Capacity in the homebuilding industry Contents

2The structure of the homebuilding industry

Developer behaviour and build out rates

6.An accusation frequently levelled at large developers is that they are artificially constraining the supply of new homes so as to ensure that consumer demand is not met, and prices therefore remain high. At the 2016 Conservative Party Conference, Sajid Javid, the Secretary of State for Communities and Local Government, argued that:

The big developers must release their stranglehold on supply. It’s time to stop sitting on landbanks, delaying build-out: the homebuyers must come first. Almost 280,000 planning permissions were issued over the last twelve months … I want to see each and every one of those homes built as soon as possible.8

7.The high volume homebuilders9 dominate the market and are therefore able to shape how it operates. Having purchased land at a given price and devised a scheme that will allow them to recoup their investment and deliver a profit, they will not risk over-saturating a local market to the extent that house prices will fall and their profits decrease. This is rational commercial behaviour and a sound business model. But it is not one that is in the country’s best interests.

8.When we asked representatives from volume housebuilders about their development model, David Jenkinson from Persimmon told us:

I would describe us as speculative builders. We go out and we build to what we perceive a demand is, rather than actually waiting until someone comes and reserves [a home]. When we release a site, we may commit to build 30 houses on a development, even though we have only sold five. We will always look to meet the demand and build what is required to meet that demand, as long as other forces are not in place … If the demand is there, we will build houses to meet it.10

9.Our concern is that when developers say they build to meet demand, what they mean is that they build to meet demand at a certain price. It is generally accepted that developers seek a profit margin of around 20 per cent of their investment, and so they build in a way that delivers this. We do not blame them for doing so, but note that the structure of the industry does not encourage them to deliver the increased supply of housing that is needed. In order to boost supply, a perspective that moves beyond the short to medium term is necessary. Later in this report we discuss the importance of Build to Rent programmes and other ways of delivering housing which are not so subject to the cyclical nature of the wider economy (see paragraphs 66 to 72). This is important as we believe that the speculative housing developer model which currently dominates in England is not always in the public interest.

10.We are concerned that the land market for development land is so competitive that speculative developers are forced to pay inflated prices up front for the land. These firms then work to ensure that their investment is protected and their profit maximised. To recover their investment, developers will be more likely to increase building density, reduce the level of affordable housing delivered and build more slowly to maintain prices. We are concerned that this is a system that serves only to increase the landowners’ profits and limits the long-term benefits that development can bring to a community. This would appear to be in conflict with the intentions of the 1947 Town and Country Planning Act.

11.We welcome the confirmation from the Secretary of State that the Government has accepted an amendment to the Neighbourhood Planning Bill that will make it easier for local authorities to establish public interest companies that can acquire land, obtain planning permission and then work with a developer to deliver housing. Under such arrangements the council would be able to capture much more of the profit from the land, which it could then invest in local infrastructure.11

12.We do not believe that developers intentionally inflate prices—but they reduce risk by building to demand at current prices, and there is insufficient incentive for them to build any quicker, and considerable incentives for them to ensure that local prices do not fall. We encourage the Government to consider how it can influence the financial model of the sector and encourage developers to take a longer-term perspective and a greater stake in civic homebuilding. We recommend to our successors that they revisit the land market, how land prices can determine development outcomes and the feasibility of increased public intervention in the land market so as to be able to prioritise long-term community benefits over short-term commercial profits in a future inquiry.

Monitoring build out rates

13.The Government recognises that developers might not always be building as quickly as they are able to. The Department for Communities and Local Government (DCLG) notes that:

There is often developer caution about the ability of local housing markets to ‘absorb’ new-build supply. This leads to unambitious build-out rates (Developers with cautious build-rate assumptions will benefit from an advantage in terms of the price they can offer landowners—assuming house prices are rising faster than construction costs and the cost of borrowing).12

14.The Government proposes in the White Paper that: “We need to hold local authorities more closely to account for the delivery of homes that they have planned for, and enable them to hold developers to account”.13 However we have reservations whether local authorities have either the capacity or the data to effectively hold developers to account. We will discuss the resourcing of local authorities later in this report (paragraphs 94 to 101), but in our view the data currently collected on planning permissions and their progress, and house starts and completions, is not sufficiently robust.

15.Following a discussion with volume homebuilders on build out rates,14 we were concerned that the number of planning permissions that had been granted seemed to be far in excess of the number of new homes started, and wrote to the Secretary of State. In his response, Mr Javid explained that using data from Barbour ABI, the Department had the following data on the planning pipeline:

As of July 2016 there were 684,000 units with detailed planning permission granted on sites which had not yet been completed. Of these, 349,000 units have started and 335,000 units are on sites yet to start. Of those yet to start 301,000 are now ‘progressing towards a start’ and 18,000 units are on un-started sites that are ‘on hold or shelved’. This includes only those units that have been granted detailed planning permission, or approval of reserved matters, on sites with ten or more residential units.15

16.It is unclear whether the quoted figure of 349,000 relates to the number of individual units started or whether this relates to the anticipated output of sites where some work has begun. It could well be that a relatively small proportion of the 349,000 have actually commenced. In a subsequent letter, we asked whether information was held on who owned the land to which the 335,000 units that were yet to start applied, and whether the Department had information on the distribution of these outstanding permissions between the major homebuilders, SME housing developers and other developers such as housing associations. The Housing and Planning Minister, Gavin Barwell MP, confirmed that “it is not possible from these data to identify who owns the land nor do the data include a systematic categorisation of the type of developer”.16

17.If local authorities are to be held responsible for holding developers to account, it is imperative that the information collected on the planning pipeline be significantly improved. Councils must be able to identify where delays are occurring if they are to speed up development. We welcome the positive comments from the Housing and Planning Minister on improving the transparency of land ownership.17 Working with developers and local authorities, the Government must ensure that the data collected by local authorities on the development pipeline are more thorough and reliable. It must be clear at a local level how many planning permissions have been granted, at what stage those permissions are, who owns the land, when the permissions will be built out and what the reasons for any delay are. We would expect this to be done by autumn 2017.

18.Once the data are more robust, local authorities must then be able to influence developer behaviour. We asked representatives from local authorities about how councils could incentivise quicker build out rates, for example by requiring developers to commit to agreed build-out rates. Sandra Dinneen, Chief Executive of South Norfolk Council, told us that:

Planned delivery agreements of some sort would work, as long as the right people were signed up to them. You need to tackle the issue of statutory consultees, utilities and so on to make sure you have everybody in on the act. However, you need some teeth about what happens if people renege on them. You are trying to get houses built, so just fining or penalising is not necessarily going to get you the outcome, because you actually want houses to be built.18

19.The need to strike a balance between penalising slow build out rates and encouraging development was recognised by the Minister:

If the powers were too draconian, it would actually have a chilling effect on house-building in this country because, if you were running a medium or large developer and you knew you were going to get hit with a big fine if you did not do something within two years and it was a marginal site, you just would not put the application in. We have to get the balance right here where the powers are effective but are not sufficiently draconian as to have that chilling effect.19

20.It is disappointing that the White Paper was not able to suggest how this balance could be struck. However, we welcome the Government’s suggestion that local authorities should be more active in their use of compulsory purchase orders to achieve development on stalled sites.20 Similarly, we welcome the proposal to publish data on the build-out rates of different developers. Mr Barwell told us:

There is also a bit of nudge policy there. We want to start publishing, at an aggregate level and at a national level, the performance of different developers in terms of speed of build-out so that you, we, the House and local authorities will be able to see the different performance of the different developers, which will be very interesting information.21

21.We do not want measures intended to increase housing completions to act as a disincentive for developers to consider proposing a development. But local authorities should be encouraged to require a schedule of build-out rates prior to granting planning permission. This, coupled with increased transparency on developer behaviour and performance and a greater use of compulsory purchase powers, would in our view be likely to increase build out rates.

Volume homebuilders

22.The homebuilding sector is dominated by the volume developers, with a quarter of all new homes in 2015 being built by the three largest companies (Persimmon, Taylor-Wimpey and Barratt) and the eight largest firms accounting for more than half of all new homes.22 If we remain overly reliant on a part of the industry that has little incentive to change the way it works, then the country will not be able to deliver the new homes it needs. As the Department observes, “large house builders have a set business model, and we can’t rely on them to increase their output”.23 The market has in recent years become increasingly reliant on the high volume homebuilders to deliver new homes. Using data from NHBC (National House Building Council) registrations, the housing White Paper highlights the recent trend towards market dominance:

Table 1: Market share in the housing industry by builder size

Small builders

(1–100 units a year)

Medium builders (101–2000 units a year)

Volume builders (2000+ units a year)

Market share in 2008

28%

40%

31%

Market share in 2015

12%

29%

59%

Source: DCLG, Fixing our broken housing market24

23.Under a market-led, speculative model, the sector is extremely susceptible to the cyclicality of the wider economy: if the demand (or rather, the demand for houses at a price that would deliver profits for developers) is not there, then construction slows. During times of economic slowdown, there is no capacity for developers to build homes which fewer people will be able or willing to buy. This was evident following the recession of 2008 when the number of new dwellings started dropped from 170,440 in 2007–08 to 88,010 in 2008–09, and as the economic situation has improved, the number of starts has risen.25 As a result of market cyclicality, the sector has become characterised by uncertainty and risk. Pete Redfern from Taylor Wimpey told us:

If you want to put capital to work in our sector, it takes a long time and the levels of uncertainty are too high. You are not sure you will get a payback before that environment changes. That is the biggest constraint. It affects our strategies, in the short term, but our strategies would change if those things changed. We want to be able to grow our businesses aggressively, but we cannot throw money at things when we have a high degree of uncertainty. It is those uncertainties that stop new capital coming in.26

24.Volume homebuilders that are seeking to grow their businesses must make judgements about economic conditions and manage their exposure to risk so that they are not threatened in the event of a downturn, or if the policy environment changes. David Thomas from Barratt Homes emphasised to us the role of risk management:

The reality is that a big part of our role, in terms of running housebuilders, is about risk management. If the Government provide a risk proposition that is substantially lower risk, then the contractors or developers will build houses at lower margins. If you have no sales risk, then you are clearly going to build at a lower margin … Currently, we are effectively speculative builders. We are taking all the build risk: the problems that we find in the ground. We are taking all the sales risk: can we or can’t we sell the houses?27

25.The country’s homebuilding market is dominated by the volume builders, whose output is determined by their assessment of risk and uncertainty. If the country is to boost the supply of new homes, then greater market diversification and counter-cyclical building will be necessary, as well as measures to reduce risk to developers. We discuss this further in paragraph 66.

Small and medium sized builders

26.Small and medium sized builders have an important role to play in boosting the number of homes built and lessening the dominance of volume housebuilders. The challenges facing volume homebuilders are however more acute for small and medium sized builders who have lower tolerances for market downturns. This is evident in the number of them that have ceased operating in the last twenty years, and from the fact that very few of them have grown into larger players:

Table 2: Number of homebuilding companies according to size

Year

The number of companies registering 1–10 units per year

The number of companies registering 11–30 units per year

The number of companies registering 31–100 units a year

1988

10,112

1,500

603

2014

2,000

244

159

Source: Federation of Master Builders28

27.The Federation of Master Builders argue that not only the number of small and medium firms, but also their output has declined:

It is well-established that SME house builders have declined significantly in terms of number of firms and aggregate output over the past few decades. NHBC figures show the proportion of new homes being registered by those building fewer than 500 units per year (a rough approximation for medium-sized firms and smaller) has fallen from two thirds in 1988 to just over a quarter in 2015. A significant part of this this decline has occurred over the past eight years. From 2008 to 2015 this figure fell from 44% to 26%.29

28.We asked representatives from smaller building companies why there had been such a marked decline. Adrian Swan, Managing Director of Swan Homes, told us:

Over the last eight years, one third of that two thirds [the share of the market that used to be SME builders] has fallen out of the marketplace because of the recession and the financial crisis. As an industry, there are a lot of capable developers out there who cannot get back in, either due to lack of access to finance or the constraints of the planning system. Both those things sit hand in glove … a lot of those guys would be encouraged to come back if those two areas were far easier to access.30

29.Daniel Gath, Managing Director of Daniel Gath Homes, told us that:

house building has gone the way of major retail and groceries, with the big players. We are the same in house building, but at the very bottom end of the industry you would have a jobbing builder who would be doing extensions and bits and bobs of work locally, who would maybe build two, three or four houses per year. The complexity of planning, with all the technical hoops you have to get through, the conditions on planning and the restriction on finance, mean that Joe Bloggs, your local general contractor, thinks it is not worth the hassle anymore.31

30.Representatives of the volume builders agreed that market consolidation had occurred. Pete Redfern, Chief Executive of Taylor Wimpey, explained:

The biggest issue for small housebuilders is that housebuilding has become a far more complex business over the course of the last 20 to 25 years. The amount of resources you need to hold for businesses like ours has grown significantly … I would not necessarily argue that it is wrong, in a material way, that it has become more complex. There are serious issues around environmental performance, around safety and around other things. A lot of those regulations are necessary. It is a natural trend in many industries. Again, with that car industry comparison, a similar trend makes it very, very difficult for small businesses to compete. Housing is not the cottage industry that it was 30 or 40 years ago.32

Accessing land

31.Alongside this market consolidation, a key barrier for small and medium sized builders is their inability to access land for development, because a significant proportion of land is made available only as part of large-scale developments. Sarah McMonagle, Director of External Affairs at the Federation of Master Builders, told us that in a recent survey of housebuilders, it was found that:

a lack of available small sites was the number-one barrier to SME housebuilders increasing their delivery of new homes. At the moment, lots of local authorities tend to focus on larger strategic sites in their local plans, which is understandable given that it is more costly, time-consuming and resource-intensive to try to identify lots of small sites.33

32.Daniel Gath, Managing Director of Daniel Gath Homes, told us that his company generally builds sites ranging in size from five to fifteen units. Many of these sites are windfall sites that were not identified in a local plan.34 The Federation of Master Builders identifies small and medium builders as largely reliant on windfall sites, which because they are not allocated in local plans, come with much greater uncertainty as to whether they will get planning permission.35

33.The trend towards local authorities focussing on fewer large sites is understandable in light of their reduced resources. Housing developments can also be politically contentious and subject to local opposition, so it can be sensible on those grounds to have fewer sites. David Heathcoat-Amory from Devonshire Homes summarised the challenge of delivering homes in the face of local opposition:

There is inevitably a tension. People with houses on the whole do not want other people to have them, at least not where they live. That is the overarching human context in which we operate, and the planning system has to find a way around this.36

34.We asked local authorities about the trend towards allocating fewer, larger sites. Tim Hill from Leeds City Council explained that:

About half of our sites are small sites, but they deliver 20% of the numbers. Yes, there is a challenge for us. If we are going to be delivering bigger numbers, we have to work out how that is going to be done at scale. Large sites will deliver at scale,37

35.We appreciate the reasons why local authorities often prioritise allocating larger sites for development over multiple smaller sites. However this has made accessing land more difficult for small and medium sized builders, and we urge local authorities to make more suitable land available to them.

Accessing finance

36.Borrowing is extremely important for small and medium sized builders, because their cash-flow is that much smaller than that of the volume homebuilders. Usually, a small or medium sized builder must complete a development and sell the properties before they can borrow for their next development. Accessing finance and being able to borrow capital at competitive rates is therefore vital. David Heathcoat-Amory told us that:

The credit crunch put a lot of banks in shock and they became very risk averse to lending on property, even to companies such as mine, which gave them no trouble. We were not highly geared, but even so, property was a kind of red zone to them. That has now improved markedly. Some banks understand the business now and have come to accept the risks. Nevertheless, for a considerable number of years it was very difficult to assemble the right capital. If you are a small company, you are almost by definition short of capital, so lending, or rather borrowing from our point of view, is crucial. When the banks withdrew, it created very severe problems for us.38

37.Daniel Gath, Managing Director of Daniel Gath Homes, argued that the finance needs of smaller builders are still not being met:

Of the three banks I have spoken to in the last 18 months—you have mentioned they are getting better, but generally they do not understand the model of the speculative house builder. In the recession they were left with a lot of half-built houses, whereas somebody controlling well their business in spec house building will control their work in progress. You might have one house finished, or a show house; you will have another one at shell and leave the rest at foundations. They want you to build out the site so that they have their security if anything goes wrong. That puts an added pressure on house builders. They do not understand at all the model we work to.39

38.Sarah McMonagle from the Federation of Master Builders (FMB) told us that the situation had improved in recent years, but not because of the banks: it was because small and medium sized builders had begun exploring alternative forms of finance. Many of the FMB’s members want to work with their local banks, but cannot do so. Ms McMonagle gave an example where a builder with a 90 year relationship with a bank had been told that it would no longer lend to his firm because it did not have an annual turnover in excess of £5 million.40 John Slaughter from the Home Builders Federation also highlighted that when banks are prepared to lend to smaller companies, they often do so on prohibitive terms or with low loan to value ratios in the region of 60–65 per cent.41 Difficulties in accessing finance are therefore a significant barrier to enabling smaller builders to grow and increase their output, and to allowing new entrants into the sector.

39.When we visited Berlin to learn about the German approach to homebuilding, we met KfW Bankengruppe (KfW), a government-owned development bank. We heard that because KfW was backed by the state, it enjoyed a positive credit rating (AAA). Customers approach their existing bank for a loan, which is then refinanced by KfW at its low rate, with the advantages passed on to the customer and risk reduced for the customer’s bank. For small and medium companies, KfW exempts the customer’s bank from liability, encouraging the bank to lend and allowing the customer to benefit from KfW’s low rates. KfW described this to us as “financing with a public mission” and we also heard from the Association of German Building Industry that companies with less than 50 employees carry out 81 per cent of all residential development in Germany. The Government should consider helping smaller building companies to access credit at more favourable rates.

40.We heard evidence from the Homes and Communities Agency (HCA) and the Housing Minister about the Home Building Fund, which in part is designed to address the needs of smaller builders. Launched in October 2016, the Fund amounts to £3 billion, with £1 billion assigned for short-term loan finance targeted at small and medium sized builders, custom-builders and those using innovative methods to deliver up to 25,000 homes during the current parliament; and a further £2 billion of long-term loan funding for infrastructure and large sites, with the aim of delivering up to 200,000 homes. The Home Building Fund is administered by the HCA, whose Chief Investment Officer, Gordon More, told us:

we have had over 1,000 enquiries, 90% from SMEs, and we are working very hard to go through all their proposals and applications. There is clearly demand there. High street banks tend to fund at 60% to 65% of cost; we are doing more than that. One of the questions we ask them is, “Can you obtain commercial funding?” and if the answer is yes, Government should not necessarily be funding them. There is big demand from people who cannot get what they consider commercial funding out of the commercial organisations. One of the things we are trying to do is to give people a track record so that they can, in future, access funding from more normal commercial channels.42

41.We heard evidence from SME builders about previous government schemes and their shortcomings. Mr Heathcoat-Amory told us:

There was an initiative called the Builders Finance Fund, but it was hopeless from our point of view, because it was very slow. It required us to put our equity in first—a familiar problem—and the conditions they attached were stricter than those of the banks … I hope the Government can design a system [through the Home Builders Fund] to bring in the banks and themselves. I do hope that it is effective and does not delay, because in one case we were still negotiating with the Builders Finance Fund when we had finished the site.43

42.It is vital that the Government’s attempts to increase access to finance for small and medium sized builders are not overly bureaucratic and that they meet the needs of the SME sector. However the Government should also recognise that due to past experiences of government schemes and long-standing relationships, many developers would still prefer to borrow from commercial high street banks. When we asked the Housing Minister what steps were being taken to encourage commercial lenders, he told us:

we are obviously also interested to make sure they [the banks] are lending to viable propositions from SMEs in terms of building new homes. It is a good illustration of this point I made at the start about having to build a very broad coalition of people. If we are going to get this job done, the lenders are part of that, so we have a regular dialogue with them. We actually had a meeting today with a medium-size developer who was expressing frustration with a particular bank that their business banked with, who had refused to loan … I will take that up with them.44

43.Whilst we welcome this dialogue and the Minister’s efforts to address specific cases, we believe that further steps should be taken. For example we note the finding of the Business, Energy and Industrial Strategy Select Committee in its report ‘Access to Finance’ that there can be a financial information gap: “Over half of SMEs do not shop around but go straight to their bank to apply for finance. And SMEs are, by definition, small and do not always have the time to research their options”.45 This report also highlights the importance of the availability of advice and guidance, and the role that the British Business Bank could play in improving this.

44.We welcome the introduction of the Home Building Fund, especially its efforts to increase access to finance for small and medium sized builders. We recommend that our successors revisit the implementation and effectiveness of the Fund within the next two years to assess its success, and consider the German model of support for SMEs. The Government should publish a strategy within the next year outlining the practical steps to be taken to encourage commercial lenders to lend on more appropriate terms to home builders. The Government should look closely at the lessons that can be learned from the German model of support for SME companies, which offers support and certainty for the sector as a whole rather than to individual companies.

Accelerated Construction

45.The Government is also seeking to increase market diversity and to support small and medium sized builders through its Accelerated Construction programme. The housing White Paper explains that the programme will seek to partner with small and medium sized builders, contractors and others to build out surplus public land to deliver 15,000 housing starts during the current Parliament. The programme will also seek to support offsite manufacturing and generate higher receipts for the public purse by sharing in the risk and reward of development on public land. By lowering developer risk and improving access to finance, the Government hopes to build out sites at up to twice the rate of a large developer. The programme will consider the most appropriate development route for each site and could include enabling works such as land remediation or basic infrastructure provision. Where appropriate, the Government will obtain or provide itself with outline permission and undertake the costs of some remediation work to reduce development risks.46 The use of publicly owned land and modern methods of construction are discussed later in this report (paragraphs 106 and 111 respectively).

46.It was unclear to us how the Accelerated Construction programme differed from the direct commissioning pilots announced by the former Prime Minister in January 2016. When direct commissioning was announced, it was intended to use the HCA to coordinate the use of publicly-owned land to build 13,000 homes across five pilot sites, using smaller building firms.47 The DCLG argued that “because we own the land we can control the pace of build out. We think we can deliver homes up to 50% more quickly than the private sector would”.48 When we asked Sir Edward Lister, Chairman of the HCA, about progress with the pilots, he told us:

We have gone a little slower than we would have liked. One of the challenges to us is we have to speed up. On the first one, we have been through the whole tendering process. We learnt a lot from that tendering process and have now completed that, and the order, if it is not already placed, will be placed within the next few days with the successful company. We have a second one that is well on the way to completion and the others are all further behind that. We need to go well north of the five sites to achieve our numbers49

47.Isobel Stephen, Director of Housing Supply at DCLG, subsequently told us that: “Direct commissioning was the predecessor to Accelerated Construction. Accelerated Construction builds on the ideas we had in direct commissioning and takes them a bit further”. When asked what had been learnt from direct commissioning and what lessons could be applied to Accelerated Construction, Ms Stephen said “I do not think we got far enough with any of the pilots to be able to work that evidence in but we are definitely looking to learn from the programme as we go forward”.50 Mr Barwell explained that “We could have sat and waited for a year and a half or two years, but we felt there was enough merit in this idea that we wanted to get on with it”.51

48.It is essential that Accelerated Construction does not become another stalled initiative like the direct commissioning pilots which have little to show a year on from the substantial initial financial commitment. The Accelerated Construction programme should be closely monitored by our successors, so as to make it possible to assess its effectiveness at bringing forward more surplus public land for development, diversifying the market through partnership arrangements with small and medium sized builders and supporting offsite manufacturing. Accelerated Construction provides a welcome opportunity for public funds to be used to reduce the risk of development through a more proactive role for the HCA. The HCA should provide regular written updates to the Committee with progress reports against key milestones.

Building by local authorities

49.Local authorities have a history of building homes on a large scale, but have told us that they currently find it difficult to build homes directly. In 1969–70, local authorities built 135,700 homes but this figure declined steadily until 1999–2000 when just sixty homes were completed. Despite an increase in recent years, in 2015–16 the total was still only 1,890. The declining contribution to housing output from local authorities is shown below:

Source: DCLG Live table 20952

50.Building by local authorities is important if the country is to meet the challenge of addressing the failings of the housing market and increase the diversity of organisations that are building homes. Many councils argue that their ability to build is restricted by the borrowing rules on their Housing Revenue Accounts (HRA). Council housing finance reformed in 2012 and a revised HRA system was introduced with the intention of boosting council investment in new homes by making them self-financing. The HRA system pools all the rent that is assumed to be collected at a local level and redistributes this resource back to local authorities to fund the management, maintenance and major improvements of their housing stock and to support the borrowing costs of the existing level of housing debt. It also introduced caps to the levels of borrowing for new developments that was allowed for each council to prevent excessive levels of debt. Local authorities argue that the borrowing caps inhibit housing development and prevent them from increasing levels of social housing. The Local Government Association (LGA), for example, argue that the Government should allow increased borrowing:

Resistance to removing the borrowing caps has been based on concerns that councils will borrow excessively and increase overall national debt, however over four years of self-financing councils have been prudent in managing their housing debt while investing in new and existing housing. The Housing Revenue Account borrowing cap should be lifted, at least for those councils with a track record in delivery.53

51.Cllr Peter John, Leader of the London Borough of Southwark, told us:

the system is broken. Where it is broken is obvious if you look at homes being delivered since 1969. In 1969, councils built 185,000 new homes across our country … Councils being able to borrow is the restriction that effectively means that we as councils cannot build at the scale that we used to.54

52.Borrowing through the HRA is the only method of borrowing that is capped for local authorities, and the limits have led to some borrowing instead from their general fund at the expense of other services. Giving local authorities greater freedom to borrow in order to invest in new homes could also help them to take full advantage of the self-financing model and use their low gearing ratio (the ratio of debt to equity) to secure finance on preferable terms. Tim Hill, Chief Planning Officer at Leeds City Council, told us:

our capital limit through the HRA is about £23 million a year. Our rent roll is something like £260 million a year. If we were a private sector business, we would be massively undergeared. We would be the Apple of local authority housebuilders … we feel there is an awful lot more we can do and not necessarily just focused on social rent. We have a build programme of about 1,000 that we think we can fund at the moment. We would like to do a lot more.55

53.When we asked the Minister about the possibility of relaxing HRA borrowing caps, he told us:

We are not in a fiscal position at the moment to do that for everybody … On the borrowing caps issue, the Government did, back in their autumn statement 2013, make £300 million additional borrowing headroom available and, actually, less than half of that was taken up. That surprised me when I heard that, but I have checked and that is the figure. The other thing that may be relevant … is that there is an offer in the White Paper for individual authorities to approach us over bespoke deals, particularly those that are in areas of really high housing demand.56

54.A survey of 141 councils by Inside Housing in 2016 found that 57 per cent had not taken advantage of the additional borrowing capacity. Inside Housing cites organisations such as the Chartered Institute for Housing and the Chartered Institute of Public Finance & Accountability which suggest that the reason many councils have not sought to increase their HRA borrowing is as a reaction to funding cuts and uncertainty. They argue that the chance for increased borrowing headroom is no longer seen as an opportunity to take additional action, but as a necessary protection from further cuts and intervention.57

55.We recognise that some local authorities may be wary of increasing borrowing in a time of austerity, but in light of the severity of the housing crisis recommend that all HRA borrowing caps should be raised and in some cases removed, where housing affordability is at its worst.

Local authority housing companies

56.Many local authorities have created arms-length vehicles and commercial partnerships. Sir Edward Lister, Chairman of the HCA, told us that the HCA estimated that there were now 160 local authority-based companies. He explained that the HCA:

cannot fund directly a local authority but we can fund a local authority company … It is still early days and everybody is still finding their feet, but that is a route and we are quite keen to encourage it, because local authority companies working alongside the RSLs [registered social landlords] and normal developers just increases the numbers that can be produced.58

57.Reasons for creating local authority housing companies vary, with the LGA noting that they include “the need to increase supply, plug certain gaps in the market, or generate revenue”. The LGA also highlight examples, such as South Norfolk Council which established Big Sky Developments, a company building homes for market sale and rent alongside affordable homes and commercial sites.59 However, we also heard from private developers who had reservations about the skills and capacity of local authorities. David Thomas, Chief Executive of Barratt Developments, told us that his company is joint venturing with housing associations, but not councils.60 Similarly, Pete Redfern, Chief Executive of Taylor Wimpey, told us:

Local authorities are a long way from having the skills at the moment. Those skills have long since gone. The housing associations are a better vehicle. They have some of the skills, but they do not have all of them.61

58.We welcome all efforts by councils to be innovative and explore alternative delivery models such as joint ventures and arms-length local authority trading companies. However we are concerned that with so many different approaches across the country, there is a risk that best practice is not shared and that resources could be used inefficiently. There is also a risk that the large number of local authority housing companies could struggle to access the skills and expertise needed to deliver at scale. When we asked the Minister about this, he confirmed that “That is something I may be looking at”.62 The Government should review the capacity and skills of local authority housing companies to assess whether they are able to access the quality of expertise needed and to identify and share examples of best practice in order to improve performance and the delivery of new homes.

Housing associations

59.Housing associations have been making an increasing contribution to the housing supply. The National Housing Federation (NHF) explain that the sector has an ambition to boost its output to 120,000 homes a year by 2030.63 The role of housing associations is especially key during recessions, as they can use public subsidy to act as an important counter-cyclical force. Kathleen Kelly, Assistant Director of Policy and Research at the NHF, told us that:

If you look at the last economic downturn, housing associations increased their output by 22%. They act as a catalyst for both the public and private sectors. That is a really important role for them to play, because they keep local supply chains going.64

60.Housing associations are able to do this because of their funding arrangements, which allow them to take a longer term view of the housing market rather than pursuing short-term profits. David Montague, Chief Executive of the L&Q housing association, explained that:

The [commercial] housebuilder model is entirely dependent on sale. In an uncertain market they will do less, not more. Housing associations are funded through the bond markets, which means we can take a 30-, 40- or 50-year view of the housing market. We are charities, and so 100% of our profit is invested back into affordable housing. We can take that long-term view of the housing market.65

61.The housing association model is usually robust enough to withstand recessions because, as Kathleen Kelly identified, the rented stock acts as a “shock absorber” in the market.66 By not working to the same financial model as commercial builders, housing associations are not as concerned about market absorption rates. As a result, the presence of a housing association on a development site can increase build out rates. David Montague told us of an example where a housing association had increased build out:

In the case of Barking Riverside, Bellway have been there for some years and their model allows them to deliver 150 homes a year. As a result of our arrival, we will quadruple that number. It is good for Bellway, it is good for the Mayor, good for the borough and good for us as well … The great advantage that we can offer is that there is a huge waiting list for affordable housing. If people are not buying, they will move into private renting or affordable home ownership.67

62.However in our report, Housing associations and the right to buy, we expressed concern at the potential for housing associations to become overly commercial and move away from their charitable purpose.68 The risk was illustrated by the previous Government’s emphasis on housing associations building shared ownership homes. Matthew Harrison, Chief Executive of Great Places, explained that this policy put housing associations in the same market as commercial developers:

On the point of saturation, one of the frustrations of the Government’s shared ownership obsession … was that we were in that same space of saturation, which probably helped to explain why there was an underbid for the funding that was available: the sector was physically unable to produce the amounts of shared ownership that was funded. The new flexibility, which we worked hard with Government to explain the need for, will hopefully help us to broaden our offer and avoid exactly [that situation].69

63.In the Summer Budget 2015, the Government announced that it would be scrapping the previously agreed ten year settlement by reducing all social rents in England by 1 per cent a year for four years, requiring housing associations and local authorities to find efficiencies and make better use of the subsidy they receive. The change has both reduced the income of housing associations and removed certainty of future rent levels. David Montague told us:

In the last Cameron-Osborne budget, we saw our rents reduced by 1% a year. For my business, that is worth £55 million a year; for g15, it is £500 million a year; for the sector, it is £1.6 billion a year. We could have built a lot of homes with that money. The bigger issue for us is what happens in five years’ time. At the moment, we just do not know. So far, the sector has raised £80 billion to invest in new homes. If we gear up, as we suggest we want to, to deliver even more homes, our future and our ability relies on the confidence of our investors. Those investors are quite rightly saying: “What happens to rents in five years’ time?”70

64.When we raised the issue of certainty with Mr Barwell, he told us that “I do not have a timescale for that … Everybody I have spoken in the local authority and housing association world is very clear that certainty on this front as soon as possible will help them. I want to provide that certainty as quick as I can”.71 We welcome the Minister’s recognition of the need for certainty over social rent levels, and call on the Government to provide this as a matter of urgency to ensure that housing associations are able to maximise their delivery of new housing. At the very latest, certainty over social rents should be provided by the Autumn Statement.

65.Housing associations have charitable purposes, and they (and Government) must remain mindful of this. Government policies on the reduction of social rents have affected the sector’s financial modelling, with many increasingly subsidising services by building more homes for sale, or merging to achieve financial efficiencies. We are not opposed to this in principle, as long as housing associations continue to deliver on their fundamental social purpose.

Tenure diversity

66.A healthy housing market addresses the diverse needs of the population, and tenure diversity is therefore key. We welcome the Government’s recognition of the importance of a multi-tenure approach. The then Chancellor announced in the 2015 Autumn Statement plans to build 200,000 Starter Homes, 135,000 Shared Ownership homes and 10,000 Rent to Buy homes, with no funding allocation for social or affordable rented homes. The National Housing Federation highlighted the impact of this policy on the business models of housing associations:

Housing associations have traditionally delivered a tenure mix of around 75% sub-market rent and 25% shared ownership. The new tenure mix of 88% shared ownership and 12% sub market rent represents a marked change. This exposes housing associations to much higher levels of market risk and makes their businesses far more pro-cyclical. This undermines the one of the of the sector’s key strengths of being counter cyclical and therefore able to maintain housing delivery in a market downturn.72

67.Since the change in government in 2016, there has been a change of emphasis and greater flexibility. Gavin Barwell told us that “I very strongly believe that we need a housing policy that has an offer to everyone. We have changed that [previous] position; we have given much more flexibility in terms of the programme”.73 This is especially welcome as we have heard about the opportunities presented by Build to Rent projects and their ability to provide greater certainty for investors and run counter to prevailing economic trends. Philip Callan, Research Associate at ResPublica, told us:

It is about certainty. That is the crucial thing that is missing at the moment within the market. We have a sales-led market, which will be cyclical. Output will vary between 110,000 and 150,000 homes depending on the pace at which housebuilders think they can sell properties. The last time we had a functioning housing market was when we had a significant amount of rented homes being produced. What is missing now is that certainty.74

68.The building of homes for rented accommodation can help to decrease the levels of risk and therefore make developments a more attractive investment. In February 2017 the Government launched a consultation on planning measures that could be used to make Build to Rent projects easier and quicker, and we look forward with interest to the announcement of resulting initiatives.

69.The Build to Rent Fund was launched in 2012 to promote the supply of rented homes and saw the Government sharing risk or providing bridging finance to enable schemes to be delivered. Developers paid the loan back by refinancing the deal or selling on to an institutional investor within one to two years of completing the scheme. In October 2016, it was announced that the Build to Rent Fund would be rolled into a broader Home Building Fund, with no specific requirements that funding be used for properties in the private rented sector. When we asked the HCA about the performance of the Build to Rent Fund, Gordon More, Chief Investment Officer, told us:

I believe that that programme has been successful in a number of ways. By the Government stepping up with a couple of investment products, it has encouraged other commercial lenders into it and has increased and proven the funding of the PRS and build-to-rent sector.75

70.Mr More also explained that the Home Building Fund was introduced because developers, especially SMEs, were finding the range of different Government programmes confusing, so they were consolidated into the single fund.76

71.As previously noted, the homebuilding industry is extremely susceptible to economic downturns, with the risk that as the economic situation worsens, firms are lost and labour leaves the sector. We therefore welcome the recognition by the Minister that the “affordable housing programme is a counter-cyclical measure”. By maintaining building throughout downturns, the sector as a whole can be more robust. Mr Barwell told us “To me, it is a little bit of, ‘Do not put all your eggs in one basket’. You want a diverse housing market where lots of people are involved in supply and the mixture of what you get at different times will probably vary depending on where you are in the economic cycle”.77

72.We welcome the Government’s recognition that focussing on a single tenure will not address the country’s housing needs. The Build to Rent Fund has proven to be successful in helping to deliver greater tenure diversity and we urge the Government to ensure that the consolidated Home Building Fund does not overlook the rented sector. We recommend that in a year’s time our successors seek reassurance from the Government that the consolidated fund is providing effective support to Build to Rent products.


8 Speech to the Conservative Party Conference 2016: Sajid Javid, The ICC, Birmingham, 3rd October 2016

9 Taken to be those that build more than 2,000 units a year

10 Qq36–37

11 Oral evidence taken on 19 April 2017, HC 1082, Q32

12 Department for Communities and Local Government (BLD068), para 9

13 Department for Communities and Local Government, Fixing our broken housing market, Cm 9352, February 2017, para 2.35

14 Qq57–60

17 Q352

18 Q147

19 Q370

20 Department for Communities and Local Government, Fixing our broken housing market, Cm 9352, February 2017, para 2.44

21 Q370

23 Department for Communities and Local Government (BLD068) para 35

24 Department for Communities and Local Government, Fixing our broken housing market, Cm 9352, February 2017, figure 7, page 47

25 Department for Communities and Local Government, Live table 208, accessed 23 March 2017

26 Q43

27 Q48

28 Federation of Master Builders (BLD071) para 7

29 Federation of Master Builders (BLD071) para 6

30 Q98

31 Q98

32 Q45

33 Q6

34 Q92

35 Federation of Master Builders (BLD071) para 13

36 Q106

37 Q166

38 Q102

39 Q103

40 Q32

41 Q32

42 Q292

43 Q104

44 Q415

45 Business, Energy and Industrial Strategy Committee, First Report of the Session 2016–17, Access to Finance, HC 84, para 41

46 Department for Communities and Local Government, Fixing our broken housing market, Cm 9352, February 2017, para 3.11–3.13

47PM: the government will directly build affordable homes”, Department for Communities and Local Government press release, 4 January 2016

48 Department for Communities and Local Government (BLD068) para 44

49 Q280

50 Qq 416–417

51 Q417

52 Department for Communities and Local Government, Live table 209, accessed 28 March 2017

53 Local Government Association (BLD032) para 3.3

54 Q156

55 Q156

56 Q407

57Councils hold back from new HRA borrowing”, Inside Housing, 20 May 2016

58 Q271

59 Local Government Associations (BLD032) para 7.1–7.5

60 Q49

61 Q48

62 Q411

63 National Housing Federation (BLD063)

64 Q169

65 Q169

66 Q171

67 Qq184–185

68 Communities and Local Government Committee, Second Report of Session 2015–16, Housing associations and the Right to Buy, HC370, paras 115–120

69 Q187

70 Q198

71 Q404

72 National Housing Federation (BLD063) para 3.7

73 Q355

74 Q208

75 Q289

76 Q290

77 Q434




28 April 2017