Developers can’t afford to build – the consequences?

by Mark Alexander - Founder of Property118

11:25 AM, 23rd November 2011, About 13 years ago 4

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Landlord’s Log, the Personal Blog Of Mark Alexander, the Founder of Property118

Earlier this week a comment was left on one of our articles by a property developer who explained in very simple terms why developers can’t afford to build.

Right across the UK, building sites are being mothballed but why is this happening if we have a housing shortage?

This isn’t because people don’t want to live there or that the developers don’t want to build. It is partly because the developers can’t sell them for as much as it costs to build them and partly because people either can’t raise the finance or are too nervous to do so due to uncertainties in the economy over job security and interest rates.

The following comment sums up the issues from a developers perspective:-

“As a small-scale property developer I know full well why not enough housing is being built: a lack of land, a deeply conservative planning system (and existing resident public) that costs a huge amount to battle through, a hostility to ‘garden grabbing’ (a.k.a. more efficient use of existing land) and presumption now in favour of large estates on land controlled by the big firms, a lack of development finance to supplement my own capital, and an inability of buyers to raise enough deposit.

On top of this, the costs to build keep increasing as we move to zero-carbon homes: all the requirement for this is being placed on new homes, whereas existing home owners are required to do absolutely nothing to help with global warming. And on top of this, developers have to pay £20K per house in S106 taxes for new infrastructure, again with existing homes and businesses not paying a penny towards all the new schools, roads, playgrounds and so on they’re receiving.

And finally, worst of all, new private homes are unaffordable because they also have to cover the cost of so-called affordable homes: for every five houses built, two have to be given away to a housing association! The Government gets a completely free ride off private house builders and buyers, and they wonder why housebuild levels are so low. The big developers have to keep the supply of new houses low and the prices high, to pay for all these extra costs and to pay for all the social housing given for free to people who live off the state and contribute nothing to society.”

The consequences of insufficient property development must not be under-estimated. The Office of National Statistics are predicting that more than 10 million more people will live in the UK within 20 years.

The way I envisage the problem is that the housing market is in a pressure cooker. The pressure is building and building and at some point there will be an explosion. We are already seeing that happen to rents in some parts of the country and it will spread as the pressure continues to build with demand. If the pressure is allowed to build too much, as soon as finance availability and confidence is restored the explosion in demand to purchase property will occur. The problem is that very little will have been built. When demand exceeds supply prices go up and where does that leave us? Here we go again, yet another property boom and bust scenario. Values will shoot up beyond affordability, lenders will compete for business, slash their margins and take silly risks and we will be right back to where we started. This didn’t start in the Credit Crunch by the way, it’s been going on since the invention of the house!

We are not like other countries here in the UK. We don’t have over supply of housing issues such as Dubai and other countries.We are an established economy and we thrive on growth of population. We have a boom and bust economy that’s so intrinsically linked to our housing economy it’s unbelievable that it can’t be recognised and managed by so many successive governments.

Property values and rents are not the only issues associated with getting the supply and demand balance for housing right though. There are social implications too and social unrest can affect us all as we saw in the riots earlier this year. Lack of supply of housing will create over-crowding and homelessness. It will also encourage profiteering from the criminal elements. Earlier this year we reported on landlords in the South East renting beds in sheds. Then there are the constant stories of rogue landlords. None of us want these people operating in our sector but when an opportunity for profiteering occurs the rogues will spot it. Only when the supply of safe affordable housing is met will the rogues exit the sector.

Mark Alexander
Mark and his family have been investing in property since 1989, initially in the Norwich area but more recently across the length and breadth of England. Mark created Property118.com as a social network for landlords with a vision of becoming the UK’s largest online property investor directory.
Mark’s experiences and strategies as a landlord are shared here

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Tags: bridging, broker, commercial, Development, finance, funding, Housing Association, Housing market, Investing, Landlord news, Mark Alexander, Property blog, Property Developer, Property Investor, property value, residential, Rogue landlords, social housing, Strategies, Strategy, Tax

Comments

Ian Ringrose

17:20 PM, 23rd November 2011, About 13 years ago

As for boom and bust house prices..

What if there was max LTV a bank was allowed to lend at, and this was calculated on the average value the property in its current state would have had over the last 5 years?

That way when the market is going up, larger deposits would be needed, but when the market was going down smaller deposits would be needed.

At present it seems easier to get a mortgage when the market is going up, but that make the market go up more, so making it very unstable.

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Mark Alexander - Founder of Property118

17:23 PM, 23rd November 2011, About 13 years ago

Interesting concept Ian but application and enforcement in a free market environment ..... mmmmm?

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Ian Ringrose

17:32 PM, 23rd November 2011, About 13 years ago

The LTV of the loan book is already used as one factor in calculating the capital a bank must hold. So just use past house price average movements to convert the value at the time the loan was taken out to average value of the 5 years before it was taken out. This could be done on mass for all moorages issues each month by a bank.

This only has to work on average to stop the banks all increasing their landing as the market goes up.

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Matchmade

11:29 AM, 24th November 2011, About 13 years ago

It's my remarks that Mark is kindly quoting. I do find it extraordinary that new housing is expected to pay to meet the Government's carbon-reduction policy, the provision of local infrastructure, and its social housing policy. In the past new private housing didn't have to pay for roads and schools and council housing: the money came out of general taxation because these facilities were seen as benefiting everyone, and there was no expectation that new private homeowners alone should have to pay for them, and then have to live next door to the council house tenants as well. (Social housing nowadays has to be pepper-potted, i.e. scattered randomly in and amongst the private houses, so someone who pays £600K of private money for a new house can easily find themselves living next door to some benefit family from hell that's been dumped there by a housing association. Affordable homes are a gigantic social experiment as well as a way of getting council housing on the cheap).

OK, the Government does still contribute substantial sums from general taxation by other channels like the Highways Agency or the HCA, but there is still a punitive and frankly resentful attitude towards new housing and developers in this country: politicians and existing residents and businesses say all these taxes - zero-carbon, S106 and affordable homes - are necessary in order to compensate them for the "burden" of accepting new housing in their areas, never thinking that the people who move into these new homes might actually be an asset, both socially and in terms of new resources.

I may be wrong: I've had local councillors justify S106 and the affordable homes system by saying that all developers have to do to cover their extra costs is to reduce the prices they offer to landowners. In other words, S106 and Affordable Homes are really just taxes on planning gain, with developers as the intermediary burdened with doing the actual work, whilst the bitter pill for landowners is sweetened somewhat by a reduced capital gains tax on their reduced proceeds. But what if the landowners simply won't sell at these reduced prices? Result: less land supply. What if the demands for S106 and Affordable Homes are increased when the developer has already paid for the land? Result: sites that have planning permission but are non-viable.

Small developers are hit hardest by this, because they have to buy backland sites at residential prices (otherwise the owner won't sell), and hope to fit enough extra houses on the site to still make a profit. But even the big developers are hit: they will have bought landbanks at one price, but now have to fit zero-carbon, S106 and Affordable Homes into their cashflow, all at a time of falling sale prices. A Taylor Wimpey development near me in Buckinghamshire has recently stopped activity and will only build any new private houses if someone places an order off-plan. The reasons? Lack of demand and lack of mortgage finance so few people are buying, naturally, but also because if the builders crosses a certain threshold of private builds, they have to build another tranche of affordable homes, which are required to be at a higher specification than the private homes and to be completed earlier. This obviously plays havoc with the builder's cashflow, because there's all this unproductive building going on and nothing coming in via private sale.

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