It’s about the Money Stupid (not planning)!

I’m going to all three main party conferences this year though for the most part only to fringe meetings. With one down and two to go I’m already disappointed with the ill-informed nature of the debate and the biased messaging of some of the numerous commercially sponsored fringe meetings. It feels like a lot of think tanks only survive (either financially or through the oxygen of political contacts) through taking the sponsor’s shilling at party conferences. As the NPPF debate swirls on it is particularly disappointing that there is very little rational and unbiased commentary.

Almost everyone (me included) has a vested interest and for the most part these interests seem to override any sense of civic duty. Given that most people would agree that people need homes and the environment needs to be protected you wouldn’t have thought it would take too many intelligent people to give the debate a strong rational foundation. But the problem seems to be that to have an informed view you need to be paid, and whoever does the paying calls the tune.

One of the perspectives that seems to be missing (in addition to any evidence that the planning system is holding back housing supply in most of the country’s travel to work areas) is an analysis of the financial constraints on supply. As we watch rents in many parts of the country continue to rise and the myth of an oversupply of flats in city centres being well and truly exploded by the vibrant letting market (there is a shortage of mortgages not a surplus of flats) we can see that it is the financing that is the problem, not demand or planning.

As someone working in the development industry I am far too familiar with the accounting games that developers play to massage their figures to deliver their shareholders’ and analysts’ expectations (or perhaps to hide the full horror of the situation from the banks). One of the main games is the accounting judgement which says that if a site could be developed at a profit, even a profit of just £1, then the site’s value doesn’t need to be written down. This is despite the fact that if they were to try and sell the site its open market value would be considerably less.

This is why house builders’ margins are low at the moment. Not because house building is particularly less profitable but because they are still using land which is over valued in their books (because it was bought in the boom for more than it is worth today). There is a natural reluctance in some cases to expose these situations by undertaking development so an inertia develops with some sites becoming sticky in the land banks.

At the same time developers have been reducing the size of their balance sheets, often to pay off the banks who are similarly reducing the size of their balance sheets so capital to develop is increasingly scarce. As mortgage finance for house purchasers is scarce for the same reason and because of increased regulation (FSA requirements that increase banks’ costs for high loan to value loans), developers have been ‘investing’ in equity loan products to help buyers to bridge the deposit gaps. These equity loans use up scarce capital and are themselves often held in the books at prices greater than they could be sold in the market.

All of these manoeuvres keep profitability at a level which is higher than it would otherwise be but gradually limit the capital available to fund development. An analysis of the housing market that focussed on the financial rather than being diverted by the heat and limited light in the planning debate might throw up some solutions that would be more likely to generate an early increase in housing numbers and the associated short term boost in GDP and tax revenues that the Government seems desperate to achieve.

The Government has put some limited funds into FirstBuy (an equity loan scheme like those runs by the developers) although surprisingly this hasn’t been targeted at schemes that wouldn’t otherwise go ahead so its impact on new starts will be more limited and delayed than it might have been.

At the same time Government seems to have lost interest in the potential for institutional investment in the private rented sector (PRS) although the participants in that market think they are closer to creating a Build to Rent institutional market than they ever have been before. But institutional investment (and bank debt) is primarily searching for low risk returns at the moment and an emerging PRS market doesn’t yet fit that bill.

So what do thoughts like these suggest for actions Government might take to kick start housing supply to deliver both homes and the short term growth boost that they are so desperate for? In the outer fringes of the party conference fringes (well away from the conference floor) loads of options are being talked about. It feels like there may be a bundle of relatively small, and costing limited public cash, nudges that could be quite powerful in kick starting the housing market and the economy.

Looking at the regulatory requirements around mortgage lending perhaps, or using the Government’s balance sheet to underwrite part of the rent for institutional Build to Rent to pilot that market (or put the land in to Build to Rent projects for less or reduce the affordable housing requirement) or underwrite part of the equity loans for an expanded First Buy scheme focussed exclusively on new start schemes. Both of these would pull in private institutional investment quickly.

Turning the historic capital grant invested in affordable housing schemes into equity and floating some of the bigger housing associations on the market, or at least freeing them from regulation, to release their balance sheets could inject large amounts of cash as would using the HCA’s delivery partner panel as it was originally intended with the public sector taking letting or sales risk on public sector land and using the building contractors’ balance sheets to undertake projects.

Another suggestion was making much greater use of Grant Shapp’s ‘Build Now Pay Later’ proposal and in particular making the receipt of land value profit dependent at the end of the project to make it easier for developers to fund the development costs (its about risk as well as cash flow).

And some have commented on the Merlin agreement between the Government and the banks which was initially targeted at small and medium sized enterprises that were in danger of going under because credit had dried up. This issue has been substantially addressed as the corporate sector has rebuilt its balance sheet relatively quickly but the construction sector, having downsized rapidly at the beginning of the recession is now coming to the end of the larger projects and looking down the barrel of a much reduced workload. I’m seeing an increasing number of professional businesses in the sector going under at the moment as their fee incomes dries up as the big jobs end and aren’t replaced and as they are unable to afford the cost of redundancies within their reducing banking facilities. Increased targeting of Merlin on the funding of housing schemes and mortgages might make a difference.

Within the planning sphere a time limited reduction in s106 affordable housing requirements for schemes started and completed within a defined time window would generate a major kick start to supply which is probably worth the relatively limited number of affordable homes foregone and in the longer term linking affordable housing planning policies to housing grant availability could keep this supply going. While changing the Use Classes Order will probably have a series of undesirable impacts as previous experience has shown.

With most of these levers Government has the ability to influence the quality of development at the same time which allows it both to help influence the politics of planning and also to help deliver long term growth through more attractive and more competitive places, particularly for the growth sectors of creative and knowledge industries.

All of this means the Government (or local authorities) is taking some of the risk on to itself but none of this uses public cash today and the risk of it requiring cash and therefore borrowing in the future is limited across a diversified portfolio (and if successful could be nil). It is arguably a lesser risk than not providing a rapid boost to the sector and therefore increasing the risk of another recession that turns into something worse that stresses the Government’s balance sheet in the short term. And also a lesser risk than letting urban sprawl take hold undermining the country’s future competitiveness.

It seems that this might be a much more productive debate for politicians to have at their party conferences than the one about planning. It is the politicians with the Treasury brief that should be leading this debate and if votes are likely to be garnered both from having a prosperous economy and from ensuring that development delivers more attractive places it is possibly a win:win:win approach.

Advertisement