Enness: Developers have no incentive to build – Whitney

Earlier this year the government published its housing white paper entitled ‘Fixing our broken housing market’.

It’s not hard to see what the main drivers are here; we are not building enough houses for ordinary people to live in. According to the latest annual figures to the end of March 2017 we built just under 148,000. Even by the government’s own analysis, we need at least 225,000 and this is probably much higher in reality, to keep up with population growth and start to eat into the years of under-supply.

The undersupply explains our incredible house price growth. The ratio of average house prices to average earnings has more than doubled since 1998 and approaching ten times in London.

By 2020, the Council of Mortgage Lenders figures suggest that only a quarter of 30-year-olds will own their own home, which is about half the number of the previous generation. Socially that doesn’t seem a good place to be heading, especially when the rental or social housing sectors can meet this demand, particularly at the lower end of the market.

It’s hard to see where in the White Paper the solution actually sits. In Britain’s free market economy, the private housebuilders build 80% of new homes, with the top ten responsible for 60%. But they have no incentive whatsoever to build the number of houses we actually need right now.

It isn’t in the housebuilders’ interest to build lots of homes. Their profits depend on managing supply and demand and extracting as much value as they can from their vast land banks. Investors in these companies have done well with huge growth in share price over the last five years or so. And it’s not just the shareholders that have done well. It is reported that Tony Pidgley, the Berkeley chief executive, is earning £20m a year despite building less than 60,000 new homes last year.

Therefore, it seems that there is a complete mismatch of supply and demand across the UK and, ultimately, perhaps we need government intervention to change this. The house builders wouldn’t necessarily have to lose out – just trade volume with margin.

In the meantime, it’s the small to medium sized developers that we are seeing as most active around the country. Many lenders that traditionally have only funded schemes in London and the south east are happy going much further afield. Lenders are also supporting developers with higher geared loans, which means that many can run multiple projects at the same time. Some 90% of cost is now widely available for experienced developers in most parts of the country with cost of funds still being very commercially viable. Many of the specialist lenders can also make funds available in half the time than you can expect from one of the high street banks.