05 March 2018

Blog: Government Housing Policy – not all bad for the builders

By Scott Fulton | 5th March 2018

In a political environment dominated by Brexit, the continued intrusion of the “housing crisis” highlights the importance all sides ascribe to the issue. The coming week promises to be particularly meaningful with the publication of a new National Planning Policy Framework (NPPF) and the Letwin Report (on land banking). According to a slew of Ministers and pundits, across Sunday’s media, the Government is “getting tough” with Local Authorities and house builders. It is likely to threaten intervention on planning; speeding up awards and requiring more homes. Government is likely to reiterate its target of 300,000 new homes per year.

Ahead of these announcements, the following should be considered;

The 2012 National Planning Policy Framework stated that each authority in England should identify five years of local housing development and put in place plans to bring this land to the market with planning. The authorities were given until 2017 to provide these plans. Anecdotally, fully a quarter have not done so.

In the last week, Barratt Developments, Persimmon and Taylor Wimpey have reported results. Combined, they account for c.30% of new homes in the UK. They own land with detailed planning consent equivalent to 3.4 years of production; 160,000 plots against almost 50,000 homes built per year.

Data on housing affordability (ONS 2016) show that median house prices were seven times median earnings, equivalent to 2008 but lower than 2006 and 2007. In London the ratio is 13x and in the South East it is 10x.

This week’s announcements are likely to focus on the first two points, referring to the last. The “threatening” nature of the possible policy statements could adversely impact house builders’ share prices.

However, freeing up more land with detailed planning should benefit the builders. At present, they are forced to “lock-up” capital in land holdings – which do not produce a return until the homes are sold – because of the structure of the planning regime. If they do not have to hold land to the same extent, they will not buy as much. The cash generative benefits of under-replacing land used cannot be overstated.

More homes should argue for lower house prices. However, there are structural issues with this analysis, not least the value of mortgage books secured on homes and the role played by mortgage valuers in setting prices. No Government is likely to implement a policy which threatens absolute house prices, not if it wants to remain in power. Thus, the clear aim of this policy, rather than the public statements, is likely to be a reduction in house price inflation, allowing wage growth to erode the affordability gap. Again, this should benefit the builders who have shown that they can generate efficiencies within build cost which could offset the absence of selling price inflation.

The EU referendum result caused a near 50.0% collapse in builders’ share prices while there have been smaller knocks from a variety of “news stories” around the housing market since. It is worth pointing out that results from the builders have barely paused since Brexit and continue to demonstrate an industry which is driving efficiency. There is more to come, particularly from off-site construction and, potentially, higher volumes. This could be achieved with less capital employed (smaller land banks), benefiting cash flow. Given the discipline which the builders have shown in returning cash to shareholders, this could argue for a further phase in their creation of value.

Not all Government policies are bad for house builders. Help to Buy has underpinned first time buyer demand and has supported new home development. Addressing the supply-side, by freeing up land, should be seen in this context.