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Who Pays for ‘Affordable Homes’ – and why?

This extract from a formal paper delivered to the Green Economics Institute at Oxford University on 18th June 2018, addresses the need for more homes across the UK. In doing so, it illustrates the requirement for 20% more urban land, evidences that house-builders’ are not making vast profits, and explains why ‘affordable homes’ are actually an unfair ‘tax’ on people who buy private new-build homes. With the UK’s planning system responsible for the delivery of this, it concludes by asking ‘What is Planning For?’

The Growing Need for More & More Homes

The Case of the UK

To get a better understanding of why the UK presently has a shortage of over 1.5 million homes and why this is expanding, let’s consider change how British society has changed, is changiing and the ‘Futurological’ importance of this over the very long term. 

  • In 1940 global population was just under 3 billion, with some 40 million people in the UK.
  • By the mid 1970’s this had reached 3.7 billion and 55+ million respectively.
  • Now these figures have gone up to 7 billion and 63+ million.
  • By 2050 – only 32 years away – some forecasters predict that there will be perhaps 10.5 billion people in the world, with a midrange 70 million or more of them living in the UK.

That’s around a 50% increase globally, and 10% nationally.

Looked at another way, over only a very short 70 year timespan – a single lifetime - the population of the world will have more than trebled, and that of the UK will be well on its way to doubling.

This is creating huge pressures on, for example, energy security, on water for personal, industrial and agricultural use, and on food security. As people move around the world to improve their quality of life, the UK could see economic immigration pushing its population even higher. And everyone needs housing.

Increased Need for Homes

The UK already has a housing shortage of around 1.5 million homes. This is rising at circa +/- 150,000 new dwellings per year. So, taking into consideration population growth forecasts, on a straight line projection over the next 40 years we need to:-

  1. House another 10 million people – say 3 million families /dwellings
  2. Add a further 1.5 million homes for the already un / under housed, and …
  3. Replace possibly 15% to 20% of our aged / ageing stock (3 to 4 million homes, see Need for more development land, below).

That means we need an all-up ballpark figure of, say, between 7.5 to 8.5 million new homes over the next 40 years.

On a straight line basis that averages around +/- 200,000 p.a. This is somewhat lower than the 240,000 (government) to 280,000 (shelter) figures, or 300,000 (labour party) figures but, validates the base number when one considers the need for ‘catch up’.

Over the next 5 years that means building another 4 or 5 cities the size of Coventry – complete with roads, sewerage, electricity, water, telephones, schools, colleges, universities, shops, warehouses, places to work, parks and other amenity provisions, like swimming pools, sportsgrounds, theatres, etc. 

Need for More Development Land

Land to replace homes that are demolished can, theoretically, be provided ‘in situ’, but that still leaves the need to find land for an additional 4.5 million homes – some 20% more than we have already. The Government has already indicated that more green-field land will have to be released, despite renewed objections that the country will be ‘concreted over’.

On average each home houses 2.4 people, so if you live in a community of, say, 1,250 people, or circa 500 houses – that’s a fairly small village – if the requirement were spread evenly across the UK, your community would need to find land for another 100 houses.

If the average rate of house-building is increased from the present 120,000 or so per year to 250,000 – a huge (and presently unachievable) jump in output, then this would only result in 250,000 x 2.4 people = 600,000 people being housed each year.

As noted above, similarly attendant on this is the need for land for employment, amenity, services, food supply, etc.

These are issues that are confronting all countries the world over. China, for example, has integrated food productioni into urban development and already acts to ensure that housing & other property development must not cause loss of food production. 

House Building is ‘Affordable’

There is a great deal of nonsense being spouted about ‘Affordable Homes’, with much of the ire being directed at house builders. What few people understand, let alone acknowledge, is that, subject to regional labour cost variations, the cost of building in one part of the UK is broadly the same as in another. True, shortage of available skills and labour in some areas enable the workers to demand more for their time and efforts in some places, but it is the house-builders who have to bear such increased costs. They are not ‘pocketing’ the increases and indeed their gross profit margins of circa +/- 20% are near the bottom of the league table of gross profitability of UK businesses, as shown below. Interestingly, the gross margins of Alphabet, who own Google, currently average +/- 60% - three times that pf housebuilders. Net margins, on which companies are taxed, depend very much on overheads which can vary widely depending on how a company is organised and run. 

Free Industry Statistics - Sorted by Highest Gross Margin

So Why Aren’t Houses ‘Affordable?

Simples! It’s the cost of land with development permissions. In themselves such permissions can be very difficult, time consuming and costly to obtain. Today this requires the professional services not only of land surveyors, architects and engineers, but also contaminated land surveys, ecology & habitat surveys, arboricultural and tree surveys, flood risk assessment, water management assessments, archaeological surveys, topographical surveys, noise impact statements, air quality assessments, geotechnical reporting and more.

Indeed, there is now a myriad of subjects that a planning officer can require more detailed information on, with such reports only usually acceptable when carried out by a qualified 3rd party.

It is not only housebuilders and estate developers who must provide this information, but anyone looking to make a planning application for a new dwelling, convert an outbuilding or carry out more significant works such as site redevelopment, demolition of existing buildings etc. will doubtless need to supply some of the reports listed here.

In fact, the cost of the land with development approvals is often between 40% and 60% of the total cost of a development; sometimes more. 

Who gets the money?

Well, apart from the professionals who have contributed their efforts to obtaining the permission – which on a large site of, say, 50 acres (that’s enough for 500 to 700 homes) could be £250,00 or more – it’s basically the land owner.

Simplistically, if the previous use of the land were agricultural, this could turn 50 acres of farm land valued at perhaps £500,000 into a residential use value of maybe £50 million or more. Less simplistically, today the Local Planning Authority (LPA) may impose requirements for ‘affordable’ homes as well as charges like a Community Impact Levy (CLT) on the development. This is likely to be related to the scale and type of infrastructure needed to deliver the area’s local development and growth needs. Varying from area to area, often depending on how keen the LPA are to get the extra development, if this were £100 per m2 of house (the maximum allowed is £132) and applied to an average 120m2 house, i.e. £12,000 per house, this would (notionally) be a deduction from the new residential land value of between £6m and £8.4m, say £7.5m, still leaving the land owner with a windfall profit of £42.5m. So after deductions the community, via the local authority, or state, makes a gift to the farmer/landowner of up to 100 times the agricultural value, or in this example +/- £42 million

Looked at another way the raw land for 500 homes costs £50,000,000, i.e. £100,000 per plot. But to this has to be added the cost of developing the estate roads and other infrastructure – footpaths, street lights, foul sewers, storm drains, provisions for green spaces and play areas, and so on. Depending on the specification required for these works the cost may be circa +/- £25,000 PLUS the cost of the professional charges PLUS any actions that need to be taken for remediation, report provisions, etc. for which a conservative provision would be £10,000, making the ‘oven ready’ land cost around £135,000 per estate house plot. Here emphasis must be put on ‘estate house plot’ since the cost of land for individual detached ‘self-build’ houses is typically £250,000 to £300,000 and can range up to £1million. 

Cross Subsidies for ‘Affordable Homes’

As should be apparent, the above costs of land for ‘residential estate’ houses is for the whole of the residential development. However, as noted above, as a condition for the planning permission the LPA will often require the house-builder developer to allocate a certain percentage of the building plots for ‘affordable homes’. Typically this ranges from 15% to 60%, with a common anticipation being that around 1/3rd of all plots must be dedicated for this purpose.

Since building and renting ‘affordable homes’ is out-with the business of residential house building, these are usually transferred to a Housing Association or other Registered Social Landlord operating on a ‘not for profit’ basis. Here ‘transferred’ is the operative term since such land has little if any commercial value. In effect the house-builder has been required to give away 1/3rd of his land. But to stay in business he has to recoup the costs of this from somewhere, and that somewhere is the private house buyer.

A Hidden ‘Tax’ on Private Buyers

Creating a worked example, if the ‘cost’ of 9 house building plots is 9 x £135,000 (as indicated above), i.e. £1,215,000, this now has to be recovered from 6 plots, making the cost of them £202,500 each.

This ‘cross subsidy’ means that the private house buyer is now having to pay an extra £67,500 for the land on which her/his house stands. Put another way, the private house buyer is subsidising the ‘affordable’ social house renter.

This might be considered a hidden tax on private house ownership.

No wonder then that large numbers of young people in particular are opting to rent rather than buy.

Why ‘Affordable Homes’ are criminally unfair

Under present arrangements, the provision of such ‘Affordable Homes’ may be considered a state backed criminal injustice. Governments of all shades have allowed a major shortage of land with development permissions to drive up land cost and with it the overall cost of housing.

Cynically one might observe that in the wake of the 1989/90 property collapse which created a major crisis of home owners with ‘negative equity’, i.e. homes being worth less than the owners owed on them, Government colluded with the financiers who had provided the mortgages on these homes (and therefore faced severe losses if they were not repaid), to separate general inflation from property price inflation and create this by starving the residential development sector of planning permissions. This had the effect of pushing up land prices for such land with permissions as was available, thereby inflating the prices of new homes which uplifted values in the whole of the residential sector.

Unintended Consequences

One unintended consequence of this was to make houses unaffordable for many people, resulting in the need for further legislation to enable the provision of ‘affordable homes’. And as has been illustrated above, this has further increased prices for open market housing.

In this, house builders themselves have been, wittingly or otherwise, broadly willing pawns in the game. With mortgage lenders prepared to loan on the higher value commanded by fewer available homes, the house builders were – and still are – able to make their revised business models work so as to achieve ‘normal’ profits on lower house volumes.

To correct the situation now is far less simple than reversing the trick of limiting planning permissions. If this were done on a mass scale then the value of land would come down, but in doing so it could lead to a general reduction in the gross value of the total UK market. This would impact on financiers, home owners and government. However, a gradual freeing up of the planning system to grant more permissions, especially when coupled with the dire overall shortage of homes, could stabilise prices / values at near their present level. To remove the unjust ‘Affordable Homes’ cross subsidies / taxes on private home ownership will take much longer. 

Overcrowding

Another unintended consequence is the move to higher and higher population densities as more homes are forced onto smaller parcels of land. However, to invoke the old truism, if you think our roads, towns and cities are overcrowded now and if you think that resources are getting scarcer and more costly, “you ain’t seen nothin’ yet”!

While the future of industry, employment, movement of goods, and travel are coincident considerations, the extra factor is that of unavoidable population growth. While it is possible that this may begin to decline in the UK from around 2050, this will vary from country to country, Whatever the case, globally and in the UK the next 40 years will see more and more people competing for less and less resources.

What is Planning For?

This gives rise to another possible concern. It is predicted that, by the same date, 75% of the world’s population will be living in dense (many of them mega) cities. This is a far cry from the ‘idyllic’ settlements envisaged and promoted by Ebenezer Howard and the Garden Cities movement and raises the question ‘What is Planning For?” Having been distorted and pulled in many directions by professionals and governments of various political persuasions, maybe it is time for a root and branch re-examination of its’ purpose as part of a wider debate as to what kind of society and country we are to bequest to future generations.