The government has taken control of housing, and the result is more mergers and takeovers – and a disastrous slump in the number of homes being built
After his renationalisation of the railways, Stephen Byers is finalising his plans for the nationalisation of the housebuilding industry. Of course, he won't be acquiring the industry's assets and putting in new management – the 1947 model. We won't be seeing a Housebuilding (Nationalisation) Bill in the next Queen's Speech. No, nationalisation in the 21st century is much cleverer. It is achieved by regulators and regulations, so that private management and capital are licensed to operate only in accordance with rules set out by government.

After the latest changes in their licence set out in the green papers on planning and planning obligations, housebuilders' output is to be more closely linked to the payment of local tariffs, prescribed social housing quotas, design and density rules and the whims of the local community. This comes after PPG3, which told them where and what they could and couldn't build.

The result, predictably, has been significant divestment from the industry. Although dubbed "consolidation" to keep the City happy, the recent takeovers and mergers – with more certain to follow – amount to a reduction in the capacity of an industry in order to bring its output into line with government controls.

The flight of capital is not entirely new, but it is now, finally, catching up with the larger players. For 20 years there has been divestment by smaller and medium-sized contractors. Many companies building 20 to 100 houses a year have long since given up, faced with the escalating cost of land and a regulatory regime they had no resources or expertise to cope with. Many of them were swallowed up as the majors grew, taking out this spare local capacity. With them has gone some 15% of the industry's output.

For a time, the big machines had the expertise and financial muscle to cope, but even they cannot now sustain output in the new climate of control. Despite rising prices, signifying growing shortages of housing, new housebuilding output stabilised between 1994 and 2000, and actually fell last year. Despite its own responsibility for this, the government panics about the effects on key worker housing, and expects housebuilders to supply increasing amounts of affordable housing on the back of reduced output.

Despite growing shortages of housing, new housebuilding output stabilised between 1994 and 2000, and actually fell last year

Trying to operate under these restrictions has shown housebuilders that high-density flats and terraced housing will only sell in some locations and only a proportion of their potential purchasers are willing to buy into these schemes alongside social renters. And, in any case, the viability of many schemes, particularly on high-value urban sites, is prejudiced by high levels of social housing. Thus, the industry is downsizing in response to both the squeeze on the market for the new homes that they are allowed to build, as well as pressures on its profitability.

Post-Second World War experience of nationalisation tell us what the future holds. Consumer choice is denied and replaced by ministerial caprice. Ministers are now busily telling housebuilders what to build (small high-density urban units) and inevitably consumers are rebelling.

Ministers then talk about housebuilders needing to "educate" their customers, but consumers' unwillingness to be educated about where, and how, they are prepared to live adds to pressures on the second-hand stock. Thus, the problems of affordability that have driven the government to require large social housing contributions are exacerbated by the increasing shortages resulting from engineered failures in the market and consumer dissatisfaction.

New homes will now take a rapidly declining share of the total housing market and those purchasers who would previously have preferred new will be adding to the demand and price pressures on second-hand, medium-density suburban housing. The green papers, while claiming to provide greater planning efficiency, in fact complete the process of the government taking control of housing supply, with the inevitable consequences: reduced housing output, a smaller industry and higher prices. Those price pressures will be further fuelled by buoyant household formation. Recent figures from the DTLR show that household formation for the period 1996-2000 is 10% above the 1996-based household projections, and yet we are building fewer new homes than at any time since 1924.