This article was originally used in submission for a module in the MPlan degree at the University of Sheffield. All uses of this work should be appropriately cited in line with the professional citation method used.
Author Name : Kiran Henry
Publication Date : 17/08/22
Understanding the problems facing the UK housing industry:
The effects of the UK housing crisis include “homelessness, overcrowding, impaired labour mobility, acute affordability issues and a higher number of younger people being forced to continue living with family” (House of Commons, 2021, p. 3). The crux of issue can be simplified down to two perennial ideological conflictions: business and profit versus social need. Current numbers show the existing housing framework is insufficient in meeting the social demand; UK government estimates report 345,000 homes are needed each year in addition to closing up the existing backlog (House of Commons, 2021). Figure 1 (ONS, 2021) demonstrates the shift from a more balanced private-public development sector in the 1960s and 1970s to one driven by a private business model from the 1980s onwards.
| Calendar Year | Total houses completed | Private Enterprise | Housing Associations | Local Authorities |
| 1955 | 324,430 | 116,100 (35.8%) | 6,650 (2.0%) | 201,680 (62.2%) |
| 1965 | 391,240 | 217,160 (55.5%) | 6,780 (1.7%) | 167,300 (42.8%) |
| 1975 | 321,940 | 154,530 (48.0%) | 14,950 (4.6%) | 152,470 (47.4%) |
| 1985 | 207,460 | 163,400 (78.8%) | 13,660 (6.5%) | 30,410 (14.7%) |
| 1995 | 199,120 | 156,930 (78.8%) | 38,760 (19.5%) | 3,440 (1.7%) |
| 2005 | 205,740 | 182,190 (88.6%) | 23,330 (11.3%) | 230 (0.1%) |
| 2015 | 172,020 | 134,330 (78.1%) | 34,990 (20.3%) | 2,700 (1.6%) |
With the introduction of the Right to Buy (RTB) scheme in the 1980 Housing Act, the government began its push to increase private home ownership and deplete the state’s role in the housing sector. New social house builds almost disappeared after the introduction of RTB as local authorities were not allowed to use raised receipts from RTB to be reinvested back into local services, including replacement housing (Disney & Luo, 2014). Just over 40 years later, the ramifications of this Act are still prevalent with affordable, social housing never reaching the heights of the 1950s and 60s. Average house price data over recent years is indicative of the causal relationships between economic market cyclicity, policy uncertainty and housing supply (Aye, et al., 2019). House price inflation has consistently been outpacing any rise in average income which can be seen using a common affordability measure known as the median house price to median earnings ratio. The data set below in Figure 2 (ONS, 2021) is an indicator of the impaired social mobility the country is seeing whereby lower income families become priced out of the housing market and pushed on to private rental, or social rental if fortunate. In essence, the ratio sets out the crucial issue of a lag between income inflation and house price inflation; London being the least affordable area in England and Wales for this.
| Area | 1997 | 2020 | Ratio point change |
| England and Wales | 3.55 | 7.69 | + 4.14 |
| England | 3.54 | 7.84 | +4.30 |
| North East | 2.98 | 5.03 | +2.05 |
| North West | 3.01 | 5.75 | +2.74 |
| Yorkshire and the Humber | 3.12 | 5.84 | +2.72 |
| East Midlands | 3.17 | 6.77 | +3.60 |
| West Midlands | 3.40 | 6.78 | +3.38 |
| East | 3.68 | 9.41 | +5.73 |
| London | 4.00 | 11.78 | +7.78 |
| South East | 4.17 | 9.92 | +5.75 |
| South West | 3.78 | 8.80 | +5.02 |
Taking Yorkshire and the Humber as an example, the data shows in 1997 a buyer would on average need 3.12x their annual income to buy a property; this went up to 5.84x in 2020. All regions have experienced a widening of the gap, but the ratio highlights geographical differences across England with the North East in particular having much lower ratios compared with London and the South. Across the country, less and less property is financially available to the average buyer. This is one of a few core issues that speculative housebuilders cannot solve; it must be tackled in a stricter regulatory enforcement on the ratcheting up of house prices seen of late.
However, it is also important to note that the decoupling of income and house prices is not the only causal factor in the UK housing crisis. Faster build-out rates are often touted as a way of improving housing supply in the UK, but unless the average buyer in the area can afford the property outright or obtain a sufficient mortgage loan, faster build-out rates run the risk of leading to more empty stock. A simple supply and demand model cannot accurately be applied to the housing market as it doesn’t account for the existing secondary housing market and that much of the sector isn’t driven by supply but by financing costs i.e., mortgages. For decades, “housing supply has outstripped housing formation” (Mulheirn, 2019, p. 4) which suggests the real issue lies outside of the speculative housebuilders’ realm. With loan-to-value mortgage rates falling rapidly in the past twenty years – “five year fixed rate products have gone from 8% to 2%” (Mulheirn, 2019, p. 21) – there is a much lower cost in borrowing capital for property purchases. This reduction in rates creates a greater demand and thus the higher level of competition causes house prices to rise (Bank of England, 2022). As a consequence, financiers and organisations like the Bank of England hold a significant weight in the post-construction element of the housing market. From examining sector data and industry trends, housebuilders must take an element of responsibility due to their heavy construction influence in the 21st Century housing sector, but it would be naïve to say they alone can rectify the issues aforementioned.
Analysing the efficacy of current schemes and solutions:
The demographic with the most difficulty accessing the housing market are young adults (Institute for Fiscal Studies, 2018). Recent schemes for first time buyers like stamp duty exemption and the Help to Buy loans have seen 2021 record the highest first time buyer mortgages since 2002 (Yorkshire Building Society, 2021). However, data compiled has shown housebuilders reporting new build demand at a score of 2.38/5 (Federation of Master Builders, 2020) – a higher score in this metric equals a higher demand. With longer life expectancies in the UK (Pre Covid-19) (ONS, 2020), the argument can be made for a shift in approaches to meet new housing needs. Older adults in larger family homes will be in the market to “downsize, freeing up larger properties for families but increasing the requirement for smaller properties, specialist housing and care provision” (Respublica, 2020, p. 20). As such, the clear issue surrounding poor new build selling rates is testament to housebuilders perhaps not building what the country needs, but instead what provides the most capital return.
In continuation with this theme, the idea of affordable housing from a purely financial perspective runs counter-intuitively to how speculative housebuilders operate. Affordable housing is a form of social housing designed to help people who are financially unable to access the property market. Current affordable schemes dictate properties must be sold/rented at discounted prices e.g. affordable rents can be “up to 80% of market rent levels within the local area” (House of Commons, 2021, p. 6). Inherently, speculative housebuilders have a lower profit margin when constructing these properties. The process of affordable housing quotas is an arduous one in the middle of recent government alterations – see (Ministry of Housing, Communities and Local Government, 2020) – and as a consequence, it would be fair to conclude housebuilders cannot, and will not, change their affordable housing provision practices until the government introduces laws stating they have to. Affordable housing is currently “secured by local authorities via Section 106” (Ministry of Housing, Communities and Local Government, 2020) but with this being merged with the Community Infrastructure Levy to simply create an ‘Infrastructure Levy’, all new infrastructures will now solely be subject to levy funding for local authorities. New legislation such as this aims to get rid of planning blocks and allow local authorities to be given more freedom in how they wish to implement affordable housing and community projects in their area. This cements the notion that the true social housing needs of communities have to be implemented by local government. Should private sector housebuilders be part of the solution for affordable housing, their current practices and model will need to be examined and rethought.
The role of profitability in the construction sector:
With speculative housebuilding existing in the realm of the private sector, profitability is an intrinsic part of the business model. Without a certain margin of financial return for private investors, the speculative and risk-return element becomes nullified. However, in relation to the current housing crisis, questions must be asked of whether profit and affordable, social housebuilding can co-exist. In the construction and development sector, the rate of projected returns usually applied for projects is a 20% markup on invested capital (Colenutt, 2020).With reference to the earlier percentages for affordable housing, a 20% markup is unlikely to occur on a project which has to sell houses at prices 20% lower than the average current local rate. It has been established there is a greater need for a specific type of housing rather than more housing in general. Subsequently, this section of the essay aims to explore whether the affordable housing needs of the UK are a) compatible with the existing profit-seeking nature of volume housebuilders and b) able to be solved by such speculative developers.
A key way in which speculative housebuilders have ensured economic returns is through the process of land banking. To preface this analysis, it must be noted there is a difference between land banking and speculative land hoarding. The process of land banking involves acquiring the rights to land via option/conditional contracts; the developers thus hold the ties to the land for when they decide they wish to develop it in the future. Where land banking is the practice of maintaining a sufficient stock of optioned land to promote optimum stock flow, land hoarding exceeds this level and instead looks to gain capital return via the artificial inflation of land value (Financial Times, 2016). As of 2020, estimates show there are just under 450,000 plots of undeveloped land owned by the top ten UK volume housebuilders (Stripe Homes, 2021). While a pipeline of land for future projects is a fair necessity for speculative housebuilders, one could argue an excess pipeline of stock is only held to keep profit trends positive. However, it is crucial to note housebuilders are in the business of developing land for homes and thus the ideal end goal for their stock is housing. This is not the case however for the many key players in land hoarding whose primary function has no relation to housing or construction. Molior consultants revealed in 2014 that 17% of permitted London development sites were in the control of non-building corporations (Molior London, 2014), i.e. companies which widely have no experience nor economic interest in affordable or quality homes being built. As such, there is the worry that direct non-builder land investment (rather than through a speculative housebuilder) is a financial tactic to capitalise on land appreciation; the company makes a profit in a market upturn with no properties released or even developed. This way of working unequivocally favours profit over the real social needs of housing.
Capital return must not be completely disregarded as otherwise the entire model of speculative development becomes redundant. One could argue instead of looking for profit margins in the house sales, housebuilders should seek returns via reduced design and construction expenses. Efficient planning and repetitive design enable quicker project turnovers as well as lowering manufacturing costs. For volume superbuilders, a standard portfolio of floor plan configuration and house types can provide accurate construction costs, central purchase of materials and more informed building time forecasts (Payne, 2013) (Gibb, 1999). These factors each help to bring down the construction expenses and thus over time a volume super-builder will see a capital return on development they know will sell based off of their previous builds. This concept won’t provide the higher markups seen in land resale inflation, but as it holds a much lower risk, it is a more sustainable practice for housebuilders to employ in combatting the current housing crisis.
Conclusion:
As established in this article, the housing crisis facing the UK extends beyond housing supply. Factors such as the fluctuating power of the market, mortgage rates, government legislations and land value all contribute to the problem. Speculative housebuilders are integral in providing housing stock supply but there needs to be more creative and mixed approaches of development to tackle the wider issues of the crisis i.e. affordable housing, enabling young first time buyers to enter the market. A heavy reliance on any one source of housing, volume speculative housebuilders in the case of this essay, will not provide a complete solution. The goal moving forward for the UK housing sector must incorporate a collaborative roll out of government policy, financial regulation and a balance in private-public housebuilding.
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