Two academics at Sheffield Hallam University have produced a useful paper, Profit Before Volume, Major house builders and the crisis of housing supply.1 The paper examines the role of the major house builders in the housing market and the connection between their domination of the market and the historically low level of house building. The concentration of production into the hands of a small number of major house builders has enabled them to exert a degree of control over what is built in order to maximise their profits and drip-feed supply.

The top ten house builders 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) house builders, building 57 per cent of all housing. In 2014 this had dropped to 2,800 firms delivering just 27 per cent of all output.” (Read on below or download a PDF here contrivedscarcity – see the PDF for the Addendum)

The customer is not king

We are told that the customer is king in the market and the producer provides what the consumer wants at the lowest price, providing ‘choice’. The law of supply and demand is supposed to operate to the advantage of the consumer. The opposite is the case in the housing market. That’s why house prices have long continued to outstrip earnings creating a crisis of affordability. Profitability comes before the interests of the buyer. Indeed there has been a phenomenal rise in profits for the nine largest companies, increasing from £372 million in 2010 to over £2 billion by 2015; an increase of over 480 per cent. This has meant big bucks for the shareholders. In 2015, the biggest five house builders returned 43 per cent of their annual profits to shareholders, an amount totalling £936m. Archer and Cole say:

This raises questions about the potential volume of new supply that could have been provided through reinvestment of at least some of this money.”

It does indeed, but producing something as expensive as a house is not like producing tins of beans. Major house builders aren’t interested in building as many properties as they can, but maximising profit and return to their share holders. Human need (homeless people, others living in over-crowded and/or poor living conditions) does not enter their equation.

Archer and Cole show that from 2012-15 the five biggest house builders delivered “year on year revenue growth of up to 22%” as compared to maximum growth in completions in one year of 11%. All in all the major house builders are not addressing the shortage of housing but exploiting it to maintain and increase their level of profitability. That’s reflected

in the growing gap between house prices and earnings.2 In 2015-16 in England the price of a lower quartile (cheapest) house was 7.02 times earnings, the median price even higher (compared to median earnings) at 7.63 times. No wonder we have a housing situation which the academic Guy Standing has rightly described as “contrived scarcity”.

Land-banking and land price

Although builders contest the assertion that “land banking” is a means of maximising their profits, it’s quite clear that control of and release of land for building is one of the major reasons for maintaining high house prices. House builders and developers buy agricultural land very cheap and the mere acceptance of a planning application increases the value phenomenally. The DCLG doesn’t keep statistics on land prices any more, but those up to 2010 show the connection between land and house prices. An hectare of land in England was £921,288 in the year that New Labour came to office in 1997. By January 2008 it was £4,005,118. the housing crash reduced it to less than £2.5 million by July 2010. London, of course, was the epicentre of land price inflation. Over the same time-scale the average London price rose from £2,486,641 a hectare to £10,490,053. Even with the impact of the crash it was still £6,457,222. This helps explain the ridiculous house prices in London.

The issue of a land-tax is beyond the scope of this piece, but it’s clear that the profits of the large scale builders are under-pinned by their ability to buy land cheap and release it when they are liable to maximise their profits. Although builders and developers have been subject to Section 106 agreements through which they pay a contribution towards infrastructure costs, they are not taxed for the increase in land value which simply results from planning applications being agreed. Moreover, the current government and the previous one have created a legal framework which enables builders and developers to reduce or remove “affordable housing” from their plans on the grounds of (usually unproven) lack of “financial viability”.

Help to Buy

The coalition and Tory governments believe, despite experience to the contrary, that there is a ‘market solution’ to the housing crisis. Archer and Cole examine what has been announced with great fanfare to be a success story, Help to Buy, designed to help people who cannot afford a mortgage to “get on the housing ladder”. They question its efficacy. Not only does this amount to a subsidy for people who cannot afford to stump up a deposit, but is has bolstered the activity and the profits of the big house builders. Archer and Cole estimate that at least 50% of the mortgages associated with Help to Buy are related to homes built by the top five big companies. For instance, in 2014, Help to Buy sales constituted 53 per cent of all Taylor Wimpey’s completions, 40 per cent of Persimmon’s, and 31 per cent of Barratts’.

Archer and Cole’s paper doesn’t mention it but one of the aspects of Help to Buy which has been neglected is the follow on costs that it will involve. It is promoting unsustainable debt 3. Whilst the 20% equity loan for the deposit helps people bridge the gap it simply cuts the cost of up-front payments. The buyer will have to repay the loan at the end of the mortgage or when they sell the property. However, unlike a mortgage you don’t owe a definite amount but will have to pay 20% of the value of the property, whatever it is. So if the market value of a £200,000 home increases to £300,000 the you will have to repay £60,000 instead of £40,000. Moreover, whilst the equity loan is interest free for the first five years, after that there is an annual fee of 1.75%, increasing each year by RPI + 1%!

Price-Out, the campaign for affordable house prices summed up the scheme well:

Help to Buy should really be called ‘Help to Sell’, as the main winners will be developers and existing home owners who will find it easier to sell at inflated prices. Pumping more money into the housing market with chronic under-supply has one sure-fire outcome: pushing up house prices. At best it may help a small number of new buyers, but it will mean housing becoming more expensive for all those that follow.”

Council house building

It is clear by now that the private sector cannot resolve the housing crisis. Archer and Cole conclude:

On the basis of the evidence in this report about the structure, organisation and financial performance of the major house builders, 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.”

Even the House of Lords Select Committee on Economic Affairs (2016) recently concluded that, without an increase in the contribution of local authorities and housing associations to housing supply, it would not be possible to build the number of homes required in the next few years. Yet the coalition and Tory governments have an ideological opposition to council house building. Indeed the current government has ended support for any social housing save for the puny amount of 8,000 supported housing units. Historically the decline in house building has been closely connected with the decline in council house building. Look at the graph in the Addendum, produced by Archer and Cole, and you can see that the downward trend in house building follows the precipitous decline in council house building.

All the various initiatives of the coalition and Tory governments are directed at the holy grail, ‘making the market work’. However, the root of the problem is that housing is considered to be a commodity like any other. As with any commodity, demand is determined by ability to pay the price (be it to buy a house or rent one in the private market) rather than need. If you haven’t got the where-withal then tough luck.

Council housing was never part of the housing market. It was built to provide for a social need; the need for secure, safe and genuinely affordable housing, without which it’s impossible to have a settled life. For private house builders ‘demand’ is simply measured by the ability to buy, however high the price. The growth of the large scale builders has made the crisis worse. It is in their interests to build only in order to maximise their profits and dividends to shareholders.

Without a return to large scale council house building then the crisis of affordability will continue. The Local Government Association has recently made the point that it is the absence of ‘social housing’ which is in large part responsible for the decline in home ownership, because tenants paying high private sector rents find it more difficult to save for a deposit on a mortgage. What is needed is the containment and shrinkage of the housing market by council house building. In my opinion this is probably the only thing which is likely to lead to a decline in house prices. If hundreds of thousand of people who would currently buy or are forced into the private rental market had council housing as a real option, then ‘demand’ for ownership and private rental would decline.

There is no market solution to the housing crisis. The greater the domination of the big builders then the worse will be the crisis of affordability. It’s only by building more homes for social need that genuinely affordable homes for rent will be available and people will not be forced to take the risk of buying or be forced to pay the often extortionate rents in the private sector.

Even the Financial Times recently recognised it’s not in the interests of the big builders and developers to meet ‘demand’ for ‘affordable rented’ accommodation.

The fact is that private developers, left to their own devices, will not build enough to meet demand, when the greatest need is for affordable rented housing in urban areas. It is not in their interest to do so, since the result would be lower house prices and land values, eroding their profitability.

Any solution to Britain’s housing crisis must include a bigger contribution from the public sector. Rather than coercive measures, the focus should be on enabling local authorities and housing associations that wish to build social housing. They should be allowed to set planning fees, to levy taxes on idle land when developers fail to use planning permission and, crucially, to borrow in order to fund their own social housing developments.”

Financial Times Editorial

The only thing I would disagree with there is on the question of borrowing. Under the current council housing finance system, with its complete absence of subsidy, increased borrowing for new build would mean existing tenants would alone be paying for it. Moreover, under ‘self-financing’ in 2012 local authorities were loaded up with ‘debt4which was largely the creation of the Treasury.

Archer and Cole’s paper is a useful contribution towards understanding how the housing market is manipulated by the big building companies and developers.

Martin Wicks

January 15th 2017

2At the height of house price inflation these ratios were 7.25 for lower quartile and 7.23 for median, so the lowest has almost reached the pre-crash level and the median has exceeded it. In Swindon the lower quartile figures was 6.66 earnings compared to the high point of 7.14 times in 2008 and for median 6.13 compared to 6.17 in 2007. (Figures from DCLG Live Tables)

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