Britain needs more housing. New housing completions in England are running at around 100,000 per annum, less than half of the volume required. This is because market capacity is lower in today’s low transaction market, but also because planning and development practice has not yet adjusted fully to the new market realities.
These realities largely centre on the limitations to the economic viability of development, as a result of the scarcity of both mortgage finance and development finance.
Finance and cash flow
The limited availability of mortgage finance, particularly at higher loan-to-value ratios, has had a major impact on the volume of residential transactions nationally. There has been a similar downturn in the volume of sales of new homes, as shown in Graph 1.1 in the gallery.
Consequently, the revenue from developing a site is received more slowly, which means banks view development as a riskier prospect. Therefore, these banks are less inclined to lend. They are also more selective when they do so while they de-leverage their balance sheets.
The impact of this restricted cash flow has most impact in the weaker markets and on the larger sites.
In the stronger markets, where buyers have more equity and are less reliant on mortgage finance, the recovery in transactions has been strongest. On smaller sites lower infrastructure costs, a shorter build period and a quicker return on capital outlay make lending a more viable prospect.
Survival of the fittest
Understandably, delayed cash flow has a much bigger cumulative impact on larger sites. Furthermore, because the opportunity cost of scarce capital is so high in today’s world, investing in a site with a prolonged period of negative cash flow has become uneconomic. As a result, land transactions for the larger sites tend to be based on deferred payment terms, unless the site is in a higher value market.
Among sites of more than 10 acres, half of transactions were paid for up-front in low value markets over the last three years, while in higher value housing markets, 69% were paid up front (see Graph 1.2 in the gallery). Assessment of site viability for planning purposes also needs to embrace this increased dependence on cash flow.
A new framework
The Government has confirmed in its draft National planning policy Framework, that it is determined to increase the supply of new housing to meet the needs of present and future generations. Its reference to meeting household projections, taking account of migration and demographic change, suggests that the policy aim is to deliver at least 230,000 additional homes per annum in England.
It also recognises that to do this, planning will need to respond to market demand. This means it will need to have regard to the differing ability of local and regional markets to absorb stock and the viability of development in different locations. Some lessons can be learnt from the reaction of the market since the credit crunch.
In London, where transactions have been most buoyant and where high house prices support economic viability, private enterprise new build completions have risen from 9% to 13% of all transactions. However, new build completions themselves remain well below the peak of the market. By contrast, in the much more restricted housing market of the north west of England, this new build ratio has fallen 0.7% to 11.5% of transactions in 2010.
Irrational performance
Planning constraints have prevented the development market from performing entirely rationally. Despite high house prices and relatively strong transaction levels, new build completions in the south east of England were constrained to 12% of transactions in 2010, having an improvement of less than 0.5%.
The proposed framework emphasises how the planning system should be responsive to other market signals such as land prices, rents and housing affordability, to ensure that supply is sufficient to meet housing needs. Demand and need should be assessed in both the local market and others that are connected by virtue of travel to work patterns.
This indicates that, wherever suitable land is available, new housing should be built in the higher priced markets, where scarcity is greatest, unless the adverse impacts of allowing development would significantly and demonstrably outweigh the benefits. This means new development should be targeted at areas where transaction levels are able to recover most quickly. Yet there will also need to be recognition that individual markets only have so much capacity to absorb new stock.
As a benchmark, in major growth areas such as Milton Keynes and Swindon, new build completions represented on average around 30% of housing transactions in the five years to the end of 2008.
Increased supply?
If transaction levels are slow to recover, one solution will be to hold initial residential phases for let in the private rented sector, which can secure income flows, while providing the flexibility to release units for sale when the market is in a position to absorb them.
There is little doubt that new emphasis on responding to demand, if implemented by local planning authorities, will shift development to markets with the greatest capacity for delivery, in terms of both market absorption and also the delivery of affordable housing.
Therefore, the new planning framework is potentially a major step towards a significant increase in housing supply. The extent to which it is embraced will therefore determine its success.
.jpg)
.jpg)
.jpg)
.jpg)