What do the cuts in the spending review mean for house builders? Who really knows?

But having tried to piece together what the implications of the Chancellor’s axe wielding are for housing, house builders, housing associations and contractors who build homes, I can’t help thinking what some might regard as the unthinkable.

I may be deluded or befuddled by the blur of jumbled numbers, but far from being bad news, I think there is a possibility that things might pan out relatively well for the traditional house builders following the Chancellor’s pronouncements on Wednesday.

That said, the prospects for housing, housing associations and contractors are far less rosy, if my creeping suspicions are correct about the drift of Government policy.

Before wading into the thoughts that lead to why house builders may come out of all this shake-up in policy well, it is probably worth making a few comments on the general housing marketplace.

I take note of the grim views of Alastair Stewart, housebuilding analyst at Investec, about the possibility of a double dip in house prices and land values. And, while Alistair is regarded as among the more bearish, I think he’s absolutely right to point out the risk – it exists and you’d be complacent not to recognise it.

The shock to those who lose their jobs as a result of the spending cuts will have made a fall in house prices more likely, particularly as they are wobbling quite a lot already.

As for my take on house prices, clearly if this economic experiment goes badly wrong all bets are off, but as things stand I remain broadly of the view that prices will not slide as much as some of the fundamentals might suggest, either for second hand sales or for new build. I think the indexes will slide back, but probably not into double-digit falls.

I think with ultra low interest rates potential sellers will be less pressured to sell and this will cushion falls in the second hand market. Meanwhile, I think, with a product mix more weighted towards houses than flats, house builders will be better placed to build to meet demand.

I suspect they will retreat to more favourable locations and target more favourable buyers to ensure they make a margin.

This would, however, mean a fall in transactions and fewer houses built.

Falling sales and weakening prices is clearly don’t provide a good backdrop for house builders. And there are further downside risks such as a bounce back in build costs, which since peak have been pushed down by about 15%.

But in the modern market the residential development game is not just about prices and volumes.

This brings me to my speculation on why the spending review may have marked the start of a policy shift on housing that might in the end very much favour the more traditional private house builder.

Now I don’t for one moment think the housing policy is in any way firmed up yet. As far as I can make out there is a significant amount of stumbling around looking for ideas going on in Grant Shapps’s housing sub-department, as confused administrators try to turn energetically delivered rhetoric into solid plans that might just stand up to scrutiny.

But I suspect there is a direction of travel that is emerging.

When the Chancellor said on Wednesday that 150,000 new homes would be built over the next four financial years with £4.4 billion allocated to affordable housing within the spending review, there must have been plenty of experts mouthing “how?”

A fair question given that the Homes and Communities Agency in the past financial year spent £3.3 billion on its National Affordable Housing Programme and claimed a hand in the completion of 53,000 homes.

So the money will have to be spread much thinner – hefty grants for social homes will be scarce in comparison with the recent past.

Meanwhile the shredding of local authority budgets means that there is little gold to be dug there to underpin the construction of thousands of new affordable homes.

But one must assume there is some calculation that leads to the 150,000 new affordable homes number being stated by the Chancellor and some rationale behind that.

The answer given in the spending review, as much as it was an answer, is that the £4.4 billion will be boosted by changes to local authority funding along with changes to rents.

The main changes to authority funding – apart from there being less to go around – are the scrapping of most budget ringfencing and the introduction of the New Homes Bonus.

Meanwhile, the rent changes referred to allow for grants to be provided for what is described in housing circles as “intermediate rents”, a form of supported rental arrangement lying somewhere between full market rent and social sector rents.

In theory higher rents should make more housing projects financially viable with significantly less public sector grant.

But what interests me is how much use might be made of schemes similar to the existing suite of HomeBuy products and what is described as low cost homeownership (LCHO).

During the housing collapse the Government extended HomeBuy to private house builders with the introduction of HomeBuy Direct – a shared-equity scheme involving house builders whereby the homebuyer bought 70% of the home, the Government (though HCA) funded 15% and the house builder paid for 15%. The buyer arranged a mortgage for the 70% and paid no rent for the other 30% for a given period.

This provided about 100,000 homes over a year, or about 10% of total homes completed and all to first-time buyers.

And what is particularly attractive to the Treasury is that, in theory, the loan is available for recycling when the home is eventually sold on or the buyer “staircases” to full ownership.

It is only supposition, but there would appear to be considerable incentive for the Government to see intermediate rent and LCHO as major delivery vehicles if not the major delivery vehicles for its 150,000 “affordable” homes.

What is more, how politically appealing for the Government to be able to say that it has provided a whole new raft of first-time buyers their first step onto the housing ladder at affordable prices?

Such an approach, were it taken, could in theory promote house builders to the role of prime deliverers of “affordable” housing.

What is more, Mr Shapps made plain at the recent Housing Market Intelligence conference that he sees the harsh settlement on local authority funding as an incentive for councils to view more favourably his New Homes Bonus incentive. (Yes it did rather come across as the sort of incentive you might have been offered by the Gestapo)

Still he may be right and it might be that hard-pressed councils also feel obliged to renegotiate section 106 arrangements to accept LCHO and perhaps some intermediate rental rather than social rent as an acceptable contribution. This would see the expected regulatory cost burden – as the HBF might describe it – priced into the land on house builders’ books drop greatly, with the added luxury of support in part from central Government.

As well as being good news for house builders and their shareholders, it may mean that more marginal sites actually are built out rather than being held back.

It is instructive to read the HBF press release concerning the spending review. It says: “Today’s statement by George Osborne included a welcome commitment to reducing regulation – something HBF has been pressing Government to tackle long and hard. We now need to see this implemented. This must include; an affordable and deliverable decision on the definition of zero carbon; and a more flexible approach to the definition of ‘affordable housing’, allowing developers to play their part in providing innovative solutions to meet peoples’ needs.”

No real upset detectable there and were I a betting man I would wager that most if not all of these wishes will be granted. That would mean that on many, many sites around the country house builders will have reduced their potential costs by many tens of thousands of pounds for each potential new house.

This will allow them to build more homes more profitably.

Meanwhile, Mr Shapps needs a way out if he is not to condemn England’s home building numbers to somewhere between 60,000 and 70,000 homes a year.

So, if this option for delivering “affordable homes” hasn’t already been explored in depth I suspect it will inevitably be and it might just prove too attractive for Mr Shapps and his advisors to ignore.