There is widespread consensus that housing supply in the UK is not keeping pace with housing demand. We suggest in this report that these debates have often failed to give sufficient attention to structural changes in the housebuilding...
moreThere is widespread consensus that housing supply in the UK is not keeping pace with housing demand. We suggest in this report that these debates have often failed to give sufficient attention to structural changes in the housebuilding industry. If we focus on this factor, our analysis suggests that any national strategy which is largely dependent on the private market sector, as currently constituted, will be simply incapable of achieving the required uplift in housing output.
Not only is the current regime for developing new housing highly unlikely to stem the long standing decline in output in the face of increasing demand; it is also unlikely that the geographical distribution of new developments will be aligned with the major local pressure points in high housing demand.
In order to guard against volatility, housebuilders use landbanks to control the flow of new housing into local markets, and to strengthen their negotiating position with landowners. The need for land leads some housebuilders to focus on the acquisition of smaller firms, in order to access their land banks. This leads to a consolidation in the sector, and a concentration of market share by bigger firms. The top ten housebuilders have increased their share of housing production from nine per cent in 1960 to 47 per cent by 2015. In 1980 there were over 10,000 small and medium (SME) housebuilders, building 57 per cent of all housing. In 2014 this had dropped to 2,800 firms delivering just 27 per cent of all output. We think this process of consolidation matters, because larger firms are more concerned to maximise returns than increase output as an end in itself. They may therefore be reluctant to increase the production of a good where ongoing scarcity is proving so conducive to enhanced profitability per unit.
From 2012-15, the output of the nine largest private housebuilders grew by 33 per cent. Revenues increased by 76 per cent. In the same time frame, profit before tax (prior to the removal of exceptional items and financing costs) rose by nearly 200 per cent for these nine firms. Over a slightly longer period, 2010-15, the profits before tax of the top five housebuilders increased by 473 per cent. End of year profits for the biggest five firms (after taxation, impairments and exceptional items are taken into account) increased from £372 million in 2010 to over £2 billion by 2015 - an increase of over 480 per cent. In their normal functions, significant surpluses are being generated by these firms. Other priorities hold sway ahead of increasing volume. The profit margin dominates, and investment is therefore directed to those sites and locations that are most likely to produce the best returns.
What happens to these surpluses? In the aftermath of the financial crisis, one firm (Berkeley Group) chose to forgo paying dividends so it could reinvest in its core activities. The strategies of the largest firms have changed markedly since then. In 2015, the biggest five housebuilders returned 43 per cent of their annual profits to shareholders, an amount totalling £936m. This raises questions about the potential volume of new supply that could have been provided through reinvestment of at least some of this money.
The Government has introduced some initiatives, such as Help to Buy, to stimulate the private housing market. Help to Buy has so far generated a 14 per cent increase in supply, which is well short of the fundamental uplift in output that is required. The risk with demand-side initiatives is that they end up simply subsidising households to afford high prices, and for a temporary period. They can bring a short-term political dividend more readily than a significant long-term shift in increased supply.
The failure of the private housebuilding sector to build in sufficient quantity is not some kind of temporary aberration, while the exigencies of the 2008 financial crisis work through the system. This failure is of long standing and is indeed integral to the business model that major housebuilders work with. This process of financialisation, in which maximising shareholder returns takes precedence over increasing output or improving productivity is not, of course, unique to the housebuilding industry. However, the ramifications of this emphasis on realising profits rather than maximising investment carries particular force in housing – not least for households struggling to gain access to affordable housing, those living in overcrowded and poor quality properties, and the increasing number of households experiencing homelessness.
There are recent signs that the government is going to focusing more directly on housing supply in the future, and some new measures have been announced. But there is scope for the government to do much more to increase investment by local authorities, housing associations and other non-profit bodies for housebuilding. It needs the political will to do it. This needs to go beyond easing access to loan finance and planning reforms. This could involve measures over the use of reserves, rent policy, land supply, borrowing restrictions and moving the balance of housing subsidy away from demand and towards supply. A wide range of economists have advised the government to borrow more for sustainable infrastructural investment at this juncture. We think there is little reason why borrowing to invest in housing should be exempt from this process.
On the basis of the evidence in this report about the structure, organisation and financial performance of the major housebuilders, the private sector alone will simply continue to fail to provide what is needed, and the gap between housing demand and supply will continue to grow larger.
