What if the housebuilding market can never produce the homes?

Following on from Tony’s post yesterday that it is the collapse in construction activity, and especially housebuilding, that has driven the economy into a third successive quarter of negative growth – the Osborne recession – it is interesting to note more people on the airwaves arguing that housebuilding is the best way get the economy moving.  For example, economists Kate Barker and Vicky Pryce on last night’s Newsnight.

There also seems to be a greater recognition that housebuilding can be got moving more quickly than other infrastructure projects such as railways and roads.

It is hard to exaggerate how dire things are in construction.  In his review of construction forecasts, Brian Green on Brickonomics shows how all the leading experts and trade bodies are adjusting their forecasts downwards, and from an incredibly low base.  His summary is that: ‘The weakening economy and lack of resolution in the Euro zone have led the expert forecasters to doubt the ability of the private sector to pick up the slack as public spending cuts reduce demand in construction.’

This week, in a timely review of the housebuilding industry published for Shelter, FTI Consulting, advised by Kate Barker, asked searching questions about the industry and why supply is so inelastic.  It looks at all the key factors that determine housing supply, the broad relationship between housebuilding and the wider economy, and the crisis conditions we have been experiencing since 2008.

Their analysis leads to an unpalatable conclusion that the issues facing the housebuilding market are not just related to the current crisis but might be even more deep-seated: ‘…while action to address market failures and limit the unintended consequences of government action may well lead to an improvement in supply, it still may not deliver from the market the level of house building that is required.’ 

And it raises an essential point: ‘These fundamental and inherent issues about the nature of the house building industry and the housing market raise questions about the appropriate role of the state in facilitating an economically and socially optimal level of supply.’

The report unfortunately shies away from directly trying to answer the question – saying it is beyond its brief – but makes a number of sensible suggestions for policy that might make a modest improvement in the way the market functions.

They are right to call for a re-examination of the role of the state in housing provision.  On Guardian Housing Network recently, also available on Red Brick, I argued:  It will take many years of economic recovery to re-establish a self- assured housebuilding sector. Even then, there is no economic reason why the output from profitable housebuilders should coincide with our national aspiration to build homes.’

It is a relatively straightforward historical point: over the long term, the private sector has never built the number of homes that the nation requires.  Since WW2 it has been surprisingly consistent in delivering around 150,000-175,000 homes a year, and it should be our policy ambition to get back to those kind of figures from the current disastrous lows.  Housing associations have become bigger players and their output is important, but increases in recent years have been marginal in the overall scheme of things.

Total output (across all tenures) reached 350,000 in the 1950s and over 400,000 in the 1960s because there was political will at the centre and because local authorities made a huge contribution (issues of quality are for another day).  As councils slowed down after the 1976 IMF intervention, and shuddered to a halt after the election of Thatcher, the slack was never taken up by either the private sector or by housing associations.

In the future, even if the planning system is improved, even if finance is more secure, and even if more people can get mortgages, there is no reason why the market will deliver the socially optimal output: it will produce the homes that can be sold and not the homes we need.  To answer FTI’s question, the role of the state is not just to tackle the barriers that prevent the industry functioning better but to address the gap between what the market is capable of delivering and what society wants.  Of course, over time the industry may adapt and improve and cut costs.  But as FTI point out in their report, even under excellent conditions, from 1999-2004, when both house prices and mortgage lending levels were increasing, private housing output remained almost stagnant.

Councils remain the key agents in this.  I have reservations but the Government has given them the primary planning role.  There is little choice but to push them to become effective facilitators of housing development.  But to get to where we want to be, Councils also have to build again, and on a large scale.

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2 Responses to What if the housebuilding market can never produce the homes?

  1. Pingback: Housing: the economic stimulus of choice | Red Brick

  2. Bernard Crofton says:

    Housebuilding can usually recover quickly because of the way it shuts down compared with other construction categories. They just stop work and sit on their landbank. Labour is a relatively large proportion of cost. They try to retain the skilled forkforce with alternative work during a short recession. As a result they can restart quickly, recruiting unskilled or foreign labour. If the fall in the market volume – and thus prices – goes on too long this becomes less and less possible. Skills are lost and assets wasted. The public sector is a small fraction of housebuilding but does not stop quite as sharply: a scheme (or phase) is usually completed once it has started . New starts are therefore slower because individual developments are not halted half-built, as spec build is.
    My advice would be that the prospects for housebuilding being a stimulus decline the longer the inactivity lasts. It is probably possible now, but unless councils start preparing (planning consents as well as council development) before any stimulus is launched, as we did in the late nineties, it will be a deminishing prospect. If it doesn’t come till after 2015 it won’t happen and will just compete with other sectors.

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