10 June 2020

How to save Britain’s housing industry

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In recent months, those in Government have been besieged by pleas for help. Industry after industry is queueing up for assistance, or outright rescue.

On the face of it, the housebuilding industry would seem to be one of the lucky ones. The Government made sure to single out construction as an area that should keep working. Housing viewings were among the first wave of lockdown exemptions – leading to the grim joke that the only way to see your parents was to offer to buy their house.

Today, the builders are back at work. The crisis seems to be easing. But as a new Centre for Policy Studies paper shows, this is not the case at all.

Industry data, obtained by the CPS and confirmed via conversations up and down the supply chain, shows that builders are indeed hard at work – finishing off existing projects. But the number of foundations being dug has collapsed – one estimate is that it is currently at a sixth of the pre-crisis level.

What is happening in construction, in other words, looks very much like the start of a “W-shaped” recession – a plunge, a brief tick up as half-built homes or incomplete projects are finished, and then another fall.

This would be disastrous not only in terms of employment – the Home Builders Federation estimates that every extra home built creates roughly three jobs – but it would make Britain’s housing crisis even worse. In the wake of the 2008-9 crisis, it took six full years for the market to recover to the same level as before. And this is not a one-off: it is baked into the structure of the industry.

This is the crucial insight behind our new paper Help to Build, written by Alex Morton, the CPS’s Head of Policy and David Cameron’s former housing adviser. Housebuilding is not like other industries. The impact of recessions is sharper, and the recovery is shallower.

There are all manner of reasons for this, but the most obvious is that in a recession, people become nervous about buying new houses, and so transactions and house prices both fall.

In a normal market, this wouldn’t be as much of a problem. Prices would fall to the point where demand picked up, then rise further as demand increased. People still want houses, after all, and we certainly don’t have enough of them.

But that’s not how housing works. Builders only build when a sale is guaranteed, or as close to guaranteed as possible. If people aren’t buying, they’ll stop building.

Moreover, as house prices fall, so do land prices. Builders, having already paid for their land, need to make their money back. Instead of selling at a loss, they will – if they can afford it – hunker down and wait for the storm to pass (or rather, switch to getting planning permissions on cheaper pieces of land, or to renegotiate their newly unprofitable deals with councils).

This isn’t just a theory: it’s exactly what happened in the last two recessions. The financial shock hit. The big builders completed their existing projects, then sat tight. Many SME housebuilders, who didn’t have the same capital reserves or borrowing power, went to the wall. The supply chain was devastated. This led to further consolidation in the industry, which increased the power of the big housebuilders and slowed development by tilting the industry towards fewer, bigger sites, which are slower to build out.

And this trend is self-reinforcing. The housebuilding industry is, thanks to bitter experience, set up for exactly this kind of boom and bust cycle. Just one in five of the workers on most large construction sites actually work for the housebuilder, enabling them to scale down activity rapidly when the downturn hits, while leaving contractors out of luck.

As Alex’s paper shows, this means not only that we are not reaching our housebuilding targets – but that we may never will. Every time the downturn comes, the recovery is a little bit slower and the trough a little bit lower. If we let economic nature take its course, we would need an extraordinary period of uninterrupted growth to make up the lost output before the next crisis hits.

This is why we are suggesting an emergency stimulus package: Help to Build. The concept is simple. Each housebuilder would be given a grant – the report suggests up to £25,000 per property, or an average of £20,000, or a set percentage of the new home’s value – that it could use in whatever way it viewed best guaranteed supply. That might well take the form of an incentive to the buyer: help with a deposit, say, or an offer to buy their house via part-exchange if they are having trouble forming a housing chain.

Crucially, this grant would be tied to continuing supply across the board – not just used to make extra profits on the few profitable houses that were going to be built and sold already. Builders would have to commit to maintaining a respectable fraction of their pre-crash output levels, this year and next, or forfeit the money. And these homes could not be buy-to-let – they would only be for homeowners or affordable rent.

This scheme would be cheap: at the £20,000 average suggested, it would support the construction of 150,000 homes – enough to keep the industry and the supply chain going – for £3 billion. It is also inherently self-limiting: in the longer term, such subsidies would simply feed into inflated land prices. But in the short term, it could be crucial. The money doesn’t even have to come from central government: they could let councils borrow and then reclaim the cash over the years to come.

The housing crisis is one of Britain’s most acute economic and social problems. That’s why fixing it has been a focus of much of the CPS’s work in recent years – and an issue we will return to in the coming months. But without Help to Build, or a similar stimulus package, that task will become almost impossible.

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Robert Colvile is Director of the Centre for Policy Studies and Editor-in-Chief of CapX