The managing director of developer Inhabit Homes has five action points for Gavin Barwell, the new housing and planning minister
Congratulations and welcome to housing! On hearing of your appointment, someone asked me what I would do if I were housing minister for a day - and I thought I’d take the opportunity to write them down and send them to you as a few suggestions.
1. Break the stronghold of the Big 10 housebuilders
I don’t think I’ve heard any dissenting voices to the opinion that the housing crisis is being caused by the imbalance of supply and demand. We’re not building enough homes and our population is growing. Doesn’t take a Nobel Prize-winning economist to work out what that will lead to. Since the 1980s, we have seen an increasing consolidation among housebuilders. This means that small and medium sized builder/developers now build approximately 60-70 per cent fewer homes than they used to and 70 per cent of our homes are delivered by about 10 different housebuilders. Why is this important? Well, consolidation reduces diversity and choice, and increases the power of the oligopoly. This means that the Big 10 can build what they like, when they like and that isn’t good for supply. Is it that surprising then that a recent RIBA report suggested that 75 per cent of us would never buy a newbuild home? So, my plea is to not just increase numbers, but increase quality too.
The Big 10 housebuilders can build what they like, when they like
Exactly the same phenomenon has taken place in the supermarket industry. We have seen a consolidation of grocery shops so that the vast majority of our food purchases are through the big supermarket chains. Similarly, the volume housebuilders create a commodity product. Their homes are built quickly and simply but don’t have the quality of materials or of design. They are built around one of a few set floorplans rather than contextually around a site.
So why do public landowners talk about doing things differently, but continue to select developers to buy the land using the same old rules? Do they expect that someone is going to come along and surprise them? Developers are not like tech companies such as Uber or AirBnB – developers can disrupt (I like to fantasise that we’re attempting to disrupt the housing market) but it takes us time to scale up. A single project of new homes may take 3 to 5 years before you can sell them and then feedback lessons into the system. So, when you are looking to build new homes, don’t just build the same old homes – look to build new types of homes. Break big sites into smaller ones and where SME builders and developers can make a difference. Don’t let the big public land-owners put out a PQQ which dictates the answer and the same-old, same-old. Give them authority, courage and flexibility to explore alternatives to the top 10. Only by changing the inputs, will you be able to change the outputs.
2. Kill the planning arbitrage market
It makes no sense that planning generally now costs tens of thousands of pounds and takes over a year on average to be successful. Land cannot be funded prior to getting planning, so must be funded with expensive investor equity. There is a huge risk associated with planning and this risk must be rewarded. If your home costs £500,000 (the average cost of a home in London) - the planning gain alone (ie the reward for taking the risk of getting planning) will be worth about £125k of the house price. If planning was not a risk that developers had to take (like councils and governments do in most Western countries by zoning areas and deciding how big each development should be), then as long as we have managed to control the cost of land (more later), this would almost immediately save 25 per cent on current house prices.
3. Scrap stamp duty
I know that this is not really your bag, but please have a word with Philip Hammond. Stamp duty is a (potentially) huge tax on transactions which discourages people from moving out of their homes. Just as we need money to flow around the system to keep the economy buoyant, so we need people to keep moving to keep the housing market working. However, when moving can involve transaction costs of up to 13 or 14 per cent (top level of stamp duty + agents fees + other costs) – that discourages moving. We’ve seen the impact of that transaction tax in the upper end of the housing market already, with a marked slowdown in the more expensive properties. If we want the elderly to move out of their large homes and downsize, freeing up space for younger people, we need to make the transaction as cheap as possible for them. If we want families living near good schools to move on when their kids leave, we need to make that cheap for them.
I want to see a brake on house prices by progressively taxing gains
4. Introduce capital gains tax
Again, a word to Philip: to offset the lack of tax from stamp duty and discourage the flipping and holding of homes as investment assets, you should introduce capital gains tax on all home profit sales over a certain level. Most of Europe levies capital gains tax if you flip a property (by holding it for less than five years). This is a much better option than a mansion tax which is not based on taxing cash flow, and stamp duty, which is based only on value at the time of transaction and not on value added. We don’t want people buying a house, doing it up and selling it on, making a huge profit. I want to see a brake on house prices by progressively taxing gains. That will reduce the difference between the top and the bottom of the market over time.
5. Change how we currently do affordable housing
At the moment, policy dictates that developers should provide around 50 per cent of new housing as affordable (borough/council dependent). In reality this never happens because of ‘viability assessments’. What happens is that a piece of land comes up for sale. It’s worth say £4 million if you put 25 per cent affordable and say £2 million if you fulfil the policy of 50 per cent. A developer puts a bid in for £4 million, knowing that the policy is for 50 per cent affordable. They then pay professionals to undertake a ‘viability’ assessment which shows that at £4 million, the scheme is not viable/unprofitable if the council requires 50 per cent affordable housing. The council is then forced to accept the lower level of 25 per cent. A travesty! This is a benefit for the landowner to the detriment of the provision of affordable housing. To add insult to injury, once the developer has agreed to provide the affordable homes, they are strongly incentivised to make these as low quality and cheap as possible.
The only winner is yet again the landowner
This is crazy - it’s a bit like asking prisoners to build their own jails or poachers to build the gates to keep them out. Instead, councils should build their own affordable housing - they know that building higher quality will pay dividends over the long term as maintenance and refurbishment (whole life-cycle costs) are reduced, so they should do so just like they used to. Also, affordable housing provision could be simpler - it should be a clear tariff-based system (like the community infrastructure levy). If you want to build say, 1,000 square metres - equivalent to 15 new flats - you currently have to pay £200,000 if you’re in central Southwark or £50,000 if you’re in the outer parts of the borough. Every council has a CIL map with these charges clearly stated and unambiguous. No one can argue and few do. Councils can look at reducing or exempting these charges when they wants to encourage new forms of housing - at the moment self-build or custom build is exempt to encourage this industry to grow as an alternative to mainstream volume housebuilding.
Shepherdess Walk by developer Inhabit
Currently smaller sites are exempt from affordable housing, which is sensible from a practical point of view, but actually, the only winner is yet again the landowner. Buying land is done through a residual appraisal - ie the land value is calculated when you take headline sales and subtract a developer’s profit (about 20 per cent), and then subtract the costs of construction, affordable housing levies, professional fees etc. Clearly, if there are no affordable housing levies, then the value of the land goes up - hardly helpful for society. If we operated a tariff-based system for all affordable housing - to be put into a pot for councils to spend on affordable housing - then the tax becomes a clear cost to the developer and therefore comes off the price of the land. There would be no ‘viability’ assessment and greater clarity.
I am at your disposal to talk about or implement any of the above. In the meantime, welcome to the job and good luck!
Gus Zogolovitch of Inhabit Homes
What do you want to tell Gavin Barwell? Leave a comment below or tweet @ArchitectsJrnal with #DearGavin