Big house builders, Less houses, more profit

You know the argument so I won’t dwell on it. But we need more homes and yet we’re building less. I have argued before that the real problem is affordability not supply, but the government certainly does accept the need to build more. It has been keen to help by creating guarantees and grants and relief from regulation to make it easier for more homes to be built. Its recent initiatives to help house builders include:

• £20 billion housing guarantee plan
• £225 million to support large-scale housing sites
• New buy scheme providing subsidy to allow 95% mortgages on new build homes
• A holiday for house builders from their obligations to build social housing as part of large housing developments
• Requirement for all new homes to be zero carbon by 2016 watered down.

So is there any sign that this vast amount of public support for the house building industry is working? Nope. The latest government statistics show that house building is actually in further decline, with housing completions down 6% and housing starts down 10%.  The industry is unapologetic and is asking for yet more help inviting the chancellor to "refine and expand" the measures he's already introduced.
So how have the big builders faired during this (apparently) most  difficult of periods? Here is the latest profit news from the UK’s ten biggest house builders:

1. Barretts profits up 159% to £111m 
2. Taylor Wimpey profits up 135% to £78.2m
3. Persimmon profits up 65% to £98m
4. Berkley profits up 40% to £142m
5. Bellway profits up 57% to £103m
6. Redrow profits up £17m to £30M
7. Galliford Try profits up 80% to £63m
8. Bovis profits up 100% to £16m 
9. Crest Nicholson profits up £34m to £12m
10. Bloor profits up £18m to £40m

I suspect that most people would be surprised to hear this, but far from having a difficult time, many of these companies are making record profits. How? simply by building fewer homes for higher prices. In their results both Persimmon and Bellway even boast that their average house sale price is the highest it's ever been. It appears suspiciously like the large house builders have happily accepted government support and used  it to shore up their own profits by building a small amount of expensive houses for the small number of people who can actually afford their prices. If I'm right and affordability is the real problem, this hardly feels like the answer.


N.b. the profits data given here is the latest from each company and is a mixture of full and half year reports. Bloor only publish operating profit information for the holding company Bloor holdings.

Don't Build More Homes

My article was published on the Guardian's website earlier in the week with the slightly unfortuante title "Don't Build More Homes" The point I'm making is not that we shouldn't build more homes. I'm convinced we do need more in the South East and a few other parts of England,  the purpose of the article was to examine why they are not getting built.   In my view the current low house building rates are a symptom, the core problem is affordability. Here is the article:

Am I alone in getting bored with the "build more homes" answer to every question in housing? We hear it daily from politicians, housebuilders, and lobby groups as if it were a mantra. Whatever the housing problem, it seems, the only answer is to build more homes and the way to do it is for government to provide more subsidy to housebuilders. In theology, mantras are not supposed to be questioned, but I think it's time we subjected this one to a bit more scrutiny.

Let me first point out that I'm not saying we don't need more homes; quite clearly we do in some parts of the country. But addressing it by finding new ways to subsidise housebuilders has not only failed (housebuilding has fallen to 100,000 units a year), it is counterproductive.
I've visited three countries in the past couple of years that have had big housebuilding programmes: Spain, Ireland and Portugal. What I saw there saddened me. Not only do their building booms appear to have worsened their economic situation, the new homes they produced appear to be having little social benefit.
It strikes me that the major housing problem in the UK is not supply (technically there is a million house surplus in England), but people's ability to afford housing. Median house prices are more than six times median earnings in England – double what most experts think is sustainable.

Essentially people's wealth has not kept up with house prices. Why? Obviously not enough people have seen their incomes rise, but I'd argue that government policy, introduced with the best of intentions, has made the other side of the equation worse. Subsidies to housebuilders, artificially low interest rates, mortgage rescue, bailing out failing banks and subsidies to social housing have all either helped house prices rise faster than they would have done otherwise, or prevented house prices dropping.

The fallacy with building your way out of the problem is that people still can't afford the houses you build. This is what Spain, Ireland and, to a lesser extent, Portugal found. In fact to get the building boom going in the first place they had to offer builders big tax breaks and subsidies, and then offer further subsidies to help people buy them. There is a large lobby in this country to do the same here. Apart from whether we could afford such an approach, I just don't think it works. Housebuilders following subsidy guidelines in Spain and Ireland built houses that people didn't want and couldn't afford. People didn't buy the houses, even when they were subsidised. They remained empty and now, most galling of all, some of them are even being demolished.

You might argue that it's different in England, but it's happened on a small scale here too. The last government's strategy of brownfield development aligned to subsidy programmes like housing market renewal led to a large amount of inner city flat developments. Much of what was built sold slowly and required government bailouts to prevent whole scale abandonment. Even now there are hundreds of empty flats in town centre developments in places like Ipswich. Places which then, and still, claim to have a housing shortage.

It appears that no politician can face it, but the only answer is to let house prices drop to their natural level in relation to incomes. That would require a less-interventionist approach, ignoring the appeals of the housebuilding lobby and having to deal with the consequences of what would undoubtedly be serious human impact through repossessions for example.But after this had happened house prices would be in balance with incomes and people would buy houses again. This would create the demand that would get builders building again.

5 big housing lies and why the public doesn't buy the housing crisis

Earlier this month I was honoured to be a guest of the CIH president at his annual dinner. This huge annual event takes place in the Natural History Museum in London. Tables of the great and good of the housing industry were assembled around the Brontosaurus skeleton and under the gaze of Charles Darwin’s statue. This is always a helpful prompt to speakers enabling them to make self-deprecating jokes about how old they are how their views have had to evolve.

This year the speakers were in fiery form. There was a general theme that public and the media were not taking the housing crisis seriously enough. “Wake up and listen to the profession about the country’s housing crisis” We were told. The messages followed the common orthodoxy of our profession. You’ve no doubt heard them too There are record levels of housing need, record levels of homelessness, a record under-supply of housing,  the backlog in supply is increasing every year. The system is creaking at its seems, This is a time bomb set to explode, we must argue passionately for our industry. It was entirely honourable, but to me, strangely unmoving.

Last year I, along with 5 million others read the entertaining economics book Superfreakanomics. In it the authors; Steven Levitt and Stephen Dubner take a deliberately mischievous look at how things really work. They take the cold facts and come up with unorthodox conclusions. One example considers how the law affects prostitution. They argue that the greater the law cracks down, the more profitable and the more widespread prostitution become. The argument works like this. If the police arrest prostitutes they reduce the supply. The remaining prostitutes can therefore raise their price, making it more lucrative attracting more women to become prostitutes. In other words the orthodoxy of how to deal with prostitution is not only incorrect it's counter productive.

Now I don’t for one moment doubt the genuine belief and commitment of people in the housing industry expressed with such zeal by the CIH president and other speakers at the dinner, but I did wonder what Levitt and Dubner might make of it all. In the absence of persuading them to take a look I decided to try myself. I looked up the data and was slightly surprised to see that almost all of the facts and truths expressed by our industry on a daily basis turn out to be … well untrue. Here they are with references:

Truth 1: There is an undersupply of housing: Untrue, in 2008 there were 22,398,000 dwellings and 21,731,000 households in England a surplus of 667,000 dwellings http://www.communities.gov.uk/documents/housing/xls/table-102.xls

Truth 2: There is a growing shortfall in housing; Untrue, the growth in the number of dwellings in the UK has outpaced the growth in households every year since 1971 http://www.statistics.gov.uk/articles/social_trends/st41-housing.pdf

Truth 3: There are 5 million people in housing need waiting for social housing; Untrue, there are 1.76 million households on council housing registers in England which equates to about 5 million people. But these aren’t waiting lists, many of the households that are on them are in housing need, but others are not, anybody can register and some register in several council areas. Housing registers are a measure of demand for social housing. They are not a measure of housing need. www.communities.gov.uk/documents/housing/xls/141488.xls

Truth 4: Homelessness is increasing: Untrue. Last year 40,000 households were accepted as being homeless by local authorities, 25% down on the previous year and a third of the number in 2003/4 www.communities.gov.uk/documents/housing/xls/141488.xls

Truth 5: Social housing is in decline: Untrue- there has not only been an increase in social housing every year, but since 2003/4 the rate of increase has gone up every year. Last year 33,120 new socially rented homes were added to the stock. http://www.communities.gov.uk/documents/housing/xls/1406060.xls

Is this the reason that the country hasn’t woken up to the housing crisis?

This is not to say there isn't a housing crisis. Many people in this country live in completely unsatisfactory housing conditions. The housing system doesn’t work on all sorts of levels for people. I also acknowledge that although the indicators I have discussed show positive progress, it doesn't mean that progress can be sustained into the future with less public money. But surely what this says is that the housing industry is a success, it's making things better for people. Yes there's a lot more that needs to be done, but if we are going to get people at large to see housing as an issue of national importance we need to break out of the cosy consensus and stop pretending things are worse than they really are. What the industry is saying may not just be incorrect, it might also be counter productive. We shouldn't expect people to believe us if what we say isn't true.

New Homes Bonus - it might just work

There had been speculation that when the figures came out they would show that less than 100,000 new homes were built in England last year, but when it happened last Friday the government was spared that particular humiliation. 102,570 houses were built in 2010. It’s still the lowest number since 1923. Of course housebuilding reacts slowly to changes of policy, and the government is still safely in the territory of being able to blame it all on their predecessors. Last week they announced details of their New Homes Bonus scheme. This looks like it’s going to be the centrepiece of their housing supply policy, and if there are not more homes as a result of this; the government will have nobody else to blame.

The idea is simple, for each new home the council gets paid a reward equivalent to the council tax paid on the homes for six years, they get another bonus of £350 a year as well if the house is affordable. Not everybody is happy with this, Sean Spiers, director of CPRE said it’s bribery and it's possibly illegal. But legal or not, bribing councils is a well-proven way for governments to get what they want.

When the idea for New Homes Bonus first emerged early last year I must admit I had my reservations too.  Governments have been struggling for years with how to deal with the poor supply of housing in the UK. They’ve have generally concluded that way to resolve it is to try and persuade housebuilders to build more houses. Unfortunately it hasn’t worked out largely because the diagnosis was wrong. It’s not more new houses the country needs, it’s more low cost houses and they aren’t very profitable for the housebuilders to build. Instead incentives and pressure to build resulted in more houses but houses that people didn’t need or want.

But may be, just may be, New Homes Bonus might work. The reason for my optimism is it seems to be genuinely focussed on the problem, not just trying to push a chosen solution. Here’s how it works:

The council gets a bonus each year calculated on the net increase in homes. Homes can mean newly built houses, or empty properties returned to use. But if there isn’t really a demand or need for homes or the homes that get built are rubbish and nobody wants to live in them, the benefit is pretty short lived. If there is an increase in vacancy levels the number of newly emptied homes are discounted off the total of new homes. So for example a borough sees 1,000 new homes built during the year, but vacancy levels go up by 800, will only get rewarded for 200 new homes.

The long-term impact of this should be to change local authorities' view of housing supply. Hopefully the'll concluded that it'll be no use getting homes built if nobody lives in them. And hopefully they'll see it’ll be doubly beneficial to get empty homes into use (they’ll get a reward for each one and won’t loose potential reward on new build homes). And also it won’t matter who brings empty homes into use. This system doesn’t reward council activity; it rewards the outcome. Hopefully this will mean that councils will start to encourage people to do up empty properties rather than thinking that it only counts if they do it all themselves.

In other words the outcome of the New Homes Bonus should be to encourage inhabited homes, not simply housebuilding. So when this system is judged in a few years time, how will we know whether it has worked? One sign of success would be that it doesn’t matter anymore what the housebuilding rate is. It’s how many homes get occupied.