The truth hurts

So the gloves are finally off: the fight between the deputy prime minister and the housebuilders has begun. John Prescott landed the first blow at the launch of the urban summit with a swingeing attack on housebuilders for building too few houses, at too low density and in the wrong way. Land hoarding and building the "wrong sort of houses" were also added to the charge sheet. Prescott instructed the industry to change and announced he would intervene where proposed developments contained fewer than 30 homes a hectare.

Let's look at the truth; the commercial realism behind these accusations and Prescott's emerging policies. First, as I wrote in this column in September, by approving regional planning guidance that provided too little housing, and then by placing restrictions overnight on builders' existing greenfield stocks through PPG3, Prescott himself has played a major part in creating the housing shortfall in the South-east.

Powerful evidence in support of this come from the South East Regional Assembly, which reveals in a report published on 15 October that the output gap is almost entirely attributable to the loss, as a result of PPG3, of greenfield sites scheduled for development. And although housebuilders have been increasing brownfield development, they have been unable to do so rapidly enough to replace those sites lost.

As to land hoarding, the same report says the amount of land with planning permission has decreased. Prescott needs to realise that it is irrelevant how many plots housebuilders say they have "under their control": without planning consent, these are just fields of cow pasture. So let's get this silly accusation off the agenda.

But there's a more fundamental objection to Prescott's belief that he can force housebuilders to build what, where and how he wants and that this will give him the outputs he seeks. Quite simply, his highly dirigiste agenda – specifying high densities, brownfield sites and dictating construction methods and the market for which developers should build – is only commercially viable for a brief time at the top of an overheated market. It is not sustainable, and private capital can – and will – tell Prescott where to get off. It will disinvest from an industry that, on the one hand, he desperately needs but, on the other, he is threatening with bankruptcy.

Prescott needs to realise that without consent, housebuilders’ plots are just fields of cow pasture

Housebuilders have learned to survive in the good and bad times, both of which present their own challenges. In the downturn, customers disappear, prices stagnate or fall and housebuilders normally respond, in the words of one of my early mentors in the industry, by "stopping the mixers". But when you are building a block of flats and can't get any cash in until you've built it, you have no alternative but to complete the block, watch the work in progress mount, reduce prices in a desperate attempt to get sales and watch the bank move in to repossess. We saw lots of it in 1989 and 1990.

Housebuilders have already put themselves more at risk than they like to admit, pending the imminent slowdown. They won't continue to put their heads in the noose when it does arrive by building flats in urban areas that owner–occupiers don't want. Not once the buy-to-let investors who fuelled the boom have fled.

The pattern for the future is clear from the current merger mania, which is actually about downsizing and is, in fact, a flight of capital from the industry. If Prescott pushes housebuilders too far, their shareholders have an option that is not open to those in many other industries – they can demand that the land is traded out and shareholders given their money back. In fact, this would probably be considerably more than their downvalued shares are currently worth. If I was an institutional investor, I would be thinking seriously about that option.

Once the majors have gone, which will happen in under five years if Prescott persists, the resulting industry of small housebuilders will neither produce adequate housing numbers nor provide sufficient planning gain. And the chancellor can't afford to fund a 200,000-a-year new-build programme to fill the gap.