Can the UK really build 1,000,000 new homes in the next 5 years?

  

Press Release (23rd September 2015)

Given housing demand in the UK Heylo believes that the short answer is yes. The more difficult question is who will actually build them?

With over 250,000 planning permissions granted last year and at least the same number again of NHBC registered plots currently across the UK one could ask why aren’t we on track to deliver this level of house building already? The answer requires some economic theory about competition (courtesy of the excellent resource that is Wikipedia). For those of you thinking "yawn" just go with this for a minute…

 "Cournot competition is an economic model used to describe an industry structure in which companies compete on the amount of output they will produce, which they decide on independently of each other and at the same time. It is named after Antoine Augustin Cournot (1801-1877) who was inspired by observing competition in a spring water duopoly. It has the following features:

 ·         There is more than one firm and all firms produce a homogeneous product, i.e. there is no product differentiation;

·         Firms do not cooperate, i.e. there is no collusion;

·         Firms have market power, i.e. each firm's output decision affects the good's price;

·         The number of firms is fixed;

·         Firms compete in quantities, and choose quantities simultaneously;

·         The firms are economically rational and act strategically, usually seeking to maximize profit given their competitors' decisions."

 There are many markets around the globe with participants that exhibit some if not all of Cournot’s competition features which are also undersupplied markets – the UK house building sector is no exception.

 When you consider the large volume businesses that deliver the majority of new build housing supply in the UK and the timelines involved for new build development it clearly makes sense for these firms to be “economically rational and act strategically” controlling, as best they can, the demand supply dynamic to maintain prices and profits. 

Therefore, looking to graph below (and historic new build housing delivery figures), the 'run rate' of new build delivery in the UK has been consistently around 130,000 for a number of years (one must suspect this is to ensure that demand and price is maintained to protect profitability and more importantly the viability of house builders over the longer term through economic cycles).

Housing was a key feature of the campaigns in the last general election and is now part of a ‘national conversation’. UK housing investment has taken off (and we are proud and delighted to play our part and do much, much more). There are planning permissions ready to be utilised and more land waiting for housing behind that.

Who will build them? The obvious delivery agents in the short term are house builders. They currently deliver the vast majority of all UK new build housing and are already “geared up” to expand.

If we want these organisations to build more, much more (and quickly), then we need to address Cournot’s competition model and the, quite correct, behaviours that have made house builders successful, because let’s face it, no private business is going to embark on a long term strategy to oversupply, push down prices and decrease margins.

 Looking at the demand, supply, price graph above, how do you maintain prices (at a steady rate) and continue profitability whilst significantly increasing supply and new build housing delivery? The answer must be to create more demand... but how?

Make home ownership more accessible and enfranchising more buyers through part-buy models.

The Government's Help to Buy programme has shown that reducing the funding requirement enfranchises more buyers assisting sales rates.

However, there is a product which can make buyer markets even bigger... so big that the increased demand could support the building of up to 300,000 new build properties each year by existing market participants (supply chain permitting of course) - see the graph below.

Shared Ownership, which has existed since the 1970's, is a part-buy, part-rent, low cost home ownership solution that can enfranchise 4 times more buyers compared to private outright purchase - or alternatively sell homes 4 times faster.

Buying a share of the property and charging an affordable long term rent on the unpurchased share means that the initial cost of purchase and ongoing cost of occupation is lower and appeals to a broader market – enfranchising thousands stuck in “generation Rent”.

In the UK there are currently more than 200,000 buyers on shared ownership waiting lists - and to be honest the tenure is not that widely known about. One waiting list organisation, Share to Buy, has a register of over 80,000 'wannabe' shared ownership buyers in and around London alone.

In light of this, delivery rates of new build share ownership properties reported by the Homes and Communities Agency for 2014/15 were 7,102 completions and 3,334 starts on site - the majority of which are actually 'built' by house builders as part of planning obligations – therefore these 200,000 people are a ‘dam waiting to be broken’.

However, whilst shared ownership is the ideal solution to deliver a step change in output by private house builders (indeed the demand for 1,000,000 new build shared ownership properties across the UK at current prices is unlikely to be a constraining factor), Heylo acknowledges that the tenure, market standard leases and processes could be improved.

Firstly, the shared ownership offer has been confused over the years with too many names and inconsistencies.

Second, the true nature of a shared ownership position' needs to be addressed (particularly in respect of a protection of tenants’ equity in distressed scenarios). Heylo believes that the Homes and Communities Agency standard form lease (expected by lenders) should more closely reflect the position of a typical mortgaged property and that simple changes to the lease could achieve this.

Thirdly, given that shared owners are responsible for the maintenance of the whole property but the landlords benefit over time from this maintenance in respect of the value of the landlord’s share, the increased value to the landlord could be more equitably shared with the customer via an improvement in the lease terms when customers purchase the property outright.

Fourthly, mortgage availability, pricing and the simplicity of transacting sales and purchases of what is essentially leasehold property needs to be much improved.

Fifth and finally, given consumer protections at law under the Landlord and Tenant Act and related statues, delivery of shared ownership by private organisations should be further encouraged to significantly ramp up delivery.

These changes and increasing demand to fulfil a step change in new build housing supply should be straight forward. In fact it would be much more straight forward than reversing 200 years of economic competition theory and dismantling, amending or replicating the current house building sector if we truly want the 1,000,000 new homes the UK so desperately needs in the next 5 years.

 

About Heylo Housing

Heylo, a joint venture with a leading local authority backed by pension fund investment, is currently active in over 40 Local Authorities. Having already acquired over 500 shared ownership affordable housing properties, Heylo is contracting with major house builders to deliver thousands of affordable homes across the UK over the next 5 years under its Home Reach brand.

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