Capacity in the homebuilding industry Contents

Summary

It is clear that the housing market is broken and that as a country we have not been building enough new homes for some time. We launched this inquiry therefore to understand whether the homebuilding industry is capable of boosting housing output and to identify what challenges need to be overcome if the country is to meet the growing demand.

We have found a homebuilding sector that is dominated by the biggest companies. The eight largest firms build more than half of all new homes, which means we are overly reliant on an alarmingly small number of commercial actors. The large developers are often accused of landbanking (holding on to land to artificially restrain supply in order to maintain high house prices), and while we have not seen evidence of this, we have found that there is little incentive for volume housebuilders to build any quicker. It is in their commercial self-interest to maintain profits and they cannot be blamed for this. However if the country is to build the homes it so desperately needs, then we need to reduce the dominance of the high volume builders by encouraging a far greater mix of developers.

We have identified the land market as an area that requires particular attention and we hope our successors will return to this issue. We are concerned that the market for development land is so tight in higher demand areas that speculative developers are forced to pay inflated prices upfront for the land. The developer will then seek to recover their investment by increasing density, reducing the levels of affordable housing and building more slowly to ensure that local markets are not saturated and house prices do not fall. A subsequent inquiry might explore the feasibility of increased public intervention in the land market to incentivise schemes that prioritise long-term community benefits over short-term commercial profit.

Key to changing the over-reliance on so few developers will be initiatives to encourage increased contributions from other sub-sectors. Small and medium builders are declining in both their number and output, and if market challenges can be overcome there is a potential for existing firms to grow in size and for new entrants to be attracted into the sector. A key challenge for smaller builders is accessing land for development, with local plans predominantly identifying larger sites that are only suitable for volume builders. We therefore welcome measures in the housing White Paper to encourage local authorities to identify smaller sites and to sub-divide larger ones. The Government must make it clear what powers will be available to local authorities to ensure that this happens. Another challenge for small and medium builders is accessing finance as they are seen as being higher risk, particularly in the wake of the 2008 recession. We note that there is an effective model of financial support for SME companies in Germany which the Government should consider, and suggest our successors review the effectiveness of the Government’s new Home Building Fund and the German model of finance.

A successful housing market is one that is competitive with large numbers of companies of different sizes all making a meaningful contribution to the country’s housing output. We believe that diversity is also key in the output itself, with homes built for rent acting as a vital cushion against economic downturns and meeting the needs of large numbers of the population who cannot afford or do not wish to buy their own home. Key to achieving this will be measures that increase certainty and limit risk for developers. If the Government, through the Homes and Communities Agency (HCA) or local authorities, were more proactive in preparing land for development, then far more developers would be able to build the homes we need. By providing infrastructure and in some cases planning permission, the risks and uncertainty for developers will be greatly reduced. The progress of the Government’s Accelerated Construction programme should therefore be monitored closely.

All commercial actors are affected by downturns in the wider economic environment. If the country remains dependant on volume housebuilders to meet our housing demand, then the housing market will continue to be shaped by the cyclical nature of the economy. This is why we believe that public money can be used to increase housing output and to protect the sector against market cyclicality. Local authorities have a long history of building homes, but this almost completely ceased at the end of the twentieth century. We heard evidence that the borrowing caps on councils’ Housing Revenue Accounts limit their ability to build. We believe these should be raised and in some cases removed, where housing affordability is at its worst. We note the increasing number of local authority housing companies that are in operation and seek reassurances that they are receiving the support and expertise they need. Housing associations also have a significant role to play in producing counter-cyclical development and we welcome their increased output during the last economic downturn. However they require greater certainty over their income from social rent and must remain conscious of their charitable objectives.

We also consider the planning reforms that will be needed to deliver the homes the country needs. We welcome many of the proposals in the housing White Paper, such as greater certainty for local authorities when assessing housing need and a five year land supply. However we are concerned at the lack of control planning authorities have over homes built using permitted development rights and the absence of any measures to address disputes regarding the financial viability of sites. It is also extremely regrettable that the Government’s response to the Community Infrastructure Levy Review was not published alongside the White Paper.

It has been claimed that Modern Methods of Construction (MMC) can address a lot of the industry’s challenges. Whilst we do not believe that MMC are a panacea, they do have the potential to make a significant contribution, especially for developments where the homes are easily replicable, such as rented accommodation. We heard evidence that modular housing in particular has a clear advantage in speeding up build out rates, but also that the relative infancy of the industry is dissuading developers from adopting MMC more fully. We argue that the Government should play an active role in supporting the growth of MMC and the wider supply chain, including through the HCA’s support of rental developments. We also note concerns from the lending community regarding different methods of MMC, and recommend that the Government should sponsor a single, recognised quality assurance kite mark.

We believe that custom and self-build homes have the potential to make a far greater contribution to housing output than at present, and are disappointed that despite apparent Government support there does not appear to have been any growth in this area in recent years. In 2012 our predecessor Committee highlighted the positive example of Almere in the Netherlands where custom build homes have made a significant contribution. We believe that this approach can and should be replicated in this country.

Perhaps the biggest challenge facing the homebuilding industry is the growing skills crisis, with the size of the workforce declining and the demand for certain skills growing. It is also a challenge that is too big to be tackled by individual actors, and so we welcome the Government’s intention to review the role of the Construction Industry Training Board (CITB). It is imperative that this review produces concrete proposals for action, particularly with regard to improving Further Education routes into the construction industry and the development of a clear cross-Departmental strategy. Workers from the European Union can provide an important cushion to cyclical workforce fluctuations. In light of the existing skills crisis, we are concerned that large numbers of an already-stretched workforce face an uncertain future in light of the decision to leave the European Union.

In summary, our message is four-fold:





28 April 2017