The third instalment of our Charter 284 campaign against public spending cuts looks at housebuilding: one of the most conspicuous victims of the recession. But what is now keeping sites closed is a whole raft of expensive, top-down regulation. Joey Gardiner counts the cost
Of all the sectors to be hit by the recession, housing was hit first, and hit deepest. A huge slice of the workforce was lost – the Home Builders Federation estimates up to half of the 400,000 employed – mostly in the carnage of 2008, as house prices tumbled and some of the great names of the industry were brought to the brink of bankruptcy. Ultimately, all the major players were saved, in no small part because of a huge £1.5bn government bailout in the form of Homebuy Direct funding and the Kickstart programme. But tens of smaller builders have gone under, and continue to suffer, while the prospect of more government financial support looks remoter by the day. Meanwhile, the latest completions figures from the NHBC suggest that only a quarter of the 240,000 homes that the government says are needed will be finished this year.
So if ever there was a case for receiving government support, it is made by the housebuilding industry, particularly given that all parties agree on the vital need for new homes to ensure a fairer and wealthier country. The problem is, with the UK’s finances in the state they are, there is no money for another bailout. In any event, no amount of money from the government can fill the void between the £22.2bn a year the industry turned over at the height of the boom, and the £14bn it turned over last year – a fall of 37% from peak to trough.
However, there is one way the government could help the housebuilders without spending big: by reducing the regulatory costs the industry faces. This is the burden housebuilders must bear, from policies such as the move to zero carbon, the introduction of the Lifetime Homes standard, the requirement to provide affordable housing, the delays in the planning process, and many others.
There are few things any government could do that could have more of an impact on the viability of housing schemes than reducing these costs. This government has just commissioned Davis Langdon to add up all the costs imposed on housebuilders by these regulations. This means that the party that comes into power after the general election will know exactly what the price of red tape is on every home that is produced.
The government will then have to choose what to do with that data. Building’s Charter 284 campaign is calling for an initial 30% cut in the cost of regulation on building new homes, thereby making countless sites economically viable again.
We are not asking the government to give up on making new housing safe, secure, well-designed and sustainable – but only that the regulations around these aims should be simplified.
Why is it so important?
Regulatory costs become particularly critical when house prices fall. The 2,300-home Glebe Farm scheme in Cambridge, which this week had its planning appeal refused, illustrates the point. The council wants 40% affordable housing, the developer Countryside has offered just 16.5%.
Chris Crook, southern managing director at Countryside, says now the decision has gone against it, the whole scheme will not be started anytime soon, because it will not make back its costs. He says: “There are so many people to consult these days and you can’t please everybody. Someone has to compromise and it can’t always be the housebuilder because it strikes at the heart of viability.”
However, until the credit crunch, government policy was to extract funds from builders, for things like infrastructure and social housing, safe in the knowledge that the growth in house prices meant this was sustainable. Mostly, this worked. The way housebuilders trade means any predictable increased cost – such as a regulatory cost – gets factored into the price they pay for land. The government knew this, and saw soaring residential land values as a bottomless pit that could pay for its policies.
But when sales values slumped, suddenly these extra cost burdens meant a lot of land had little or even negative value. When this happens, a landowner will not sell to a housebuilder, and if a housebuilder owns land, it will not build on it, unless some way can be found to reduce development costs. Development dries up.
Aside from reduced mortgage lending by banks, this is the principal reason that supply has been so dramatically choked off in the past two years. Sites no longer make money, so builders don’t build on them and landowners don’t want to sell them. Clearly regulatory costs aren’t the only ones builders face, but other principal outlays – for marketing and construction – can only be reduced by limited amounts.
This is why any reduction in the regulatory burden could have a huge impact on the number of homes built. John Anderson, chairman of Berkeley Homes’ urban development business, says he is aware of a “tremendous number” of stalled schemes in the capital because of unrealistic demands placed on them by central and local government. He says: “Councils need to understand there’s only a finite pot for the demands and initiatives being put forward.”
John Slaughter, director of policy at the Home Builders Federation (HBF), adds: “This is the key issue which conditions the business environment housebuilders work in, and directly affects their ability to meet demand. If the next government doesn’t tackle this, the goal of building more homes is very difficult or impossible to achieve.”
The industry shows its support
The housing body
Understanding and managing the policy and regulatory burdens placed on housing development by central and local government and public agencies is absolutely vital if we are to provide the homes this country needs.
Regulatory costs are still on a steeply rising curve (zero carbon is only six years away), whereas housing land values have fallen sharply, making many potential housing sites unviable – a problem that is not going to go away when the economic climate improves.
The Home Builders Federation (HBF) has been campaigning on this issue for two years, providing detailed evidence from real-life case studies to officials across the government to highlight the scale of the issue. We have successfully achieved widespread recognition of the problem within the government.
As a direct result of HBF’s representations, the Treasury committed to a series of actions in last year’s Budget and the pre-Budget report. But we need to keep up the pressure, so we fully support Building’s campaign.
Stewart Baseley is executive chairman of the Home Builders Federation
The design firm
We wholeheartedly endorse the aim to consolidate and simplify current regulations to help bring greater certainty to the development process.
We share the view that the industry is hampered by confusing, overly complex and sometimes contradictory regulation that gets frequently in the way of delivering appropriate solutions of long term benefit.
It is increasingly true to say that the cost of uncertainty in the regulation of housing is a significant brake on the rate of supply. A significant source of uncertainty stems from the overlapping range and duplication of the regulatory frameworks that impact on housing design. To the greatest extent possible, regulations should be reduced in number, and rationalised to minimise confusion. Multiple standards that require negotiation with statutory authorities over aspects that overlap create uncertainty, delay and abortive costs in the system. Greater certainty in the development process is an important objective which we support. We support Building’s campaign.
Ben Derbyshire is managing director of HTA and speaks for 4Architects, a group of the four biggest housing architects HTA, LBA, PRP and PTEa
What are the costs?
Although every builder will grumble about the burden of regulation, it is complicated and difficult to quantify. The costs can be split broadly into the national and the local. The work that Davis Langdon has been asked to do will cover everything that could possibly affect housebuilders on a national level, from the numerous town and country planning acts, and building and products regulations, to the more contentious areas of the Code for Sustainable Homes and the possible introduction of the Lifetime Homes standard. In reality, much of this regulation, which has built up over the past century, is unlikely to change much – nor should it.
But newer policies, such as the Code for Sustainable Homes, which are still being defined, potentially have a much larger impact, and offer more scope for being streamlined.
How much meeting these policies adds to the cost of building homes has never, in many cases, been reliably counted. According to Kathleen Dunmore of housing consultancy Three Dragons, the cost of Lifetime Homes is one such example. She says: “The government and [housing association] Habinteg quote this figure of £500 for the cost of meeting Lifetime Homes, but you ask any builder and they will think it’s a lot more. But there isn’t any other figure we can use.”
In some areas, however, it is possible to make some estimates. The Code for Sustainable Homes is still being defined, but Dunmore says it is realistic to expect that it will cost £30,000-35,000 to meet level six, which will be required of all homes by 2016 (the latest government estimates are that it will cost in the region of £25,000).
On the local side, the costs can be just as great: from providing affordable housing to negotiating the planning and section 106 systems. This depends on local proclivities and policies, which can vary widely.
It is possible to use the £30,000 Milton Keynes tariff as a benchmark, introduced by the local authority to give developers certainty. Therefore Dunmore maintains that developments could face a cost of £60,000-65,000 before a brick has been laid. It’s not hard to see that this could affect a scheme’s viability.
Roger Humber, policy adviser for the House Builders Association (HBA), says action to reduce these costs needs to be taken locally and centrally: “We’ve been in the teeth of an economic crisis, and the government must start to think about what’s essential, and what’s nice to have. Because what’s nice to have can’t be had in an economic crisis.”
It all adds up
This analysis of the cost of regulation combined with the provision of affordable housing shows the impact of regulatory costs alongside falling house prices on land value.
An example 1ha, 35-unit scheme of three- bed houses, with a selling price at 2007 house prices of £170,000 per unit, would have given a land value of almost £2m – enough to tempt many.
However, fast forward to 2009 house prices, and then add 30% affordable housing without grant – seven units for social rent, three for New Build HomeBuy – and environmental costs, and the land suddenly has negative value. This theoretically means the landowner would have to pay the builder to take it off their hands, but in practice it just means it will remain undeveloped.
(See graph attached)
Cost for achieving code level four from Building Regs: £7,000
Cost for achieving code level six from Building Regs: £35,000
Analysis: Kathleen Dunmore of Three Dragons consultancy
The industry shows its support
I endorse the statement that we’ve got to cut out the red tape, there’s just too much of it. We need to have a common sense approach, and take out a lot of regulation. Because if we can start building houses again, then this country can get back a bit of the feel good factor. And if that comes back, if the building industry gets back on its feet, we can start creating jobs again.
Tony Pidgley, group chairman, Berkeley Homes
The small housebuilders’ body
The small housebuilders’ bodyWhen house and land prices were rising, to levels we now know were unsustainable, the government thought it had found a bottomless pit of money that it could plunder to pay for its social engineering policies.
The collapse of house prices has destroyed this illusion, but the regulatory burden remains. This is what is causing housing sites to be mothballed and planning permissions to remain unimplemented, which results in a moribund land market. It is essential that this regulatory burden is significantly reduced otherwise housebuilding output could drift down even further and much of the industry’s capacity could disappear in the next few years. Building’s campaign exactly mirrors the view of the housebuilding industry.
Roger Humber is strategic policy adviser to the House Builders Association
Where to start?
According to the HBF’s Slaughter, there are two key areas where there might be the flexibility to reduce regulatory costs – the move to zero carbon, and the provision of affordable housing. Discussions over the Code for Sustainable Homes, which defines zero carbon, are continuing. The focus is now on how builders can cost-effectively pay for renewable energy solutions that mitigate the carbon given off by the home and its appliances. But most in the industry think there is further to go.
On affordable housing, Slaughter says the government needs to look at whether there can be more flexibility over whether housebuilders have to build homes for affordable rent or can build for other usages, such as cheap home ownership, which offers more return and so reduces loss of profits.
There is clearly an argument that reducing regulation may put quality at risk – and some also argue it wouldn’t suddenly get builders to ramp up the rate of production. Certainly, reducing some build costs won’t make up for the continuing log jam in the planning system, and the refusal of mortgage lenders to raise lending to the levels of 2007.
Still, housebuilders say it will make a difference to build rates, and that regulation can be made more intelligent without compromising quality. They want a change of mindset from the government – an understanding that the value of residential land can’t be mined indefinitely to pay for social benefits, such as increased affordable housing and zero carbon. The HBA’s Humber says: “The civil servants are starting to realise that the policies they were pursuing were only sustainable at the very top of the market – and that means that if we’re going to get a sustainable, reasonable housing market with modest rises, it won’t ever return to what it was before.”
And if development isn’t enough incentive, less regulation could also bring savings for the government. According to the National Housing and Planning Advisory Unit, development control costs £3bn a year. The 43 weeks average time it takes to determine a planning application can’t be cheap, either.
A reduction in costs won’t mean builders can start building 240,000 homes overnight. The industry has lost too many people, and there is still not enough enthusiasm from banks to lend to homebuyers. However, in the current environment it may be the cheapest action the government can take to change the viability of thousands of stalled sites. And builders argue that once viability returns, they will return to site. Once the government has a proper idea of the costs it is loading upon the sector, there is no reason it cannot work to reduce that in an organised manner.
Original print headline - 3. Housing