The United Kingdom’s construction industry will no doubt welcome the news from the Office of the Deputy Prime Minister that the department intends to work with the industry with the intention of helping it to break out of the current research and development cycle — to move from the era of demonstration projects to ‘mainstream quality modern construction’.
This is related to Mr. Prescott’s search for an affordable homes formula that will help him realise his vision of ‘Homes for All’. He looks forward to the time when everyone – owner-occupiers, first-time buyers, social tenants, key workers and people who rent privately – have the opportunity of a decent home at a price they can afford. One of the factors compelling a fresh look at building economics is, as his paper on Sustainable Home Ownership puts it, that construction costs continue to rise faster than inflation. “We will work with industry to build homes more cost-efficiently, without sacrificing quality. This will help more people to find a home at a price they can afford.”
As Kate Barker whose Housing Supply report has shaped the present phase of housing and planning policy said in her final report, “The industry needs to address its weak record of innovation and remove barriers to the take-up of modern methods of construction and off-site manufacturing.” This is what Mr. Prescott seems to have had in mind when he announced the ‘design for manufacture’ competition at the Sustainable Communities summit.
On previous occasions when the Deputy Prime Minister has voiced his misgivings about building cost inflation, he put most of the blame on the contractors and their suppliers. They in turn have been contending with sharp increases in costs, notably the steeply rising price of fuel during the past year, which with its tax component makes the cost of bricks, cement and timber so much higher, not only to manufacture but also to transport.
In fact the U.K.’s Construction Confederation chief executive Stephen Ratcliffe said recently that though the industry is enjoying sustained growth due to higher private housing activity and government investment, rising interest rates in mid-2004 were expected to dampen private house-building.
‘Poor transport damaging productivity’
Around the same time a trade survey carried out by the confederation jointly with the Construction Products Association revealed disquiet among builders and suppliers about the poor state of the roads infrastructure. In a statement the two bodies agreed that “while the industry is investing in new plant, poor transport is damaging the industry’s productivity.”
Around 30 per cent of building contractors and product suppliers surveyed reported that inadequacy of the road network is having a serious impact on their businesses. None of this cost escalation is the fault of the construction industry. And traffic congestion is all the more expensive when vehicles are burning fuel wastefully at prices 25 per cent ahead of the year before.
So there is now to be a drive to build homes at reduced cost, a drive in face of severe inflationary pressures. The general idea is to make homes more affordable, but there is much more to house-price affordability than reduction of building costs. The Government has effectively conceded this, by its acceptance that the £60,000 house at a median price can only be achieved by subtracting the land from the equation. This apparently is to be one of the cornerstones of extending sustainable home ownership to as many people as possible who are able to take the opportunity.
To buy a home which stands on land in someone else’s possession, producing the collateral required to secure a loan will not be so easy. Indeed, Mr. Prescott’s paper appears to recognise this in a panel on ‘how the scheme will work’ by saying:
“Initially, most of the homes will be built on public sector land that is surplus to requirements. The share of the home the buyer purchases will, at a minimum, need to be large enough to cover the home’s construction costs. The landowner will retain a share worth up to the full value of the land.” Not much margin there for obtaining financial help in acquiring a house at rock-bottom cost on land surplus to government requirements. The paper discloses that the ODPM is exploring with the Council of Mortgage Lenders the scope for introducing private finance for the funding of equity loans. “Initial discussions are promising and indicate potential to reduce the cost to the Government, enabling assistance to be given to more first time buyers.” Equity financing however is usually based on the assumption that the house stands on valuable property in land securely in the hands of the owner or the tenant.
First-timers barred from nine out of ten towns
The Council of Mortgage Lenders on the other hand has much to tell the Government about affordable housing, or rather unaffordable housing. On 2005-01-22, at a time when the ODPM was putting the finishing touches to its paper on ‘Homes for All’, the Halifax released its 2005 First Time Buyer review which put the current situation in stark terms.
It said that in 2004 nine out of ten towns were unaffordable for first time buyers. By this the Halifax review meant that of the 597 main postal towns in the United Kingdom, 548 were unaffordable for the first time buyer. This is tantamount to saying that the housing market is closed to the rising generation. Schemes to reduce building costs, valuable though they may be in themselves, will never remedy this situation.
Halifax went further, saying that the average price paid by first time buyers in 2004 increased by 16 per cent, from £112,541 in 2003 to £131,024, acknowledged to be a crude average. The affordability difficulties confronting first time buyers have significantly reduced the numbers entering the market, an estimated total of 361,000 in 2004, the lowest since 1981. The number last year (2004) was almost a third lower than in 2002.
These figures can only mean one thing: the market for new homes is shrinking. Moreover, Halifax added a note pointing out that among those yet to purchase a property, the likelihood was that most of these people would fall into the category of not having enough funds. “Therefore it is likely that our affordability measure actually understates the degree to which properties are unaffordable for first time buyers.”
Mr. Prescott’s efforts to get homes at cost price will according to the ODPM paper help a total of 81,900 people between 2005 and 2010. That should be set against the 2004 level of 360,000 first time buyers every year. This gives some idea of the demand that young people have for homes of their own. But given fewer than 82,000 opportunities over the next five years, a lot of them will still be on the waiting list at the end of this decade.
There are also plans to transform the delivery of new housing. “We will do this by investing in the infrastructure across the country, completing our reform of the planning system and ensuring that industry and the public sector have the right skills to deliver.” The chairman of the South East England Regional Assembly, one of the eight regions in England responsible for the new Regional Spatial Strategy plans, and under the Barker scheme responsible for housing allocations, said: “After an extensive debate [on housing investment over the next 20 years] the Assembly concluded that we should consult on a lower range of options for growth. Without certainty on the question of infrastructural investment, we could not see how the higher levels of growth proposed were sustainable.”