Housebuilders

Lord Best Excerpts

Thursday 11th January 2018 Lords Chamber

Moved by

[Lord Best]

That this House takes note of the performance of the United Kingdom’s major housebuilders.

[Lord Best (CB)]

My Lords, I am delighted to introduce this debate on the performance of the UK’s major housebuilders and, in advance, I thank all noble Lords who are joining in. For some excellent briefings and reports, I also thank our Library, the property analyst Alastair Stewart, Shelter, the Town and Country Planning Association and the Local Government Association. I declare my interest as vice-president of the last two of these. My contribution to this debate is to note that the UK’s major housebuilders are not going to achieve either the quantity or the quality of the new homes the nation needs. I will then suggest ways in which the current situation might be improved.

For well over 50 years, the private sector housebuilders have built something in the region of 150,000 homes a year. That was less than half the total in times past, but with the demise of council housebuilding this contribution has become 80% today with, thankfully, housing associations providing most of the rest. There is no reason to expect this sector dramatically to increase its output. Indeed, it is not in the interests of the industry to end the scarcity of homes that has driven up house prices. Over the five years to 2013, for example, while housebuilding nosedived to a post-war low, the stock market valuation of Britain’s largest housebuilders rose by 342%.

Moreover, the shape of the housebuilding industry has changed dramatically in recent years: there are just half as many small and medium-sized builders as there were 10 years ago. The SME builders have seen their share of the market drop from about two-thirds of new homes in the 1980s to around 37% 10 years ago, and to just 12% today. Meanwhile, fewer than a dozen major housebuilders are responsible for 70% of the nation’s new housing, with just eight companies accounting for well over half the total. It is crystal clear not only that private sector housebuilders will never get us anywhere near the 300,000 homes we need but that relying on this sector now means dependency on a very small number of huge firms. This brings with it the dangers of the market being controlled by a small, powerful oligopoly.

The business model for the major volume housebuilders has let us down. With some notable exceptions, too often these companies appear to do whatever it takes to secure the land, concentrating on pristine greenfield sites. They then promise plenty of affordable housing and developer contributions, but once planning consent is granted, they tell councils that viability means they must renege on agreements made, in particular by reducing drastically the number of affordable homes previously pledged. If the local authority has the temerity to object, the housebuilder may threaten to go to expensive appeal, deploying well-paid consultants who can easily outgun grossly underresourced local authority planners.

The volume housebuilders are also accused of using bog-standard national pattern-book designs, unsympathetic to local circumstances, and of shoddy workmanship and poor customer care. As a member of the 2016 inquiry of the APPG for Excellence in the Built Environment, I was appalled by the tales we heard of defective construction—water cascading through roofs, mould inside and out, inoperative drains et cetera—and the difficulties encountered in getting these problems fixed. We noted that 93% of buyers had had problems with their builders and that customer dissatisfaction had grown from 10% of buyers in 2013 to 14% in 2015, leaving some 15,500 dissatisfied homebuyers that year. Then there is the scam—which I am thankful the Government are keen to address—of the big housebuilders selling houses on a leasehold basis with fiercely escalating ground rents.

Productivity in the industry remains very low, with a chronic lack of investment in modern technology or new materials. All work is subcontracted, very often with bills not paid until as late as possible. There is a disgraceful disregard for the need to replace the ageing indigenous workforce and train a new generation, the industry instead relying heavily on imported labour, mostly from eastern Europe, which may well be a more scarce resource post Brexit.

The response to this dependency on a handful of major housebuilders must be to support alternative providers, and the Government are indeed bringing forward a range of measures to this end. I commend the diversification policies set out by the Secretary of State, Sajid Javid, and my criticism is rather that each of them does not go far enough. They involve, first, backing those councils who are up for it as direct housing providers. After all, councils were building almost 200,000 homes a year when I started in housing. We need to go further than the Chancellor’s latest move to allow an increase in the borrowing limit for certain authorities in as yet undefined places. All councils should be able to borrow freely, as in Scotland, within the existing prudential borrowing rules which protect against any risky borrowing, and to add a further boost councils should be able to keep 100% of their receipts from further council house sales to plough back into building replacement affordable homes.

Secondly, we must boost further the all-important output of housing associations, which could certainly double their current programme of 30,000 to 40,000 homes a year. It was good to hear the Prime Minister announce in October extra money for so-called social rented homes, in contrast to recent policies that have driven housing associations to charge rents too high in many areas for those in severe need, but the level of the essential government grant for this programme is relatively modest, and more of the same is badly needed.

Thirdly, we should be giving life to the more specialist providers like community land trusts, custom housebuilding projects and an exciting new generation of garden town development corporations.

Fourthly, we should be bolstering the smaller, local housebuilders who are well suited to handling small sites and more specialist schemes. Many are run by people living and working locally who are keen to train their own workforce and see their efforts enhancing their own communities, not blighting them. The Government’s announcement that local plans should include 20% of future homes on small sites could be a game changer in favouring small firms, alongside their enlarged guarantee scheme which can overcome the reluctance of banks to extend credit to these firms. They deserve more of the same.

What about the extra costs of government support for all these alternatives to the volume housebuilders? I recommend that funding should come from the Government rapidly phasing out their multi-billion-pound Help to Buy subsidies. That scheme was justified in the wake of the financial crash, but its value is much more questionable now volume housebuilders are operating very profitably. Economists maintain that Help to Buy, by increasing demand more than supply, inflates house prices and boosts housebuilders’ profits. Certainly, when the Government announced their £10 billion extension of the scheme, it put nearly £1 billion instantly on to the share prices of the big builders, reflecting a view in the City that these subsidies help builders more than buyers.

Even more important than money is land. Control of land use is, at least in theory, in the hands of the local planning authority. There is an urgent need to reassert the authority and creativity of the local planning system, restoring its status and latent value. A grossly underresourced planning department means delays that are intensely frustrating for everyone. Even so, although housebuilders blame planning delays for holding up development, it is also true that nearly all planning applications do eventually get approval, and there are thousands of consented sites where nothing much is happening—we await the report on this from Oliver Letwin MP.

Meanwhile, the Government are on the case in recognising the need to rebuild the capacity of planners. Recent support in allowing a 20% uplift in planning fees and providing some grant aid is more than welcome, but there is a very long way to go. Local leadership will be all important, not least through the new metro mayors and in the new combined authorities. Enforcement of good Building for Life design, often respecting local design codes, allocating sites for specific purposes, insisting upon adequate standards for lifetime homes and using proper master planning is also necessary: a confident, determined local planning authority could do so much, if properly resourced.

At the same time, central government needs to be supportive of decision-making by local councils. The Secretary of State should use the current review of the National Planning Policy Framework to overhaul completely the specious “viability” test that is the subject of widespread abuse in evasion of requirements to provide affordable homes. The Greater London Authority is setting a fine example in offering a fast track through the planning process if there are no quibbles over providing the required quota of affordable homes.

Also on the land question, the Government’s public sector land programme is pressing government departments and local authorities to dispose of unused sites for new homes. But I would go further, not simply flogging off these precious assets to the highest bidder—even when the housebuilder promises to include some affordable housing—but instead always giving first option to those providers who can add social value, for example in building tailor-made homes for older downsizers which will save NHS and social care funds and release family homes. For sites not owned by public bodies, a revival by local authorities and Homes England of—hopefully streamlined—compulsory purchase powers is needed, too, where blockages hold up much-needed new development.

Finally, to improve the performance of the major housebuilders—because, at least for the moment, we remain heavily reliant on their output—I am hopeful the Government will progress their interest in creating a new homes ombudsman. Along with a call for improved building control and better on-site supervision, a new homes ombudsman to handle the catalogue of complaints from consumers was the key recommendation from the APPG for Excellence in the Built Environment. But this ombudsman, if it is to stand up to the mighty housebuilders, will need sharp teeth and proper resources.

In conclusion, I appreciate that my various recommendations could mean lower profits for the plc housebuilders, unless they negotiate better prices when acquiring sites and/or step up profit productivity in the industry, but shareholders in these companies have been doing very well indeed over recent years. Share prices for the top eight housebuilders have increased by 127% over the past four years, compared to just 31% for the FT all-share index—four times better than the average. My sympathy for the housebuilders themselves is moderated by the knowledge that current profits have made the bosses of these companies extraordinarily rich. Note that the chief executive of Persimmon, a company selling about half its homes using Help to Buy subsidies, is receiving bonuses this year worth more than £100 million—one individual employee with bonuses of more than £100 million.

On other occasions, I have pointed to the abysmal consequences of the so-called welfare reforms, which have made it tougher for those on the lowest incomes to afford a decent home. While welcoming recent universal credit improvements, I am still fearful that without further changes of DWP policy, the tragic problem of homelessness will get worse. However, in relation to what I am delighted now to be able to call the Ministry of Housing, Communities and Local Government, the Government are espousing some excellent policies. The problem is that they are as yet underpowered and somewhat tentative. What is needed is for these to be backed wholeheartedly by HM Treasury and translated into a powerful package of intervention through financial, land-use and consumer protection actions that could make a really significant impact on the quantity and quality of new homes. I hope that the Minister agrees. I beg to move.

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[Lord Best]

My Lords, I know that we must conclude at 2.08 pm, so I have only a few minutes in which to express my appreciation to everybody who has joined in this very good debate. A few extra points were made that I had not picked up sufficiently—for example, my two noble friends mentioned apprenticeships and sustainability. I do not think we have done enough on that. However, nearly all the points were the subject of agreement rather than disagreement, with the possible exception of Help to Buy subsidies. But apart from that I think that broadly we are all agreed on the direction of travel. The list of ways in which government is now pointing in absolutely the right direction was impressive. I think that it was Paul Getty who said: “A billion here, a billion there, pretty soon, you’re talking real money”. Some resources are coming down the track, we just need delivery and a foot on the accelerator to make things happen, not to castigate the big builders but help them perform better in the future. I thank all noble Lords for joining in the debate.

Motion agreed.