David Birkbeck: Why contractors’ faces fit new housebuilding agenda

Construction forecaster Experian says UK private housing starts in 2009 will fall by 69% to just 60,000. But the numbers that truly show the pain in housebuilding are in your address book. Try ringing the first dozen people or so with jobs in the sector and see how many are still in work.

Historians at least are busy. Is this the worst crash since the 1926 General Strike? Or since 1848, when revolution across Europe precipitated the collapse of investment markets? Whether it’s the worst in 80 or 160 years, it’s beyond the rite-of-generation bust the housebuilding and contracting industries know how to suffer. This time the shake-out will bring transformation. Here’s how.

In housebuilding, the traditional difference between a developer and a contractor is that the first raises development finance on the strength of its balance sheet, the latter builds for cash. The first works to fat margins to reflect ‘development risk’, the latter modestly prices build risk.

But banks have now turned off finance and are forcing housebuilders to go from developing homes to paying off loans. Their balance sheets are shot to pieces with land assets in freefall and a stock of unwanted homes, mostly tiny apartments aimed at the investor market.

Right now most housebuilders want to be contractors – they want to be paid to build for someone. But who? Just as the government took stakes in banking to prevent collapse, it looks like it will now have to shore up UK housebuilding.

From 1 December the Homes and Communities Agency has rolled up the development grant of the Housing Corporation and the land bank of English Partnerships into one superagency. In the short term, HCA will be forced to add some impetus, acting like a New Town Corporation (which HCA has its roots in through the English Partnerships half of the merger). It will have to commission contractors to build roads, drainage and energy infrastructure – which the housebuilders can no longer finance – and then, like the New Towns, also pay contractors to build homes on bite-sized land parcels.

The HCA has to restore activity, but volume won’t come from the usual suspects

This is what English Partnerships had started to do with schemes such as Upton in Northampton. But the difference there was that developers had to bid to win the right to develop parcels under license to EP, then paid for the land and a percentage of their profit back to EP as they sold the homes. To be a player, you had to show the financial profile of a developer. Under the new HCA mechanism, however, the contractor profile fits. That contractors even know best how to build innovatively and economically can only help.

To sustain activity, the HCA needs to do business with companies that can price to a specification (the old EP ‘quality and price standards’ for the time being) and have the capacity to deliver more than the drip of homes that is the norm on market-sale sites. In the short-term, many of these homes will be for rent, so constraining supply to protect values won’t apply.

The HCA has to do as much as it can to restore activity towards the output levels anticipated by the government’s housing targets. But with housebuilders now run by skeleton crews, volume won’t come from the usual suspects, which are unlikely to build as many homes ever again.

This is the shift. Without the crash, as many as 60,000 homes a year had been expected to come from a trio of giants – Barratt, Taylor Wimpey and Persimmon. Now that slack will be taken up by an explosion of contractors, each offering closer to 600 homes a year, built to fulfil a fixed-price contract rather than inflating a bubble.

The new era will only see volume restored through far more competition – exactly what housing supply needed so badly in the boom times.