Communities and Local Government CommitteeWritten submission from the Home Builders Federation

The Home Builders Federation (HBF) is the principal trade association representing the interests of private home builders in England and Wales. Our membership, which includes companies ranging from major national firms, through regional companies to smaller local firms, is responsible for more than 80% of the new homes built every year.

Summary

Private home builders account for a large majority of new housing supply. The inadequate supply of mortgage finance, especially high LTV loans, is by far the biggest constraint on new home sales and housing supply. Once effective housing demand begins to recover, development finance could hold back the industry’s expansion.

The Affordable Rent model should make every pound of subsidy go further, but cuts in total grant funding will work in the opposite direction. However significant numbers of Affordable Housing units are delivered with nil grant from private housing sites through S106 agreements. In these cases, a sizeable private subsidy is provided out of the development and land value. National and local authority regulatory demands often squeeze the supply of Affordable Housing.

The public sector controls between a quarter and a third of potential residential land. The industry welcomes the coalition government’s programme to dispose of surplus public sector land, and especially the “build now pay later” scheme given current financing constraints.

High land values, created by shortages of permissioned residential land, and the cumulative regulatory cost burden, mean it is very difficult to achieve (a) an adequate development profit margin and (b) a residual land value to persuade land owners to sell and (c) an acceptable institutional yield. The answer to the housing supply crisis is to increase permissioned land supply and to reduce the regulatory burden on all housing, and not to provide favourable treatment—eg subsidised public land or waivers of Affordable Housing requirements—for one type of provider within one tenure (ie institutional investors in the PRS).

We are unable to judge yet whether the Affordable Rent model will be sustainable in the medium to longer term.

Introductory Comments

Private home builders have for many years accounted for the vast majority of new home building, whether sales to private owner-occupiers or investors, or Affordable Housing delivery on private housing sites through S106 planning obligations agreements. Since the downturn in 2007, the social housing share of total completions has increased. HCA funding was increased to maintain Affordable Housing output, whereas completions for private buyers have fallen sharply. However once more normal market conditions return we would expect to revert to the pre-recession situation.

Because private home builders normally account for the bulk of new home production, any discussion about meeting the country’s housing requirements must focus primarily on removing constraints to private home building.

At present, by far the most serious constraint on private housing completions is the shortage of mortgage finance, especially the absence of higher loan-to-value mortgages for buyers with very limited equity (whether first-time buyers or existing home owners whose equity has been eroded by the fall in house prices).

Most of the Committee’s questions are about public funding, and are therefore relevant to Affordable Housing delivery, whether by private home builders or directly by registered providers (RPs).

An important issue, not covered in the questions, is development finance for the private sector. There are no statistics available, so we can only make general comments. Most of the major home builders have refinanced and are now on a sound financial footing. However, funding is very restricted for many SMEs in the sector who often rely on project-based bank funding. Some SMEs have decided to eliminate debt altogether. The key question for the future is whether development finance availability will expand, and whether homes builders will be prepared to increase gearing, once housing demand begins to pick up. If funding remains restricted, this could restrict the industry’s ability to meet expanding demand.

How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms

The Affordable Rent model should make every pound of public funding go further in terms of numbers of homes provided, but cuts in funding will act in the opposite direction. However a large number of Affordable Housing units are delivered annually with nil grant through S106 agreements on private housing sites.

Public subsidy is not the only relevant consideration. Because most S106 Affordable Housing delivery is nil grant, there is a considerable private subsidy provided out of the development value or land value. For example, on a site of 100 units, at an average market sale price of £150,000, with the local authority requiring 30% to be Affordable Housing, then if the RP pays the developer £80,000 per Affordable unit, there is a £2.1 million private subsidy. (Note these numbers are for illustration only.)

This raises a further important issue. The viability of many housing sites is seriously challenged outside the highest priced markets. The cumulative regulatory demands made on development value by central government, local authorities and various public agencies and private utilities, have become a major cost burden. The higher these demands other than Affordable Housing, the less land value subsidy there will be left over for Affordable Housing, and so the more Affordable Housing delivery will be squeezed. In effect, demands such as zero carbon, or onerous education demands in local tariffs or S106 agreements or CILs, or high levels of public open space, will be at the expense of Affordable Housing provision. There is only so much private land value subsidy available to cover regulatory demands.

What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them

No comment.

What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening

The 2008 OFT report on homebuilding concluded that the public sector controls between a quarter and a third of potential residential land. Therefore the public sector has a potentially very significant role to play in promoting home building.

The industry welcomes the coalition government’s programme to dispose of surplus public sector land. The “build now pay later” scheme will be especially beneficial because the private sector is capital constrained.

However the industry’s ability to expand production on public sector sites will be held back by the shortage of mortgage finance—if companies do not have customers able to buy, they cannot build. Also public land, like any land, requires planning permission before home builders can build. Therefore the NPPF will be critical to whether increased disposal of public sector land leads to a significant increase in new home production.

As the mortgage market begins to improve, public land should be able to provide an increasingly important contribution to total housing production, whether through outright sale or schemes such as “build now pay later”.

How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening

A great deal of work has gone into trying to get long-term institutional finance into the private rented sector with very little success so far. The HCA did a lot of work and most of the larger home builders have had discussions with institutions, advisors, the HCA, etc.

New homes are clearly likely to be the primary source of housing for institutional investment. From the private home builders’ perspective, the reason for this failure is quite clear: on most sites it is not possible to (a) generate an acceptable development margin, and (b) generate a residual land value sufficient to persuade a land owner to sell, and (c) produce an institutional yield. If a. or b. is not met, no production can take place. If c. is not met, the institution will not invest.

There are two fundamental problems. First there is the high price of land, caused primarily because the planning system controls supply so tightly. The price of residential land is largely set by home prices in the owner-occupier market. Second, the regulatory burden on new homes (Affordable Housing, other S106 demands, CIL, zero carbon, Flood and Water Management Act provisions, public open space demands, etc.) increases the cost of development very significantly. High land prices and high regulatory costs mean institutional yields cannot be achieved from most new housing.

However we should note that we do not believe these two fundamental barriers should be removed solely for institutional investors in the private rented sector, for example by waiving Affordable Housing requirements or by offering discounted public sector land. High land prices due to permissioned land shortages and high regulatory costs are barriers to all home building. It would very undesirable—and indeed quite wrong—to remove them for one type of provider in one tenure. The solutions are (a) to allow a significant and sustained increase in the supply of permissioned land for housing, and (b) reduce the cumulative regulatory burden on home building, as promised in last year’s Spending Review.

How housing associations and, potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply

No comment.

How the reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply

No comment.

How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term

This question is probably best answered by RPs. A number of larger private home builders bid successfully for grant funding under the most recent Affordable Housing programme, so clearly they believed the Affordable Rent model could be made to work and deliver housing supply. An important test will be the nil grant offers RPs make to private developers for S106 Affordable Housing units compared with the size of offers under the old programme. HBF is not yet able to answer this question.

October 2011

Prepared 4th May 2012