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Delivering 1.5m homes:  Why we need a diverse and competitive housebuilding industry

The UK has a huge backlog of housing need, with the effects of this rippling across our society.  Studies in 2018-19 suggested that there where over 4.75m households in need of suitable housing, with recent updates outlining the need for an additional 60-70,000 social rented homes per year, rising to 80-90,000 by 2030.  Beyond this, many argue that we should be adding 300,000 homes in total to our housing stock each year. This is something Labour are committed to, in the delivery of 1.5m additional homes over the next parliament.

But we need to wake-up to the scale of this change. Over the last five years we have added under 16,000 social rented homes a year across England, Scotland and Wales. Net additional homes in England have been below 250,000 for well over 20 years and new housing completions across the UK have not exceeded 300,000 per year for over four decades[1].

In sum, we are miles off Labour’s supply targets, and to get there would take a radical long-term approach far beyond the proposals presented so far.  Assuming the proposals around planning reform, land compensation and compulsory purchase, and the creation of new towns, all deliver significantly more land for development within five years – something we are justified in being sceptical about – one fundamental issue would remain. Who will produce these homes?

At present, over 40 per cent of new homes are built by just eight housebuilding firms, as the market share of SME developers has shrunk over several decades.  In contrast to Germany, where over 50 per cent of homes are self-build, or directly commissioned by future residents, the equivalent supply here in the UK is just 7 per cent.

This matters for a number of reasons. Firstly, to create 300,000 new homes a year we will need to ramp-up of delivery by lots of different producers, in order to meet the varied housing needs that exist.  Secondly, as explained in the recent Competition and Markets Authority (CMA) report on housebuilding, diversity of supply affects the speed at which homes are built-out, and therefore how fast you can add new supply. The greater the diversity of housing types, the quicker the market ‘absorbs’ them. Thirdly, as stated again by the CMA, the particular brand of speculative housebuilding we have in the UK is problematic, and not only in terms of the level of supply we get, but also in terms of its effect on prices and the extraction of value.  Value extraction through dividends and other shareholder returns represents lost investment, or more precisely, lost homes.  There are other factors that affect new supply, with the CMA at pains to stress the dysfunctions in our planning system, but far too often the nature of speculation in our housing system, and associated capital flows, are overlooked.

Over the past few decades, large UK housebuilders have changed markedly, particularly in terms of who owns them and how they are governed. The largest shareholdings in our big housebuilders are now largely held by global asset managers who, when studied, seem to extract more capital from these firms than they impart into the wider housing supply system. When we case studied one of the biggest shareholders in our PLC housebuilders we saw investments of £45m to support new housing production in a given year, but this was eclipsed by capital returns of £158m.

In our recent report, The Invisible Hand That Keeps On Taking, we showed that in 2005 the eight largest housebuilders paid out 16 per cent of pre-tax profits in dividends. This equated to just over £5,000 per home built. By 2022 their dividends were 47 per cent of profits, representing £22,000 per home. Dividends increased by 230 per cent in real terms, compared to new housing completions which rose just 23 per cent over the same time frame.  Dividends have been made possible by a long running period of ‘super-normal’ profitmaking, evidenced by the CMA’s analysis and our own research.  Whilst the claim is these super-normal profits are part of the ‘cyclical’ nature of housebuilding, and therefore just a feature of a boom period, we see that for twelve out of the last twenty years housebuilders have made super normal returns.  Only five of these years saw returns on capital below a ‘normal’ range.  We would argue that is a pretty favourable cycle, if indeed it is one. When we analyse changes in the costs per home built we see that this profitability has made possible, in part, by driving down land costs.

And herein lies the problem for Labour. Building 1.5m homes offers little time for slow market restructuring, to boost competition and production by different actors. And yet, reliance on the current market suggests completions will not rise at the rate required, largely because that would have a deflationary effect on the price of those homes, something which cannot be tolerated if your modus operandi is increasing margins rather than increasing volumes. 

So, what can be done?  Firstly, Labour should reorientate itself to targets on affordable homes, focusing its efforts on policy responses which boost affordable supply. If we cannot borrow more to increase funding for more affordable homes (as per the fiscal rules) then this should be achieved through targeted taxation or by capturing value elsewhere to reinvest.  Here it is instructive to note that between 2016-21, the UK government allocated £9bn in affordable housing grants in England, to create tens of thousands of new affordable homes. Over same period, the dividends of the eight biggest housebuilders equated to £11bn. And so just the dividend payments of a few companies exceeded government expenditure on affordable housing grants, and this does not factor in the other means of returning capital to shareholders that such companies engage in.

If there is surplus in this system, then it needs to be directed toward increased supply, or captured for the public purse to then be redirected.  Forms of taxation, and conditioning public funding and support for housebuilders, are just two means to do this.  If you are benefiting from public subsidy – for instance where a housebuilder is building homes funded with affordable housing grants – then you should adhere to certain requirements on the reinvestment of surpluses. If we can levy charges on housebuilders to remediate fire-safety issues, then perhaps we should be levying charges to help address critical housing need.

Beyond private housebuilding, there is much that can be done in policy terms to incentivise development by small and medium builders, self-builders, and community-led housing groups.  This could include incentives in the planning system, making better use of exception site policies, and creating presumptions in favour of these types of development.  Labour has had very little to say on this to-date, and it’s time to dedicate some proper policy attention to this issue, which can help us diversify the production system.

The hope is that in the rush to increase housing supply, we do not deepen the dysfunctions within our housebuilding system further, and instead we play the long game to radically shift who builds, and therefore who benefits.


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Our failure to plan for rural housing development

Rural housing is one of the most pressing, and contentious, issues facing this country. If Labour is to stage a rural revival then we must confront this issue head on.

In my home constituency of North East Somerset, and across rural England, there is a great distrust around the idea of house building. It is common for people to feel that residents have little to no say over when and where new housing is built and that housing developers are unaccountable. These concerns are not misplaced. For too long we have seen housing developments simply bolted on to towns and villages with little to no thought about the impact these new developments have.

When housing developments are built without infrastructure such as shops, restaurants and healthcare facilities it puts pressure on the existing infrastructure in a town, particularly road infrastructure. Most towns and villages in North East Somerset are simply not equipped to deal with increases in traffic, often due to road size and layout.

When infrastructure is already crumbling under 11 years of Tory misrule these strains can be devastating. But this lack of infrastructure is equally damaging to new residents, a lack of shopping or healthcare provision nearby harms the ability to forge a community spirit in new developments. The Covid-19 pandemic has demonstrated clearly the dangers of isolation and it is incumbent on the Labour Party that our housing strategy acknowledges this.

As a consequence of austerity, rural communities have seen much of their infrastructure disappear. With police stations, fire stations and GP’s being closed in small towns and villages and often converted in to flats. This has increased the distrust around housing developments for many people. But it also contributes to the poor conditions of new housing: as a parish councillor who sits on the planning committee I have seen many examples where buildings are converted in to flats or flats are built.

Often, these flats do not have an appropriate number of parking spaces, which further contributes to the weakening of road infrastructure. If you live in a small town with roads designed in the late 19th and early 20th century, and there are cars parked on the road due to a lack of parking spaces, it can become very difficult to drive around.

We must also face up to the climate crisis. It is not possible, or desirable, to continually build on every field in perpetuity given the environmental consequences. Our green spaces must be protected, not just for the environmental benefit – and biodiversity benefits they provide, but for the mental health benefits the existence of these spaces provide for the people who live near them.

When we do build it must be with a with a long term plan in mind, rather than for the short term financial interests of housing developers. This means, building homes that can last for 100 years – and – envisioning what the community will look like at that point too, including its green spaces. A climate combating housing strategy must also include retrofitting old houses, as we’ve seen championed by our Labour Metro Mayor Dan Norris.

Despite this, there is a need for more housing in North East Somerset. In the towns and villages of my constituency there has long been a strong community spirit. However many people are concerned that children and young people are unable to afford housing in the communities they grew up in – and are forced to move to Bristol and Bath (further contributing to the housing issues faced in those cities) – never to return.

The only way to combat this loss of community, is of course to build more housing in these areas. But this house building must be accompanied by a strategy to assist people in renting and buying their own houses at a reasonable rate. Otherwise for many people the dream of living in the town they grew up in is unreachable.

I believe firmly that there is public support for building the houses we need to combat the crisis we face. But I also believe that more work needs to be done to gain the full confidence of people that under Labour housing will be a benefit to everyone.

<strong><span class="has-inline-color has-accent-color">Jonathan Wallcroft</span></strong>
Jonathan Wallcroft

Jonathan Wallcroft is a parish councillor in North East Somerset as well as the Secretary of the South West Branch of the Labour Housing Group and a steering group member of Labour Coast & Country. 

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For someone involved in housing for 50 years, it is impossible not to feel embarrassed and ashamed by the appalling conditions lived in by some social tenants as exposed by Daniel Hewitt’s ITV documentary, Surviving Squalor.

The ‘regulator’ (sic) should be throwing the book and the ‘Ombudsman’ (equally sic) should be down on them like a ton of bricks. Sadly, they are both ineffectual. I would like tenants to be able to sue for damages more easily and for landlords to be prosecuted. But where are the highly paid Executives, and where are the Boards and where are the councillors who run these organisations?

We are rightly angry at some of the cases shown and it is excellent journalism especially when the tenants themselves are allowed to speak. Once again, we see people who are articulate but totally exasperated, just wanting a decent service in return for their rent and service charges.

But equally fine journalism and campaigning has also exposed many a bad private landlord over the years. The cases of many badly treated lessees and shared owners have also had wide coverage recently. And I recall that some of the worst housing conditions and poverty I ever encountered were amongst elderly homeowners. So, the issues are broader, not confined to a single tenure, and must be properly examined.

Across all tenures, our standards and expectations are just too low – and falling behind all the time, especially when health implications and climate change are considered – the remedies are just not good enough, and accountability is totally inadequate.

At the core, we just don’t invest enough of our national wealth in homes, and we don’t invest because we do not value highly enough the human dignity that comes with living in a decent, appropriate, warm, dry, affordable home.

There was plenty to be annoyed about in the programme. The practised apologies seemingly written by PR people. The disgrace that urgent action is taken when a bad case gets on the telly – ITV might quickly find itself inundated as the country’s leading housing advice agency. The lack of intervention by people who should intervene. The quick return to normality that inevitably follows.

But one thing above all made me feel sick. Robert Jenrick, the Housing Secretary, said it was nothing to do with the government, it was all down to bad practice and mismanagement. However guilty we feel, rightly, housing people should condemn this oleaginous brass-necked man.

His Party abolished the regulator, abolished the Audit Commission, abolished the National Tenant Voice, cut housing by 60% as its first act in 2010, ended new funding for social rented homes, introduced chaos into rent setting so no-one could plan, and pushed landlords into taking money out of housing management, maintenance, and capitalised repairs to ‘cross-subsidise’ new build as the only way of getting new homes built.

This is not an excuse for landlords, and it is not all about money – some of the worst disrepair cases in the programme seemed to be in blocks that had expensive new cladding – but for Jenrick not to admit that government drives this increasingly rickety machine is buck-passing of the worst kind.

I do think social landlords have lost sight of the bread and butter, their first duty, that homes must be properly managed and properly maintained. I know only too well that it is possible for things to go wrong even when you think you are doing it right. But now there is too much emphasis on shiny new schemes, sparkling financial products, innovative new structures, and fancy regeneration.

Development is seen to be exciting and strategic, management boring and messily detailed. Housing Association Boards do not have enough people on them with experience of running social housing in which people with relatively small incomes live. They are stuffed with people interested in development and finance, important skills but not enough. I suspect many of them never meet a tenant. I know quite a lot of dedicated councillors and I have almost no explanation as to why local councillors in the boroughs depicted were not up in arms.

Of course, some people jumped at the opportunity to denounce social housing. This is where the greatest peril lies. All too often, social housing has been made to fail by government, even if too many social landlords have also been complicit. Yet the sector has rallied due to the efforts of tenants and campaigners, and it has survived an attempt to end it altogether.

It is still the case that millions of people would be delighted to get a social rented home. Most social tenants are satisfied with their homes, the vast majority are in reasonable condition but lacking investment since the end of the decent homes programme.  

Social rented housing is still the main hope in the search for a solution to the housing crisis. But the sector must stop shooting itself in the foot, speak out for tenants, be more competent, be more caring, and be more focused on the core task of running what we already have well.

<strong>Steve Hilditch</strong>
Steve Hilditch

Editor and Founder of Red Brick blog.
Former Head of Policy for Shelter. Select Committee Advisor for Housing and Homelessness. Drafted the first London Mayor’s Housing Strategy under Ken Livingstone.

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Lessons from Kosovo: Structured Development Payments

Councillor Dave Ward returns from Kosovo with lessons in development finance. He argues that allowing the land and development supply chain to share in the upside of apartment sales can lower the barriers to entry for smaller housebuilders.

I have just returned from Pristina, Kosovo where I got my new apartment ready for a summer rental to a couple of German students who are volunteering there for the summer and needed a place to stay. 

As Chair of Planning at the London Borough of Merton, I am always interested in housing and planning policy, particularly around building new homes and it was very interesting to see and learn about the differences between the UK, specifically London, and Pristina. 

Firstly, the scale is a lot smaller, Pristina is a city of nearly 150,000 people, just over eight per cent of the total 1.8 million population of Kosovo, and growing. This quite closely compares with London’s 7m people, roughly 10% of the total population of the UK. 

So both cities are the centres of government, the financial sector, the media and the headquarters of many national and international businesses and other organisations. As in London this attracts a higher population as people come to the capital for work, which then leads to housing pressures. 

Pristina is in the middle of a housebuilding boom. The block where I now live (for some of the year) is ten storeys, with roughly 60 apartments varying in size from small studios to three-bed apartments. It is one of at least eight similar blocks, either completed or under construction, just within a few hundred metres, in an attractive location just ten minutes walk from the city centre. 

The most interesting thing I discovered about housebuilding in Pristina is they way it is financed which is very different from the UK. Typically a developer will find some land upon which a block could be built, purchase it from the original landowner, pay contractors to build the block, and suppliers for the materials, then when it is complete, sell or rent the homes and try to make a profit, just like here. 

The difference is that the original landowner, contractors and suppliers are often paid, at the end of the project, in completed properties. 

For example, the company which supplies the concrete struts which form the frame of the building might, instead of cash, upon completion of the project receive a floor, 6 or 8 properties which they can sell, keep or rent as they wish. The same for the building contractors, glaziers and anyone else involved in the project. 

I was surprised at this and wanted to know more so, as I was due to meet the owner of the company which built the block I live in, I asked him about it. 

His company usually funds around half of the construction costs of a new development in this way. It is kind of a loan, without interest, but it is more expensive. He estimates that building a new block of apartments would be 5 to 10 per cent cheaper if paid up-front in cash. This is a compensation for the contractors, for instance a building firm. They need to pay their workers, purchase the materials and do their work, paying up-front, on the promise of a number of properties upon completion, not knowing for certain what they will be worth at that stage. They are taking much of the risk, and therefore take a higher return. 

This model is used widely in Kosovo and has been borrowed from nearby Turkey where this has been the norm for development for some time. 

The practical implications of this are that housebuilding is slightly more expensive, but easier to do for those without huge amounts of up-front capital. So building is not dominated by large developers funded by the major banks or the very wealthy. A relatively small company, such as the family firm which built my block, can get into the housebuilding business and deliver new homes from very small beginnings. 

Property prices and rental values in Pristina are, like London, higher than the rest of the country. They are much lower than London in actual terms, but also lower in relative terms compared to average income, wages and cost of living in Pristina. Housing is genuinely affordable for those on modest or low incomes. 

To rent an apartment like mine – 2 bedrooms in the centre of town – a single person would need a salary around the middle range in Pristina. A couple sharing would find it more affordable. This is for a sought-after area near the centre of town. Move a few miles out, a bus ride from the centre and rents and prices become comfortably affordable for the lower paid. 

Could this be replicated in full or in part in the UK? Could we open up housebuilding to smaller entrepreneurs, to housing associations, non-profit organisations, and to Local Authorities to build new housing, without the need for huge amounts of capital up front? 

I think it is worth looking into. 

<strong><span class="has-inline-color has-accent-color">Dave Ward</span></strong>
Dave Ward

Dave is a Labour Councillor in the London Borough of Merton where he is Chair of the Planning Committee. He represents the ward of Colliers Wood.