebuilding
targets, both for market and for social housing;
— the effects of the credit crunch
on the financial viability and ongoing business of housing associations;
and
— the likely effectiveness of measures
to help existing and prospective homeowners affected by the credit
crunch.
THE EFFECTS
OF THE
CREDIT CRUNCH
ON THE
PROSPECTS FOR
ACHIEVEMENT OF
THE GOVERNMENT'S
HOUSEBUILDING TARGETS,
BOTH FOR
MARKET AND
FOR SOCIAL
HOUSING
8. The Government's Green Paper Homes
for the future: more affordable, more sustainable, set targets
for housebuilding in three key areas as follows:
— More homes to meet growing demand.
— Well-designed and greener homes,
linked to good schools, transport and healthcare.
— More affordable homes to buy or rent.
More homes to meet demand
9. The key targets in Homes for the Future
were two million new homes by 2016 and three million by 2020,
to be achieved by ratcheting up housing delivery from 185,000
units per annum to 240,000 units per annum by 2016, and to maintain
this rate in the four years to 2020. However, the effect of the
credit crunch has been to drive housing production in the opposite
direction at alarming speed, and as a result, prospects for the
2016 and 2020 targets look bleak. Far from increasing delivery
from 185,000 units per annum, delivery in 2008 could be as low
as 90,000.
10. Economic forecasting is notoriously
difficult, but if as expected the economy continues to experience
difficulties throughout 2009 bottoming out and beginning to recover
in 2010, then recovery in the homebuilding industry will be unlikely
to even start in any meaningful sense until at least 2011 as it
will take the industry some time after this recovery to regain
capacity lost during the recession. The length of the recovery
period will depend on the length and depth of the recession. The
immediate problem is that the credit crunch has decimated the
market, forcing many firms to make skilled staff redundant, and
cut back orders for materials. The consequential effect on materials
suppliers means that they too are having to lose skilled and experienced
staff as they reduce production levels. These people will try
to find work elsewhere in the industry but if their search is
unsuccessful, their essential skills and experience may be lost
on a permanent basis. This means that it will take considerable
time after the beginnings of an economic recovery for the building
and materials supply industries to begin to rebuild their capacity
as this will only return as market recovery filters increasing
demand down through the supply chain. The longer the recession,
the worse the damage to capacity becomes, and the less likely
it will be that the targets are met. In terms of trying to quantify
how far off target delivery will actually be by 2016, estimates
vary but even a conservative estimate of the damage predicts considerable
problems.
11. A simplified estimate would say that,
if the Government wanted to increase from 185,000 units per annum
in 2007 to 240,000 in 2016 and do so in even increments, based
on current projections, even two years of production at 90,000
units per annum would leave the industry at least 200,000 units
short of where they needed to be by 2010. Given that the industry
is highly unlikely to recover to 2007 levels of production by
2010, the total number of units behind target will continue to
increase until production levels can be raised up past 2007 levels
and back to the relevant incremental level and maintained thereafter.
From this point production would need to be further increased
to take into account the need to not only maintain targets but
begin to tackle the shortfall from previous years. 2020 is some
way off, but failure to meet the 2016 targets will naturally make
the objective of achieving three million new homes by this date,
far more challenging.
Well-designed and greener homes, linked to good
schools, transport and healthcare
12. The better homes objectives set out
in Homes for the Future are by their nature difficult to
quantify. However, what is concerning is the fact that as the
supply of new build housing declines due to the credit crunch,
so does the number of homes being built to the standards laid
down by the Government. The Department for Communities and Local
Government (DCLG) has made it clear that it will not compromise
on standards in favour of housing supply. DCLG officials have
made it clear to the industry that they have no intention of softening
targets, and that they intend to proceed with their plan to ratchet
up the standards required by the building regulations by 25% and
44% in 2010 and 2013 respectively to achieve the Government's
target for all new homes to be zero carbon by 2016. The FMB is
committed to improving standards in the built environment but
has a number of concerns relating to the practicality and desirability
of these targets in the current economic climate.
13. First, it needs to be recognised that
raising standards pushes up build costs, and pushing up build
costs pushes up sales prices, making the units for private sale
more expensive and thus less affordable. The increases in building
regulation standards planned for 2010, 2013 and 2016 are based
on the DCLG's Code for Sustainable Homes, which consists of six
levels with Level 6 being "zero carbon". The FMB is
aware of a project to build a two flat unit to Level 5 which meant
that it was 24% more expensive than building to existing building
regulations. In addition, the environmental modifications added
an extra £40,850 per flat to the build cost. There is therefore
an inherent tension within the Government's policy between standards
and affordability which needs to be acknowledged and dealt with
before the Government can be said to have a coherent housing strategy.
14. Secondly, there are concerns about customers'
attitude and adaptability to higher specifications. Anecdotal
evidence suggests that low pressure showers and energy efficient
light bulbs are often removed on occupation. The development mentioned
above experienced similar problems once the tenants took up residency.
The mechanical ventilation with heat recovery was switched off
to save electricity, the thermal stores were switched off and
the biomass boiler fell into disuse once the initial store of
pellets had run out. Similarly, the time and expense of maintaining
environmental technologies from wind turbines and photovoltaic
panels are also likely to be unpopular with many, especially as
the latter are particularly vulnerable to vandalism. The FMB has
heard of incidents where photovoltaic roof panels have burnt roof
trusses, ground source heat pumps have caused permafrost and there
are serious doubts about the pay back times on certain environmental
technologies. At a time when the Office of Fair Trading (OFT)
is demanding that the industry improve customer satisfaction,
the FMB does not feel that it is fair or appropriate to use the
private customer as a testing ground for new technologies.
More affordable homes to buy or rent
15. Homes for the Future states
that, "Government will help deliver at least 180,000 new
affordable homes over the next three years, and more than 70,000
affordable homes a year by 2010-11—with an ambition to increase
further in the next spending review". It further commits
to the provision of at least 45,000 new social homes a year by
2010-11, a goal of 50,000 new social rented homes a year, in the
next spending review period, and over 25,000 shared ownership
and shared equity homes a year funded mainly by the Housing Corporation/Homes
and Communities Agency. The extent, to which these remain achievable
targets following the credit crunch, depends on the extent to
which the Government intends to rely on the private sector to
deliver them via site specific contributions. Naturally, the drastic
reduction in private homebuilding will considerably reduce the
number of units that are delivered in this way, due to there being
a smaller number of sites from which to solicit a contribution.
The FMB would also suggest that the economic situation has serious
implications for the Government's finances, particularly in terms
of tax receipts, and therefore questions whether it will be able
to maintain its £8 billion commitment to affordable housing.
16. However, the credit crunch is not the
only contributor to rising un-affordability. The Government makes
housing less affordable in a number of ways.The key challenges
that the construction industry faces when trying to provide decent
and affordable housing, is that the Government and the planning
system consistently force up production costs. They do this in
the following ways:
17. Taxation: stamp duty is paid
on the purchase of land. The customer also has to pay stamp duty
when purchasing the house. Given that that the stamp duty cost
incurred by the land purchase will ultimately have to be passed
onto the customer, this means that they effectively pay stamp
duty twice. The final price paid by the private buyer will also
have to cover some or all of the developer's Aggregate Tax, Landfill
Tax, and Corporation Tax. Private buyers may soon also have to
pay for the Community Infrastructure Levy as well, despite the
likelihood of their already having contributed to local infrastructure
via the site specific contributions made under Section 106 agreements.
18. Excessive restriction of land supply:
land is the fundamental resource without which no development
can take place. The planning system restricts the supply of land
available for development, driving up land prices, and thereby
driving up house prices. The planning system makes the process
of gaining planning permission on land approved for development
so difficult, time consuming, and expensive that the uplift in
land value that occurs when planning permission is granted, is
sufficient in the Government's view to warrant taxation in the
form of its proposed Community Infrastructure Levy. Inefficiencies
in the planning system are a prime driver behind restricting the
supply of land with permission to develop thereby inflating its
value. The FMB is concerned that the Government's reaction to
the problem is to tax the outcome rather than deal with the cause.
19. Planning fees and bureaucracy:
as well as the considerable planning fees that a planning authority
may charge, planning officers can and do demand excessive numbers
of technical reports covering everything from traffic flow to
archaeology. These can cost thousands of pounds to produce, and
when multiplied across the sheer number demanded, the final bill
for professional and consultancy fees can be in the hundreds of
thousands of pounds for even relatively modest developments.
20. Planning delays: while planners
deliberate over an application, many developers will continue
to have to pay considerable interest charges if they used a loan
to purchase the land. The longer the application takes, the more
the developer will have to pay in interest, and ultimately the
more they will have to sell the final housing units for if they
are not to go into bankruptcy. The recent report A Call for
Solutions, published as part of the Killian Pretty Review
of bureaucracy in planning, has suggested that there are around
29,000 units of housing caught up in the planning system at any
one time. They further cite the Barker Review estimate that planning
delays cost the overall economy between £700 million and
£2.7billion.
21. Section 106 agreements: everything
from contributions to education and health care, to building extra
class rooms on schools and 10 year maintenance contracts for sports
fields can be demanded by local authorities which only serves
to push up the price of final housing units.
22. Affordable and social housing provision:
when a local authority takes for example 30% of a site for social
housing, and insists on another 10-20% for open amenity space,
the developer only has 50% of their site with which to recover
100% of their total outlay. This effectively pushes up the price
of the units for private sale, thus making them less affordable.
The greater the costs put on the developer, the greater the cost
of the units for private sale, the less affordable they become,
and the more affordable housing units will be needed. Ironically,
affordable housing provision ultimately makes the remaining units
less affordable.
23. Specification: the FMB supports
the green agenda but recognises that sustainability needs to be
pursued in a sensible and sustainable way. The higher the specification
created by standards such as the Code for Sustainable Homes are,
the more expensive the final units become. As mentioned above,
building to Level 5 is in the region of 24% more expensive than
building to building regulations alone an could potentially add
over £40,000 to the final sale price.
24. Ultimately the Government needs to understand
that the each and every cost placed on the construction industry
is in fact paid for by those who purchase its products. When the
customer can no longer afford the products, the industry has no
choice but to stop producing them. The credit crunch has had a
massive impact on people's ability to afford housing. As a result
production is expected to dip below 100,000 units this year as
the industry cannot afford to build what it cannot sell.
THE EFFECTS
OF THE
CREDIT CRUNCH
ON THE
FINANCIAL VIABILITY
AND ONGOING
BUSINESS OF
HOUSING ASSOCIATIONS
25. The FMB does not feel it appropriate
to comment on this area, as the issue would be better addressed
by bodies such as the Housing Corporation, the Northern Ireland
Housing Executive, Communities Scotland, and the Welsh Assembly,
who are responsible for the funding and regulation of housing
associations in their respective areas.
THE LIKELY
EFFECTIVENESS OF
MEASURES TO
HELP EXISTING
AND PROSPECTIVE
HOMEOWNERS AFFECTED
BY THE
CREDIT CRUNCH
26. The £1 billion package of measures
announced by Hazel Blears MP, Secretary of State for Communities
and Local Government, on 2 September 2008 is designed to assist
first-time buyers who are frozen out of current mortgage markets,
support vulnerable homeowners facing repossession, particularly
those who would be eligible for social housing, and ensure we
are as well-placed as possible to meet our housing needs, especially
affordable housing in the short and long term. The £1 billion
consists of four key commitments:
— offering up to 10,000 first-time
buyers currently frozen out of the mortgage market the chance
to get onto the property ladder through a new £300 million
shared equity scheme;
— supporting up to 6,000 of the most
vulnerable homeowners facing repossession to remain in their home
through a £200 million mortgage rescue scheme;
— improving the support offered through
the benefit system to homeowners with mortgages who lose their
jobs, at a cost of £100 million over the next two years;
and
— bringing forward £400 million
in order to deliver up to 5,500 new social homes over the next
18 months on top of current assumptions.
27. The FMB is of the view that the measures
are unlikely to make a significant impact in terms of rescuing
the aforementioned delivery targets because they are short term
policies which do not tackle the core issues. The Government needs
to understand that it is the cause of its own housing supply and
affordability problems, and until it stops forcing up prices with
planning restrictions, tax rises, higher specifications, and section
106 agreements, it will not get affordable housing.
28. Unfortunately, UK house prices have
been allowed to inflate to an unsustainable degree due to lack
of supply, rapid increases in land and production costs driven
by counterproductive Government policy, and easily available credit.
What is happening now can be seen as a sharp, unpleasant but necessary
correction to the prices of existing stock reflecting how far
beyond realistically affordable levels they had risen. Expectations
of further falls in house prices are likely to be self fulfilling
in the short term at least, as prospective buyers wait to see
how far the market will fall before deciding to purchase. However,
like the proposed measures, this correction does not address the
basic problems of build costs being too high, and there not being
enough developable land coming out of the planning system to satisfy
demand. As such the intertwined supply and affordability problems
will still be there when the billion has been spent.
29. In terms of the likely effects of the
proposed increases in funding for shared equity schemes and social
housing, even if they fulfilled their ceiling ambitions, they
would still only account for 15,000 units at a time when the industry
has lost demand for approaching 100,000 units, and expects to
be down by a similar figure again next year. Beyond the impact
of the current financial crisis, if the Government wants to meet
its targets, it needs to resolve the complexity and contradictions
within the planning system, ensure the supply of land available
for development, drastically cut back on section 106 agreements,
revise new build environmental targets to bring them back into
line with what is financially viable to deliver, abandon the proposed
Community Infrastructure Levy, and make better use of the existing
housing stock.
30. Existing homeowners wanting to make
their homes more energy efficient and thereby cut the cost of
rising fuel bills could be helped further if the Government set
out a clear, succinct strategy to tackle the refurbishment of
the existing housing stock. The existing housing stock, which
contributes 27% of the UK's total carbon emissions, has the potential
to help achieve the Government's overall target to reduce carbon
emissions by 80% by 2050. In 2050 an estimated two thirds of Britons
will be living in homes that already exist today. If the Government
wants to achieve its target of cutting carbon emissions by 80%
by 2050 it must look at the existing housing stock. Existing homes
can be renovated to meet eco excellent standards at a cost of
£20,000, whereas building new homes, requires an infrastructure
subsidy alone of around £35,000 per home plus the tens of
thousands of pounds required to make them "zero carbon"
in use. As such incentives are needed now to encourage homeowners
to make their homes more energy efficient. The simplest and easiest
way would be for the Government to reduce VAT from 17.5% to 5%
on all repairs and maintenance work to existing homes. The FMB
would also be keen for the Government to consider low interest
loans, as Germany does, for upgrading houses and public buildings,
which could bring the whole existing stock up to eco-excellent
standards while regenerating all run-down areas by 2030.
November 2008
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