Man with the plan

Man with the plan

Man with the plan

First Published 18 February 2016

Build more affordable homes, protect jobs, shore up a struggling industry and fill Treasury coffers? Yes we can, says Brian Green.

Faced with failure of the banks, the government steps in. That is the way it should be. It stepped in well beyond what had been thought possible before the credit crunch redefined the bankers’ role. Nationalisation had been unthinkable. Not now.

So what should the government do when faced with failure of the house building industry? And we are seeing systemic failure. Developers and house builders are unable or are shying away from risks now associated with building homes.

The industry’s talent is being tossed to the wind. Thousands of social homes tied to private sector development may not be built. The industry is grinding to a halt. This raises three important questions. Should the government step in? To what extent? And, how?

The first question is easily answered. For Gordon Brown, who placed housing at the pinnacle of his agenda, it would be poor politics to leave the means of delivery to rot.

So, the government has stepped in, but with the timidity of a nervous swimmer eyeing freezing water. The actions are of such a small scale that the homes built are unlikely to meet even half the government’s target.

It is hard to be precise, but the country faces losing the skills of more than 200,000 people employed in or associated with building homes. Many, if not most, will not return.

Construction is more flexible than most industries, but the infrastructure that delivers new homes is being demolished. It will take many years and cost hundreds of millions of pounds to repair the damage.

This will constrain home building for years and inflate the prices paid by private and social housing providers alike. There seems an overwhelming case for the government to do more than it is already. But what?

One option is for the government to step in as the ‘developer of last resort’ -to temporarily fill the gap left by the retreating private sector. If done well this would safeguard the nation’s capacity to build homes, while providing a much-needed targeted non-inflationary multi-billion pound stimulus to the economy.

The idea is simple. The government borrows, say, £20 billion to spend on building 200,000 homes over two years. These would not be council houses, nor homes delivered through housing associations.

The government, through a tightly-staffed, ring-fenced, arms-length company under the leadership of a strong commercially minded director, would act to all intents and purposes like a private developer -seeking to maximise the return on the £20 billion. But its exit strategy would be clearly defined and time limited. It need not undertake all the functions associated with private developers. Its primary functions would be to buy relatively small ‘oven ready’ sites and finance the building of homes for private sector sale.

It would engage contractors or house builders as appropriate to deliver the homes to a standard expected of a best practice builder. It would meet section 106 and other obligations associated with the planning permission, most importantly, the affordable housing provision.

While some sales may be made at completion, the company would be freed from making ‘instant’ sales, being able to hold on to homes until house prices returned to a level providing a suitable return.

In the interim, say until 2015, most of the homes would be rented on private sector terms. The company would most likely seek to purchase services from housing associations to estate manage the private rental.

But the aim, when the market crisis eases, would be to head towards a more balanced and suitable tenure mix with homes sold outright or on a shared-ownership basis. This would need to be done with sensitivity to avoid flooding the market, hence the need to focus on a wide spread of smaller sites.

The initial two years of intervention would safeguard about 150,000 jobs in house building and many others in associated businesses, saving billions of pounds on benefits and providing billions in tax revenues.

It would ensure thousands more affordable homes were built and place the nation closer to the target for new homes that the government strenuously insists are needed.

This is a solution targeted at the woes of an industry, not its companies. But it would become a handy buyer of assets of companies in distress and protect the lifeblood of the industry -its people.

Most importantly, the government would be able to pay back the £20 billion loan and should end up making a handsome profit of many billions to help pay off some of the swelling debt it is currently piling up on its other economic interventions.

Naturally, there are political issues, feet will be trodden on and egos bruised. There are assumptions that must be tested. There are boundaries to be set.

But these issues are small beer if we can preserve a strategic industry from ruin -an industry that for homeless and aspirant alike has more obvious value than the banking system that precipitated this crisis. Oh and yes, the sums do seem to add up.

How the numbers stack up

Treasury coffers would potentially benefit to the tune of £16 billion after paying back £20 billion of borrowings, if it made private sales when prices return to 2014 levels. This assumes that rental income supports the cost of borrowing over the interim period before sale.

The costs are typical for a home built for sale at the 2014 average sale price of £180,000. The assumption is that in the current market land might be acquired at two-thirds 2014 prices and that there will be some discounts on general build costs. Other ‘savings’ to net cost accrue to the Treasury that are not applicable to private firms. Most notably the tax take and the savings in benefits otherwise paid.

Cost and benefit estimates Per home
Sale price (late 2014) £180,000
Build costs (late 2014)
Land purchase £39,000
Labour £38,000
Materials £55,000
Sales, marketing & misc £12,000
£144,000
‘Cost savings’ by Treasury
Discount on buying land £13,000
Other current build discounts £5,000
Reduced sales and marketing £5,000
Revenue from tax on labour £9,000
Savings on reduced benefits £12,000
£44,000
Cost to Treasury £100,000
Revenue benefit to Treasury £80,000

Brian Green is a housing and construction commentator. Visit the Brickonomics blog for more details.