Is £2bn enough to fix the housing market?
Last week the government announced plans for a £2bn accelerated construction fund that will be used to guarantee housing schemes, including deals to purchase homes that do not sell.
The guarantee, which will be achieved by the Homes and Communities Agency (HCA) directly selling any ‘government purchased homes’ on the market, to the private rented sector, institutional investors, or registered social landlords, will in the words of new HCA Chairman, Sir Eddie Lister, ‘guarantee money’ and help minimise risk for developers.
On the face of it this is excellent news. For too long government and the industry have talked about the need to diversify the sector and bring back the smaller builders who suffered, and in many cases went out of business, during the last recession.
Unintended consequences
However, I would put the party poppers away for now and consider the possible unintended consequences of government intervention.
Underwriting sales values will ensure that developers can carry on securing funding should economic uncertainty during the two-year Brexit negotiations squeeze the market. But, the government will take on the sales risk, while the market wants to off-load. This is not a sustainable solution.
When a government intervenes in a market which has failed and seeks to support it, the result is that when eventually the cost of supporting it becomes too much, the market correction is severe and for those whose business model has been supported, catastrophic.
Short term production increase
My prediction is that when details of the construction fund are in place we will get a very short-term production increase, which will only be sustainable for as long as the money is pumped in. The affordability of homes will not increase and the underlying dysfunctional nature of the market will not be changed, and if I am wrong any increase in production will be stifled by the growing skills shortage – which will be exacerbated by possible constraints on the free movement of people.
The seriousness of the government’s desire to resolve the housing crises cannot be doubted. The continued interventions in buyer support, developer support, incentives to local authorities and tweaks to the planning system demonstrate this commitment. However, these efforts have not been rewarded with a functioning market.
If the government wants to create a self-sustaining model that unlocks the supply and affordability of housing, while not throwing vast amounts of public money at the problem, then there are solutions available, but they require a number of changes.
Incentivise investment
First, reform tenure structures to give people an incentive to invest in their communities as a result of long-term access to good quality, affordable housing; second, invest in more efficient forms of construction so that the market can respond quickly to changes in demand; and third, reform planning conditions to remove delays in the delivery of new build properties.
The unintended consequence of the delay caused by negotiating planning obligations is higher prices, which are required to ensure that capital contributions can be sustained. This combination lowers rates of sales and slows the delivery process.
The solutions and the majority of the mechanisms are already available, and there is minimal need for new primary legislation, but it will require some joined-up thinking between government departments, local government and industry – all of which are easily achievable.
While there has been a modest short-term increase in production, from a very low base, the long-term trend has remained stubbornly downwards, with ever reducing affordability, in the face of growing demand.