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Brickflow on Solving the UK’s Housing Crisis

ByDave Stopher

Sep 11, 2020 #property

The UK housing crisis is often in the news, first the crash and economic recession of 2008 followed by the prolonged wrangle over Britain leaving the European Union which did little to inspire developer confidence.  And now the damage caused by the Coronavirus the real economic implications of which are yet to be properly felt.  The UK is widely reported to have a housing deficit of around three million homes and the UK government is determined that the construction sector and house building industry will be supported throughout the dark days ahead but, the prosperity and optimism of this sector are not solely within their gift and requires a multi-faceted solution to tackle this complex situation.

Why is there a housing crisis in the UK?

It’s something that is mentioned so frequently in the press and the media but where do the origins of this problem stem from?  Most experts agree that this crisis has been years in the making.  The main and really obvious problem is the lack of new houses being built, an issue which dates as far back as the 1980s.  Under Thatcher, council houses were sold in their millions and then public bodies started to abandon large scale house building, partly through lack of funding and partly down to policy decisions. The expectation was that the private housing sector would fill this gap but this simply hasn’t happened and there are several reasons why:-

  • Britain is a small and crowded island with an increasing scarcity of suitable sites for house building programmes
  • The UK public does not have the appetite for further building in their neighbourhoods and on greenfield sites and areas of outstanding natural beauty.  Housing developments are often resisted by local residents, parish councils and action groups.  This approach has encouraged local authorities to be somewhat guarded in terms of their approach to planning permission.  Historically, the UK has been pretty poor at putting in place supporting infrastructure such as amenities, schools and medical services when new estates are being built which is one of the biggest complaints made by existing residents
  • Land banking is another influencer – this is where property investors buy land and bank it, in some cases for years, waiting for its value to reach a particular peak.  In the meantime, the land just sits there unused for housing.  Despite adverse commentary from politicians of all colours, it has proved virtually impossible to do anything about this in a free market economy and intervene on an official level 
  • A significant degree of housing ends up in the hands of landlords meaning these properties remain firmly parked in the rental sector and are not available for people to buy.  Landlords are defensive about this as many rental properties are not new builds but nevertheless, this does still have an influence

The other key factor is that there has been something of a population explosion coming at a time when house building output has dwindled to levels not seen since just after the First World War.  Governments of all shades have failed to really grasp this problem and this was before the additional impacts of Brexit and Covid-19.

Demand for a small pool of properties pushes prices up beyond the reach of the majority of first-time buyers who are crucial for the health of the property market, acting as the first and second gears of this potentially powerful engine.  Add to this the long lost correlation between wages, salaries and house prices – was it really possible for a teacher to buy a London house on just one salary in 1964?  Growth in annual incomes has been stagnant for years and record low-interest rates are hardly a help either; these are great once you have a mortgage but not much help if you are trying to save for a deposit.  Conversely, rental levels are at an all-time high making the challenge of saving money to build up a deposit almost an insurmountable challenge for some people.

What are the solutions for the housing shortage?

There are short term measures which can help facilitate buyers such as the very recent loss of Stamp Duty and there are calls for more to be down in terms of removing or reducing the taxes which affect property.  Some other suggestions include:-

  • Encouraging local authorities to start their house-building programmes
  • Providing financial incentives to housebuilders looking to develop for both owner-occupation and rental
  • Source new brownfield sites which will involve cleaning up and repurposing to make them suitable for building residential accommodation
  • Relax planning laws and take steps to discourage NIMYism – Not in My Back Yard
  • Awarding infrastructure grants to local councils so they can welcome new residents and actively embrace the concept of house building
  • Making Development Finance more accessible

Covid-19 has bought the housing market back into sharp focus as no-one wants to feel the aftermath of another property crash with all the signs indicating that a severe, global economic recession is looming large on the horizon.   But there are other more subtle problems which affect property development and these are not usually aired in the press, probably because there are so many bigger and louder reasons ahead of them but they are, nonetheless, still relevant and important.

One of the biggest challenges and real disincentives for property developers especially small outfits or people new to the industry is the seeming complexity of obtaining funding for development.  Compared to the systems in place for private borrowing either in the form of a personal loan or as a mortgage, the process is outdated and ultimately pretty prehistoric.  It is also as with most things from prehistory, very slow and speed can often be of the essence for some developers sending them into the arms of bridging finance which has grown exponentially as a response to the dinosaur shuffle of the conventional lending industry.

About 50% of all the new homes in the UK are built by the same ten companies according to a report by Sheffield Hallam University; compare this to the 1980s where nearly 60% of the houses were built by small businesses which were local to the site.  This figure has dwindled to just 27%.  There are some clear advantages in supporting smaller local house builders which could ultimately have a growing and positive ripple effect throughout the property development industry:-

  • Smaller companies tend to build smaller developments and focus more on sympathetic architecture which will fit in with what’s already there, compare this with large scale developments of several hundred soulless houses which all look the same
  • They are keen to build and keep a positive reputation in the local community and whilst focused on profit, they are not focused on profit at any cost
  • They live in the locality where the homes are being built and feel the impact of increased congestion on the road, competition for school places and closed lists at the local GP surgery
  • Local builders are more likely to focus on traditional styling and design and use locally sourced materials
  • Their accountability makes them more popular with local planning departments
  • Small and local construction companies will create employment opportunities and use local traders and suppliers providing a knock-on benefit to other businesses in the area

One interesting and innovative way to reduce this positioning is to encourage more people to buy a plot of land and commission their own homes built entirely to their own design and specification by local architects and builders.  Currently, in the UK, custom-built properties account for only around 10% of the overall build whereas, in Germany, it’s more like 60%.  Pilot schemes in the UK have shown a demonstrable appetite for this amongst the UK public but is this just a long-term measure that will take decades to filter through and have no immediate impact on the problem?

One measure which is much more urgent and will probably have a much more immediate response is to encouraging fledgeling and small family-owned house building firms with a radical overhaul of the current lending environment.  This has traditionally been dominated by the usual big names and high street faces.  Their focus has been mostly on the residential mortgage market with high tech streamlined processes which have not been transferred into the commercial lending arena. 

One of the most time-consuming elements is trying to find a financial institution who is receptive to the particular development that is proposed; there is no ‘one size fits all’ in property development finance and it is also a fluid picture with lender portfolios constantly changing and risks being assessed differently.  Using a broker is crucial to cut done on expensive and protracted time-wasting applications that would never have had a chance of success.  There are also new fintech developments appearing, platforms which allow developers to browse the available options and make a selection which is closely allied to their particular needs, designed to improve accessibility to the lender market and choice.

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