Challenges for the Recovery

John Stewart

Director of Economic Affairs

Home Builders Federation

17 March 2009

SHORT-TERM

THE CRISIS

Mortgage Approvals for House Purchase

Quarterly totals

0

50100

150200

250

300350

400450

5008

7 Q

1

88

Q1

89

Q1

90

Q1

91

Q1

92

Q1

93

Q1

94

Q1

95

Q1

96

Q1

97

Q1

98

Q1

99

Q1

00

Q1

01

Q1

02

Q1

03

Q1

04

Q1

05

Q1

06

Q1

07

Q1

08

Q1

(000)

-78% peak to 2008 Q4

(2 years)

-57% peak to trough (4½ years)

Includes estimate for December 2008 approvals not yet published.

Historic House Price Inflation

Annual % change

-10

-5

0

5

10

15

20

25

30

35

401930

1934

1938

1942

1946

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

% c

han

ge

-40

-20

0

20

40

60

80

100

120

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

£b

illi

on

Net mortgage lending (UK)CML forecast 2009

CML forecast for 2009 prepared before 19 January Treasury Crosby response

Total housing completons (GB)

Experian forecasts

0

50

100

150

200

250

300

350

400

4501920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Co

mp

leti

on

s (

000)

Actual Experian forecasts

Necessary Preconditions for

Recovery

• Restoration of mortgage market

• End to recession & rising unemployment

• House prices stop falling

Mortgage Finance RestorationMortgage-backed Securities Guarantee

(from April 2009)

• Scale of guarantee

• Lenders take part

• Investor take up

• Easing of mortgage terms (e.g. LTVs,

differential rates, fees, etc.)

Development Finance Easing

• Availability and cost of finance

Government New Home InterventionHCA Broad ‘Portfolio’ Approach

• RSL private stock purchases (£300m+)

• HomeBuy Direct (£300-480m, 18,000 units, ~£3bn sales)

Make current scheme work

Additional funding?

• Mothballed Sites (infrastructure & S106 funding,

investment in land/equity stakes/JVs, Affordable Housing)

• Affordable Housing (grant rates, Intermediate Rent, tenure mix)

• Private rental initiative

Local Authority Flexibility

To restore viability:

• Renegotiate S106 agreements including

Affordable Housing

• Revised planning permissions (mix, density)

• Review other policy/regulatory demands

New Home Valuations

• CML Disclosure of Incentives Form –

restore lender confidence

• New home valuation (RICS new

guidance, lender instructions, valuer

behaviour)

MEDIUM-LONGER TERM

THE RECOVERY

Do we really need more homes?

Structural long-term housing under-supply

Demographic, social and economic

necessity to raise supply

Household Growth Average, England

Annual Increase (2006-based Projections)

0

50

100

150

200

250

300

71-76 76-81 81-86 86-91 91-96 96-01 01-06 06-11 11-16 16-21 21-26 26-31

000

1981-2006: 166,000 pa

2006-31: 252,000 pa

Structural under-supply

“But there remain structural differences with

the euro area, some of which are

significant, such as in the housing market”(HM Treasury assessment of single currency membership, June 2003)

Structural under-supply

The study has revealed “high house price

growth and volatility, reflecting to a

significant extent the low supply response

of house building in the UK”(HM Treasury assessment of single currency membership, June 2003)

Structural under-supply

“I do not believe that continuing at the current rate

of housebuilding is a realistic option, unless we

are prepared to accept increasing problems of

homelessness, affordability and social division,

decline in standards of public service delivery

and increasing costs of doing business in the UK

– hampering our economic success.”(Barker Review of Housing Supply. Final Report. March 2004)

Achieving the Government‟s Housing

Targets

(England)

Net Additions to Housing Stock, England

Indicative Trajectories: Before Current Downturn

100

120

140

160

180

200

220

240

2601991/9

2

1993/9

4

1995/9

6

1997/9

8

1999/0

0

2001/0

2

2003/0

4

2005/0

6

2007/0

8

2009/1

0

2011/1

2

2013/1

4

2015/1

6

2017/1

8

2019/2

0

(000)

Net additions to hit targets Housing completions to hit targets

Net Additions to Housing Stock, England

Illustrative Trajectories: With Current Downturn

80

130

180

230

280

33091/9

2

93/9

4

95/9

6

97/9

8

99/0

0

01/0

2

03/0

4

05/0

6

07/0

8

09/1

0

11/1

2

13/1

4

15/1

6

17/1

8

19/2

0

(000)

Net additions to hit target New build to hit target

Requires 20-25% pa

growth 2010-16

Net Additions to Housing Stock, England

Illustrative Trajectories: Current Downturn, Realistic Recovery

80

100

120

140

160

180

200

22091/9

2

93/9

4

95/9

6

97/9

8

99/0

0

01/0

2

03/0

4

05/0

6

07/0

8

09/1

0

11/1

2

13/1

4

15/1

6

17/1

8

19/2

0

21/2

2

(000)

Net additions New build

2 million 2006-20

at 5% pa growth

Development Models

• Are the current models broken?

• Realistically, are there alternative

models?

Current Development Models• Open market sales : ~66%

Private house builders, to owner occupiers & private landlords

• Intermediate sale or rent: ~11%

RSLs, few home builders, to owner occupiers or tenants

• Social rent: ~14%

RSLs, to social tenants

• Self build: ~9%

Owner occupiers

Note: 58% Affordable Housing 2006-07 via S106 agreementsPercentages are estimates, based on 2007-08 CLG statistics of total completions and Affordable Housing supply in England

Future Development Models

Begin with what people want!

• Private house builders („current trader‟)

• Commercial developers

• RSLs

• Foreign contractors

• Self build

• Institutional investors/private rent

Development „Viability‟

Two essential conditions for development:

• Profitable, and

• Land value sufficient to persuade land

owner to sell/exceed current or

alternative use value

Land Value Viability

Cumulative

Cost Impactof

Taxation, Policy & Regulationon

Land Value

Taxation, Policy & Regulation• Affordable Housing (S106)

• Off-site infrastructure (S106)

• Other S106

• CIL (partly offset by reductions in S106 demands?)

• Zero carbon (national targets)

• Other Code, e.g. water efficiency standards

• Local authority sustainability demands (e.g. renewables, Code 3)

• Higher space standards (cost > value gain)

• Lifetime Homes (direct and layout costs)

• Increased public open space

• S38 commuted sums

• Building for Life Award (BfL) standards

Taxation, Policy & Regulation• SUDS (cost, adoption problems)

• Local authority bonding requirements for S106 items

• Excessive/inefficient planning delay

• Excessive planning application fees, processes and paperwork

• Building regulations higher standards and testing

• Density and mix requirements unrelated to local market demand

• Land fill tax

• Council tax on empty (unsold) properties

• Business tax on showhomes

• Stamp duty land tax (SDLT)

• Cost of uncertainty of demands/outcomes

e.g. S106 and Affordable Housing

S106 contributions value

+57%: 2003-04 to 2005-06 (£4 bn)*

S106 Affordable Housing numbers

+150%: 2001-02 to 2006-07 (25,838)**

*Sheffield University study for CLG

** CLG statistics

Average Land Price & Cumulative Regulatory BurdenS

pr

93

Spr

94

Spr

95

Spr

96

Spr

97

Spr

98

Spr

99

Spr

00

Spr

01

Spr

02

Spr

03

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Land Price Regulatory Burden

„Viability‟ zone: Residual land value less

regulatory costs

Average Land Price & Cumulative Regulatory BurdenS

pr

93

Spr

94

Spr

95

Spr

96

Spr

97

Spr

98

Spr

99

Spr

00

Spr

01

Spr

02

Spr

03

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Land Price Regulatory Burden

??

?

CIL;

Part L

-25%

2010

Part L

-44 %

2013;

Lifetime

Homes?

Part L

-100%

2016

Building Regs reviews

Parts A, C, F, G, J (and L)

in 2009 and 2010

Residential Land Viability2007: many sites near limits viability, or over

Today: few residential sites viable

Future: insufficient land value to fund

cumulative taxation, policy and regulation

well into the future

Housing output/targets at risk unless• Drop some policies, reign in LAs

• Delay introduction of some

• Find alternative funding

• Eliminate unnecessary cost (e.g. Killian Pretty)

• Rethink, redesign some policies

• Find a different policy route to objective

Demands must be prioritised, and

Coordination of cumulative impact („ring master‟)

Affordable Housing Delivery Model

Developed in boom

• S106 private land value subsidy

• Cross subsidy

• Ready access to keenly price funds

• Reduced grant rates

No longer viable model

Land Supply/Planning

Sufficient permissioned land to meet targets

(RSSs, LDFs, SHLAAs, SHMAs)

Against background of

Residential land declining since 1994

Average densities to fall

Residential Land, by Land Type, England

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.01989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Hecta

res (

000)

Brow nfield Greenfield

Housing Completions and Density, England

120

130

140

150

160

170

180

1901989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Co

mp

leti

on

s (

000)

20

25

30

35

40

45

50

Dw

ell

ing

s p

er

hecta

re

Completions Average density

Product Mix and Density

Industry will focus on products to meet local

demand, if necessary at expense of volumes

Industry Capacity

• Development finance restored, „excess‟ debt

eliminated

• Skills – management, professional, trades, new

skills, skilled teams

• Expand company output

• Expand number of companies

• Innovation and productivity improvements

Demand: Private Rented Sector

• Large-scale private funding, suitable vehicles,

professional management, focus on yield, long-

term model vs short-term opportunism

• Issues: taxation, S106 demands, planning

attitudes, Affordable Housing (PPS3), right

products/locations

But may be lost cause…

Financial and Economic Regulation

FSA Turner Report: 18 March

FSA Mortgage Market “by third quarter”

“amounts to a revolution”

“profound changes”

“absolutely fundamental”

Financial and Economic Regulation

Regulation at three levels:

• Lenders (capital adequacy, wholesale vs

retail, etc.)

• Products (LTV, income multiples, etc.)

• Macro-economic policy – including house

prices

Summary: Recovery Conditions

Begin with:

• Serious supply/demand imbalance

• Private sector „current trader‟ primary

delivery model, RSL contribution

• Majority aspiration home ownership

Summary: Recovery Conditions• Drastically reduce cumulative impact taxation,

policy, regulation on land value

• New Affordable Housing delivery model

• Sufficient permissioned land

• Product mix & density – market flexible

• Industry capacity

• New models for private rented sector

• Revolution in financial regulation & economic policy