Britain’s Broken Housebuilding Sector

What a housebuilding industry in crisis would like from politicians after the next general election is a return to the days before a hike in mortgage rates, a shortage of skilled labour and inflation, which pushed the cost of materials through the roof, prevented them profiting from selling overpriced houses to increasingly indebted families. What politicians want from housebuilders are contributions to their election campaigns. So, we have seen the usual manoeuvring and reshuffling proceeding the conference season to ensure no one embarrasses companies prepared to pay for exhibition space or seats at private dinners with ministers. Nevertheless, you can forgive companies for being confused given Michael Gove’s erratic approach to housebuilding and, just weeks after claiming “We are unashamedly on the side of you the builders, not the blockers,” Lisa Nandy removed from her post as Labour’s Shadow Secretary of State for Levelling Up, Housing and Communities.

Anyone with an interest in where the cosy relationship between the construction industry and successive governments is taking us should visit the Darwin Green development in the north of Cambridge where 80 newly built homes are about to be demolished. While it is not unusual for buyers to discover faults with their houses, and according to research by the charity Shelter 51% do, usually buildings remain standing long enough for owners to move in.

To the dismay of Cambridge city council Barratt and David Wilson Homes seemed in no hurry to apply for permission to demolish houses which, it transpired, lacked adequate foundations. Unfortunately for the council, which is keen to meet its target for new houses, the market for new homes, even in Cambridge, has slowed and Barratt and David Wilson Homes, like Persimmon and Redrow, has slammed on the brakes.

A pause in housebuilding in the run up to the general election, while uncomfortable for some, may prove welcome by others – an opportunity to bury bad news regarding RACC and inflammable cladding. And there are plenty of vacant plots in housebuilder’s land banks which could be sold to pay dividends to shareholders when revenue falls.  The period of inactivity might also persuade a new government to forget about reforming an industry which is wasteful and hopelessly inefficient and not to burden Britain’s house builders with environmental regulations or insist they build affordable houses in unprofitable parts of the country such as the north of England. Still pity the industry’s SMEs who cannot afford to dine with ministers or part with £2,000 for an exhibition stand at a party conference.

Small, But Not So Beautiful

Tony De Simone’s company Hawkswren is a developer which fills the gaps left by major developers; it has recently obtained planning permission for eight houses on three former gardens at the edge of Countryside Partnerships’ Abode development to the west of Cambridge. De Simone has almost £1 million of finance in place to complete the development and while the recent fall in house prices, particularly steep in the East of England, may give De Simone’s investors pause for thought his principal concern is where to find a builder to complete the work.  

Hawkswren’s eight-house development would be of little interest to Crest Nicholson, who worked on the Abode development. Until recently Evecross and B F Design Solutions, both owned by Tristan Frampton, have been Hawkswren’s builders of choice. However, B F Design Solutions has purchased a development on the Essex/London border and most of its working capital is tied up in houses, which, a year ago, would have sold off plan. Frampton put the nine houses on the market earlier this year at a time when a show home and an online presentation seemed an unnecessary expense. When it became clear there was no queue of prospective buyers, the show home and advertising were hurriedly put in place: a truck owned by the builder is visible through the window in one of the interior pictures of the show home and the drone shot of the development showed a pile of building waste burning in one of the gardens. By September only half the houses had found buyers.

The failure of the houses to sell sees small companies using mezzanine finance – the industry’s equivalent of a second mortgage – while they tread water, and delaying taking on another development. Industry wide, debt is backing up through the building pipeline like effluent in Britain’s antiquated sewage system.

Both De Simone and Frampton retains, and rents out, a handful of the properties they developed or built. As a hedging strategy this only works up to a point as the rental income from the properties is derived from the same asset class as those supporting Hawkswren and B F Design Solutions and financed by institutions whose lending is based on the value of land. If the large housebuilders downsize their land banks and, consequently, land prices fall, then banks will start asking smaller developers and builders for more collateral which, in some cases, they will not have. This could prove the tipping point at which a property crisis turns into a political drama as the buy to let market finally loses its long, Wile E. Coyote style, battle with gravity. A HS2 sized bail out of the housebuilding industry might be on the cards for party donors but is unlikely to extend to small companies who currently build 10% of houses in Britain. As their share is down from 40% in 1980 small developers and builders are an endangered species

The Worst-laid Plans

Politicians complain nimbyism delays new developments and is responsible for the current shortage of housing. However, the reason fewer plans are being passed is because fewer are being submitted: down 12% on the year. Hawkswren had plans refused by council planners, but most were accepted when amended and resubmitted. Despite concerns regarding biodiversity and access to gardens and play areas, Hawkswren’s Austin Drive development was passed. The underlying problem with planning is the result of decades of central government cutting funding of local authorities.

It is politically convenient for Michael Gove, Minister of the Orwellian named Department for Levelling Up, Housing and Communities (it is not levelling up, providing houses or adequately funding communities) to accuse local authorities, starved of cash, of incompetence as many of these are either Labour or Liberal Democrat run.

Through necessity, much of the work local authority planners once carried out in house is now outsourced to private companies. This has resulted in a race to the bottom as these companies compete to get the best result for the developer. The 80 houses on the Darwin Green development, soon to be demolished, would have been inspected by a company appointed by the builder rather than Cambridge City Council which represents the people who were to live in them.

Even parts of the planning process local authorities still undertake in house rely heavily on input from private companies. There is a reluctance to challenge information provided by these companies or do anything which slows the construction of much needed houses. Hawkswren’s application for its Austin Drive development was submitted by the property consultant Carter Jonas. In the past, with several large developments underway in Cambridgeshire, overworked local council planners tended to take applications from Carter Jonas on trust. This, inevitably, resulted in an increasing lack of attention to detail. A more recent application on Hawkswren’s behalf contained multiple errors, some of which, including a reference to a footpath which did not exist, would have a potential impact on the decision-making process. However today it is unlikely, as was the case with the play area and gardens in Austin Drive, council planners will be willing to use PowerPoint to conjure the missing footpath out of thin air.

With housebuilding slowing, the mood music is changing and pressure on council planning departments easing. As well, housebuilders who are taking a scythe to their inhouse planning departments are no longer regarded as a potential employer by council planners who, as a result, are less deferential in their dealings with developers. A case in point is Greenwich Council’s insistence two blocks of flats in Woolwich are demolished as they deviated from plans submitted by the developer.

It is clear reform of housebuilding should begin with an overhaul of the planning system. However, on this neither political party appears to have a coherent strategy. Priti Patel has, on several occasions, tabled questions in parliament regarding the implications of someone submitting a planning application containing information they know to be false. The answer she received from Bob Neill the then Parliamentary Under-Secretary of State for Communities and Local Government was guarded. However, Dominic Raab, in response to the same question, pointed out that ‘anyone making a false or misleading statement in connection with a planning application could be prosecuted under the Fraud Act 2006.’

If Michael Gove swoops on Cambridge, and takes over planning in the city, it is not clear what shape his reforms will take. Will he heed the advice of Dominic Raab and prosecute companies such as Hawkswren and Carter Jonas? Probably not. Nor is it likely those responsible for ensuring those 80 houses on Darwin Green did not collapse on their owners will see the inside of a court room. In fact, regardless of which party is in power twelve months from now for the housebuilders which survive the current economic crisis it will be business as usual.

Peter Kruger