The housing market is not dysfunctional, it is the planning system that is holding back development, writes Paul Smith

Figures recently published by the government show that, in the year to March 2023, just 234,400 new homes were delivered, including conversions – almost exactly the same as the year before, and far below the government’s target of 300,000 new homes each year.

The position is likely to be far worse when the figure for the current period is published. Trading updates from the biggest home builders indicate that volumes are likely to fall by around a third.

The reaction from those that already oppose new development has been to claim it is proof that the “free market” is simply incapable of delivering the number of new homes we need. Developers are incapable of selling more new homes than the market can absorb, we are told, and will always prioritise profit over volume.

It is worth unpacking those claims.

The first relates to the elasticity of housing supply – the degree to which the number of new homes built responds to demand. In a healthily functioning market, when demand rises so does supply. Conversely, when demand falls – perhaps due to economic conditions – so too does supply.

Research by Savills for the Land, Planning and Development Federation (LPDF) shows this elasticity of supply for the eight biggest house builders over the last twenty years. Their sales rates – the number of homes sold divided by the number of sites they were selling from – reached a low of around 0.4 homes per week in the immediate aftermath of the financial crisis.

By mid-2021, it had more than doubled to around 0.93 homes per week – evidence that they will indeed significantly increase build rates if market conditions allow. The falling sales rates and falling sales volumes being reported by house builders are evidence of that elasticity in action once more.

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Paul Smith, managing director, Strategic Land Group

If housing supply is elastic, why is it that we are consistently falling short of the 300,000 homes a year the government wants to see built? Can it be true that developers are simply unable to build that many new homes?

While the demand for new homes across England as a whole is vast, the demand for a specific house type, in specific location at a specific point in time is finite.

You might love the local area but not be a fan of the house design. Or you might think it’s your dream home, but it’s too far from your children’s school. Those factors limit the number of new homes that can be sold from a development although, as we have seen, that number will change depending on market conditions (and therefore demand).

The degree of choice available to home buyers can also impact the sales rate. When two different home builders are operating from a development, the number of house designs available doubles – and, broadly speaking, so does the sales rate.

Critical to the total number of homes we build is the number of development sites that home builders are working from. The more sites, the more consumer choice.

A second development even a short distance down the road will be able to tap into a slightly different pocket of demand, even if the house designs are the same, increasing the number of homes sold overall.

Critical to the total number of homes we build, therefore, is the number of development sites that home builders are working from. The more sites, the more consumer choice.

The same research for the LPDF identifies that the largest home builders are operating on less than 70% of the development sites than they were fifteen years ago. Over that period, total sales volumes have been fairly consistent, with the declining number of developments being concealed by rising sales rates. But it is only when the tide goes out that you can see who is swimming naked.

Despite the economic climate, sales rates are holding up relatively well – the figures reported by PLCs of around 0.6 per week are in line with long term average. The fact that planning consultancy Lichfields is forecasting that the number of new homes built will fall to around 156,000 this year is a function of the lower number of development sites. And to explain that we must look to the planning system, the gatekeeper of new housing development.

>>See also: Reforming planning: one way to solve the housing crisis

>>See also: UK housebuilding recession: How much worse is it going to get?

The number of new homes granted planning permission has fallen in each of the last five years. The number of new local plans being adopted is at a 10-year low, with around 60 plans explicitly delayed. Despite the government’s political aspiration to build 300,000 new homes each year, England’s local plans are, in aggregate, planning to deliver just 233,000 – coincidentally almost exactly the level at which house building tends to top out in the strongest market conditions.

Local plans explicitly take into account “unexpected,” or windfall, development, making them essential to meeting housing targets rather than extras to allow supply to exceed them.

What this all tells us is that the housing market is working exactly as you would expect. The supply of new homes does respond to demand – both upwards and downwards. In strong markets the limiting factor on supply isn’t demand, however – it is the planning system, which is structured in a way which caps the number of new homes the market is able to deliver. The problem isn’t that the free market can’t deliver the number of new homes we need; it’s that we haven’t even let it try.

Paul Smith, managing director, The Strategic Land Group