So no, it doesn’t appear to be a shortage of housing that is the principal cause of the strongly rising price-income ratio. But given this real-terms price rise, would it be reasonable to assume that builders would be able to build new homes profitably, and so fulfil the Government’s plan?
Housebuilding economics is complicated at a local level, but essentially relies on the combined cost of land (with planning permission), together with the building and compliance costs to be sufficiently lower than the presumed sale price to allow reasonable profit for the risk and the capital employed.
Land is the most variable part of this equation, but builders buy land ahead to allow themselves time to plan their projects, so the land cost becomes embedded. What appears to be happening is that a weakened customer environment (flat real wages; higher interest rates; higher taxes; more uncertainty), has come up against rising building and compliance costs. With banked land already priced in, builders calculate that they cannot make a (sufficient) profit, and so don’t start new projects.
Why are building and compliance costs rising so strongly? Yet again, the state and its role as intrusive regulator of every aspect of our lives is a principal culprit.
Builders are facing increasingly onerous net zero requirements – the most visible and recent of which is that new builds cannot be heated by gas, but by heat pumps.
From March 2027, no new dwelling can have gas central heating (and so will have to be heated by electric heat pumps), and all new dwellings must have their own electricity generation capability – meaning solar panels on the roof.
Among the thousands of other provisions are so-called Section 106 obligations, which establish legally binding obligations on a site’s developer as a condition of granting planning permission. The most onerous current obligation requires developments to include a proportion – often 20-40pc – as “affordable homes”, which means that they have to be sold to qualified “social” buyers at a 10-40pc discount to “market price”.
Not only are the affordable homes cross-subsidised by the “market-priced” homes in each development, but many builders are finding it difficult or impossible to secure contracts from social housing providers to buy the affordable homes they are required to build.
All of these obligations, and the delays associated with planning, together with provisions such as “nutrient neutrality”, have pushed up the cost of building and means homes are sold way above the rate of earnings increases.
The overall effect is to have pushed up the development cost of homes (including profit for the developer) above the market price. The inevitable result is what we now see – falling numbers of homes being built.
Without fundamental changes to the cost structure of housing developments – which essentially means the Government removing many of the restrictive provisions of the past 20 years – this low rate of building will continue.
But, as I explained above, if lower prices are what the population and the Government want, more new houses alone will not solve that problem.
