IPPR – #NPPF will not increase Housebuilding unless development industry is reformed

In a report published today the IPPR .

It states that In the long run, the only way to end the UK’s chronic housing crisis is to build many more homes. But are Britain’s big builders willing and able to deliver the new houses we need? In this report, we argue that, even with the release of new funding and land, we will not see the increase in housing supply we need unless we look also to reform the development industry itself.

The report ‘we must fix it’  states

the government’s new Housing Strategy does not demand the reform that is needed. Instead, it offers the major housebuilders public land, money and guarantees without
articulating a serious quid pro quo. The result, as things stand, is likely, as in the past, to be subsidised stagnation. If we want a can-do supply-side response, government must demand more bang for the taxpayer’s buck…Key to this is a new approach to land. For decades our developers have focused more on playing the land market and the planning system than on building homes

Specifically on the NPPF

The proposed government changes to the planning regime through the National Planning Policy Framework (NPPF) are unlikely to force significant reform in
the building sector or increase housing output. Proposed changes will not lead  to sectoral improvement, new market entrants or innovation, but will favour existing
market actors and not lead to a significant increase in new house building…

Just as the government’s attempt to increase bank lending has broadly failed, with a banking sector more concerned about recapitalisation and risk management, so the
attempt to encourage the major UK housebuilders to increase supply may also fail due to their overriding focus on restoring their damaged balance sheets and entering into a long period of risk aversion and stagnation.

The report finds that the industry has not increased output despite rising demand whilst quality and size of homes has increased.  The industry might respond that this does not fully take into account shortages of housing land supply, although the report states:

What is particularly interesting from a UK perspective is the example of the Netherlands, where a restrictive planning system and a highly populated country still manages to deliver large homes. Poor UK delivery cannot be entirely explained by population pressures and a tight planning regime.

The falling size of new British homes occurs alongside a poor record on product, innovation and design. The housing minister recently criticised UK housebuilders for
producing an ‘identikit Legoland box’…In large part this is to do with problems such as lack of competitive pressure and low levels of choice, derived from low sectoral output. As the Callcutt report observed: ‘[T]hose developers with a poor reputation for quality do not appear to have suffered appreciable financial damage’ (Callcutt 2007).This matters not just because British consumers are living in small and poor quality houses, but also because people are less likely to favour development if it is done badly, creating a vicious circle of NIMBYism which forces house and land prices up further.

The report quotes KPMG research that land banks for the major listed builders grew from an average of 4.6 years in 2002 to six years by 2007.  This suggests that simply allocating more land for development will be used to further prelong landbanks.

The report finds that this is at least the third boom bust cycle the housebuilding industry has been through and after each one the industry has been hobbled by overvalued balance sheets for a decade, with neither banks nor housebuilders keen to release land at market clearing rates.

Expanding production is not on the agenda. As one industry analyst put it: ‘Financially, housebuilders are geared up for more retrenchment rather than growth’

The report continues

Why does the UK have a building sector that is failing to respond to market demand, fails the consumer, and has a combination of conservative levels of housing output combined with heightened vulnerability to economic shocks?This question usually has two answers: either it is the builders themselves, or the fault of the UK planning system. The answer, of course, is both.

Larger UK housebuilders have become more focused on land trading and adding value through the planning system than the actual business of building houses. The Callcutt Review put it succinctly: ‘[I]dentifying, acquiring, preparing, developing and selling land is the key activity of all [UK] house building companies’.

planning reform that does not deal with issues of access to new land and the health of the building sector, [has] the danger that this will deliver a very muted level of new house building

Specifically on planning reform

One of the boldest moves by the current government is its intention to reform the planning system. As we have seen, the UK planning system has not been releasing nearly enough land to meet housing demand. Restrictions in land supply, particularly in places where people want to live, have raised levels of costs, debt and risks for the building sector and pushed the price of new housing up for the consumer.
Reforming the planning system therefore needs to be central to the aim of releasing cheaper land into the development pipeline. But although necessary, it is not sufficient.
In order for planning reform to lead to an increase in cheaper, better quality, housing it is reliant upon having a building sector that can use cheaper land to build cheaper housing….

There are four areas of concern where the NPPF looks unlikely to overcome the barriers presented by the dynamics of planning reform, the likely behaviour of the building sector, and the control of and access to land with planning permission:
(a) The behaviour of local authorities
The politics of local authorities make most reluctant to prioritise housing development, as anti-housing groups have greater clout at the ballot box than the more dispersed interests  of those who need housing.

Local authorities will be required to use need assessments to calculate their housing plans, but these assessments underestimate housing need, particularly in high demand housing markets. Local authorities are therefore likely to release limited amounts of new land for house building, and only in order to satisfy central government pressure. This will almost certainly be land that was likely to be designated as planning land over a short to medium time frame.
(b) The control of land likely to be granted planning permission
Given the time and investment of the larger housebuilders in building up strategic land banks (and lobbying local planners), allocated land is highly likely to be already under their control via option agreements or direct ownership….maintaining a barrier to entry for potential new market entrants in their access to land. Option agreements eventually lapse, but as many are held for 10 years or more, this will mean optioned land will take some time to re-enter the market.
Banking forbearance will not add pressure on housebuilders with balance sheet issues to sell existing land to third parties. A land market in which there is no sustained downwards pressure on land prices may make landowners generally more reluctant to sell at lower prices to new market entrants.

(c) The viability of land released by planning reform
With a legal hold on the small amount of new land released, existing builders will have little incentive to bring it forward for development unless it meets their viability criteria.
Development decisions will thus be taken within the framework of viability assessments for businesses that have either large balance sheet problems or land bank viability problems, both of which make development less likely.
Land designated as allocated for development is also likely to be larger strategic plots, which larger housebuilders had concentrated on acquiring before the credit crunch. These sites now have particularly severe viability problems, given the current muted level of demand and the scale of infrastructural investment needed to develop them.
Builders will utilise any released cheaper land in ‘mix adjusting’ their current land stock as a medium-term strategy to improve the overall viability of their land banks slowly. But this will dilute the impact of cheaper land being released via the planning system and the overall market impact of cheaper land on providing lower cost housing.

Existing builders will use the Presumption in Favour of Sustainable Development to ‘cherry pick’ the best sites, and use lower prices to prioritise higher margins over higher output.

(d) The ability of new entrants to break into the market
Other actors, more able to exploit cheaper land prices, will not have access to this newly released land. Smaller builders, self-builders or new market entrants will lack both the capacity to lobby for new land in the local authority plan and the finance to purchase land to be included within the new planning framework. The NPPF is likely not to challenge continuing consolidation within the industry.
The proposed changes within the NPPF therefore look insufficient to revitalise the performance of UK housebuilders, and are unlikely to drive sectoral reform through greater pressure from market forces. The end result for government may well be greater levels of political tension between central government and local authorities without any substantial increase in new homes.

The report wryly observes

The large housebuilders are too often seen uncritically as indispensable partners in increasing long-term housing delivery. Much of recent government intervention in the
sector has been heavily shaped by industry. To quote housing minister Grant Shapps on the recent Mortgage Indemnity Scheme for new builds announced in the November
Housing Strategy:
‘Government is backing a scheme which the industry has come up with,this is not our scheme, it’s their scheme.’
As one seasoned housing journalist commented this year, the large housebuilders’ industry group, the House Building Federation ‘seems to be getting pretty much everything it asks for when it lobbies the government’.
Government must rediscover its critical faculty when dealing with the house building sector

Specifically on solutions it suggests that the government should act as the ‘clearing house’ for land banks of failing housebuilders, much like the Irish NAMA, although it is difficult to see how this could be implmented without forcing them into bankruptcy (via the nationalised banks).

the government should act as a clearing house for bankrupt housebuilders’ land banks. Government should discuss plans to release non-performing residential land assets held by housebuilders with large debts owing to nationalised banks and seek strategically to release these holdings to new market entrants

On planning reform

The government, in acting as a passive granter of planning permission on an applications basis from the developer, creates a lose-lose situation. It injects uncertainty and risk into
the system (through granting some applications but not others, on criteria which shift over time), and also loses the land value uplift, which is captured by private actors.
This system rewards those developers who are most adept at procuring land and at  processing it through the planning system. The planning system creates a development industry where the single most important competitive edge for developers is the ability to play the land market and the planning regime.

Objective 1: Releasing more land
The first step of reform must be to release more land, ensure this land is released cheaply and do so in a way that avoids releasing land that is in the existing control of current
vertically integrated housebuilders. There are two possible methods of doing this.Through a new market-based method of land release utilising competitive inverse auction,
particularly the community land auctions idea promoted by Tim Leunig from the London School of Economics (Leunig 2007). [Note we have already demonstrated that this auction system wont work as bidders will bid low on land to be released in a small number of years and high on unsustainable land that would never normally be released ]

Or through more strategic government intervention in permitting and controlling land release for development, such as that used in the building of the new towns and garden cities in the 1940s and 1960s, primarily though the strategic designation of land for development and purchase at existing land-use values.

Objective 2: ‘De-risking’ land in the development process

The innovation of releasing new land cheaply must be coupled with an innovation in how this land is controlled and how it is released for development. This is critical to breaking the negative pattern of underperformance and boom and bust that has plagued UK market house building for over half a century. Land must be ‘de-risked’ from the development process.

This can be achieved by creating an institutional framework to separate (and mediate) land released for development from the construction of new homes. This could happen as a replacement to the existing planning system, or in parallel to it (such as happened with new towns and garden cities).
The easiest way to achieve this is through an agency that acts as a de facto land allocations board. This agency will broker land purchase (either via land auctions or
strategic purchase) and then act as a broker of development with the private sector on a joint venture basis.

Objective 3: Breaking open development to new entrants

The new towns model and the Public Land Initiative’s Development Partnership Panel give us examples where this has happened successfully, and both revolved around the
control of land risk and the split between land trading and house building. Indeed the new town development corporations were the most successful post-war development model, achieving large-scale house building and enjoying substantial cross-party support.

In the 2011 autumn statement, the government pledged to support ‘locally planned largescale development … which could include modern garden cities’ (HM Treasury 2011). The government should ensure that, in making any moves towards these modern garden cities, we learn the lessons of previous large-scale planned residential developments and focus explicitly on methods to remove land risk and encourage new entrants in these plans.

IPPR is currently undertaking further research on planning reform that will examine the lessons from these previous models in greater detail.


3 thoughts on “IPPR – #NPPF will not increase Housebuilding unless development industry is reformed

  1. The report finds that the industry has not increased output despite rising demand whilst quality and size of homes has increased.

    The last word in this sentence should surely be, DECREASED.

  2. Good analysis but what alot of communist tosh the conclusion is. We’re in Britain 2012 not communist Russia 1917 for heavens sake! Can’t IPPR grow up and find a market driven response.

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