The hotchpotch in property policy

The construction sector was one of the hardest hit by the financial calamity of 2008. And the effects are still being felt. According to official data, the sector’s gross value-added score shrank by 18.9 per cent between the first quarters of 2008 and 2013, whilst the whole economy was down just 3.7 per cent. Before the election, the Conservative Party promised to make reviving the sector one of its priorities. So just how effective have the coalition’s policies on construction and housebuilding proved?

Before the financial crash, the level of net additions to the housing stock levels in England had risen to almost the highest point since World War II. Figures from property consultant Savills show the 223,000 homes added to the total in 2008 virtually matched the average annual figure during the record period of construction between 1962 and 1971, when much higher overall build rates were offset by a parallel large-scale slum demolition programme.

Upon taking office, the coalition dismantled much of the housebuilding policy machinery it inherited. Delivery targets, imposed on local authorities via regional plans, were denounced as “Stalinist” by communities secretary Eric Pickles, who attempted to abolish them at the stroke of a pen. However, he was challenged in the courts, which ruled that the regional targets still had to be taken into consideration until due process had been followed. The plans were still officially in place in some regions as late as March this year, and continue to be given weight in some local authority planning decisions.

The legal battles resulted in a lack of clarity over housebuilding policy. One developer complained of “paralysis” in the planning system to a 2011 communities and local government select committee hearing, and the committee recommended that in future the government should adopt a “more evidence-based and consultative approach” to policymaking. Trudi Elliot, Royal Town Planning Institute chief executive, says: “Whatever you thought of regional strategies, the way we abolished them was not very clever. It made it more challenging for property investors, who crave long-term certainty.”

Carrots, not sticks
In 2010 the coalition’s new housing minister, Grant Shapps, announced that the previous system of top-down targets would be replaced by financial incentives for councils to encourage the construction of new homes. The New Homes Bonus policy would match-fund the additional council tax for each new home for six years – with both sums retained by local authorities. The change of emphasis was intended to win over sceptical shire counties, which had bitterly complained about the regional plans and would now be free to choose whether to accept the rewards of new homes.

Unfortunately, many weren’t tempted. By 2012, according to research by planning consultant Tetlow King, local authorities in England had removed a combined 272,720 dwellings from the local plans which set their framework for planning decisions. Richard Tamayo, commercial director at standards body the National House Building Council (NHBC), says: “The policy has polarised local authorities. Some, which were already positive towards new homes, are doing well out of it, but councils politically biased towards refusing housing only saw the bonus as a marginal benefit.”

In October, a Public Accounts Committee report slammed the “lack of credible data” about the scheme, pointing out the importance of assessing “whether policies are achieving their objectives and providing value for money as early as possible in order to refine the policy or its implementation where appropriate or counter any unintended consequences.” Five month earlier, the National Audit Office had called on the government to carry out and publish its planned assessment of the scheme “urgently”, but the Department of Communities and Local Government has only promised to do so by Easter next year.

Planning for new homes
Another major strand of government policy aimed at boosting construction was a comprehensive reform of the planning system – a longstanding bugbear of the development lobby. The National Planning Policy Framework was launched in March 2012, following tweaks to a draft document which provoked a Middle England revolt led by the Daily Telegraph and National Trust. The final result condensed thousands of pages of planning guidance into a single document, and introduced a “presumption in favour of sustainable development”.

Steve Turner, spokesman for the National Homebuilders Federation, says the policy “has put a bit of certainty back into the system following a couple of years of hiatus.” But John Tomaney, professor of urban and regional planning in the Bartlett School of Planning, University College London, says it is too early to tell whether the reforms will foster more housebuilding: he’s not convinced by what he sees as an “article of faith in some quarters that altering the planning system will bring forward new housing.”

Nick Raynsford MP, honorary vice chairman of the Construction Industry Council and former Labour housing and planning minister, says the framework has resulted in more homes, but only because national planning inspectors now have greater scope to overturn planning refusals made by local councillors. “This is planning by appeal, and makes a nonsense of localism,” he says. The RTPI’s Elliot agrees, saying: “If people see homes imposed on them by strangers at the Planning Inspectorate when their elected officials said no, then it does nothing to help [build] support for new housing.”

However, she praises another strand of policy, which allows communities to create their own neighbourhood plans. These plans cannot contain smaller housing numbers than those set in local authority strategies, but they do empower residents to guide their location and design. The policy was given a boost in January by planning minister Nick Boles’ announcement that communities adopting such plans would be financially rewarded for every new home.

Supply and demand
Despite all these supply-side reforms, though, our commentators agree that a demand-side measure is having the biggest effect on the construction of new houses. The Help to Buy scheme sees buyers benefitting from a government loan of up to 20% of the value of a home, meaning they only needing to find a deposit of 5%. The government is also promising to underwrite lenders’ losses if the home has to be repossessed.

Buyers seeking mortgages have also been aided by the Funding for Lending scheme, which allows banks to borrow at low rates from government and lend on to their own borrowers. Turner says that these policies have had the effect of overcoming one of the main restraints on housing provision: the lack of mortgage availability for buyers with small deposits. He says: “As a result, we are seeing more homes being built. Developers are increasing the rate of construction on their existing sites, and are looking to get on site quicker to start new developments.”

Tomaney voices worries that the policy is likely to create an unsustainable house price bubble in London, where demand for new homes has already been pushing price growth up far higher than that in the rest of the country. He says: “There is a set of issues in the capital which requires a different set of policy responses to those needed in former mining communities in the north of England.” Raynsford adds that some housebuilders are worried because there is no guarantee that Help to Buy will extend beyond the existing cut-off point of 2015. “If it goes at the same time as interest rates start rising then things could start looking very different,” he says, concerned over the sustainability of property price rises.

In addition to the showpiece policies, a number of smaller streams of funding for housebuilders have been made available through a series of bidding processes. The £1bn Build to Rent scheme is aimed at kickstarting the private rented sector, while the £500m Get Britain Building programme aims to unlock locally-backed stalled sites with planning permission. Brian Berry, chief executive of the Federation of Master Builders, welcomes the intention behind such schemes but warns that the high bidding costs favour volume housebuilders. “These schemes haven’t really benefitted small builders,” he says.

Slow recovery; patient remains critical
Whichever set of statistics you turn to, it is clear that something is beginning to stir in the housing market. Figures from construction analysis firm Glenigan show that in the first nine months of 2013, the value of all planning applications granted (for projects of up to £100m) was 17% higher than the same period last year. Tom Crane, economist at Glenigan, says that after a very slow start to 2013, the first signs of an upturn appeared in March.

The government’s own most recent figures show that housing starts in England over the 12 months to September increased by 16% compared with the previous year, rising from 101,280 to 117,110. The 32,230 homes started between July and September represent the fastest rise in housebuilding since 2008. The NHBC’s Tomayo has also noticed the upturn: “2012 was a crap year, but we have seen a rise of 30 per cent in our registration figures for new developments this year compared to last year. When they register, housebuilders have to send us a cheque, so they don’t do it lightly.”

Crane is cautious about giving all of the credit to individual government policies, saying that wider economic conditions also play a large part. “Undoubtedly, Help to Buy is assisting, but the market would be picking up anyway, even if you stripped out all the policies,” he says. But Tamayo is certain of the value of the power of policy, calling for a more radical approach from Whitehall. He says: “Useful though these incremental gains are, to get the doubling of output that the country needs will take much greater political courage.” Certainly, we are far from home and dry: even the latest annual figures show housebuilding at little more than half the level it attained in 2008.

Infra structural weaknesses
Outside of housebuilding, the picture for the construction sector is less rosy, according to experts. Jonathan Hook, engineering & construction leader at consulting firm PricewaterhouseCooper, says: “It is still reasonably tough in the wider market, particularly away from London.” Glenigan’s Crane agrees, but says some sectors, such as the office market and green energy projects, are holding up well.

The slashing of government spending on capital projects has taken its toll. Data from the Office of National Statistics shows net UK central government investment in capital projects has halved – from £48.4 billion in 2009-10 to £24.1 billion in 2012-13. The scrapping of major building programmes such as the £55bn Building Schools for the Future scheme have taken pressure off the public purse but added to the pressure on contractors. Although some new schemes, such as the Department for Education’s £2bn Priority Schools programme, are set to come online next year, Hook says: “2014 is still going to be a tough year in terms of results – nobody will be making big profits for a while.”

The Treasury also scrapped the controversial Private Finance Initiative, replacing it with what it says is an improved finance mechanism dubbed PF2. But the jury is still out on whether the new mechanism will boost construction. Hook says that the process of introducing the new model has created a further hiatus: “It is still at the early stages and not many projects are using it yet. It will take a while for specific packages to be put together.”

Measures to boost infrastructure spending grabbed the headlines last year, with the government announcing that it would underwrite schemes to the tune of £50 billion, including £10 billion for housing schemes. So far, just one, the conversion of Drax power station, has used the guarantee. Raynsford says: “The problem is it that when the individual schemes were worked out they were extremely complicated. A couple of firms I have spoken to have said that it would cost them more to get the guarantee than the benefits they would reap from them.”

Another infrastructure measure, the Pensions Infrastructure Platform, was launched in 2011 by chancellor George Osborne, with the intention of injecting £20 billion of institutional investment in the sector. So far, however, only £2 billion has been forthcoming from pension funds. Alexander Jan, a director of construction firm Arup’s Transactions Advice team, says: “The problem is that the scheme requires pension funds to tie up their money for the long term. In addition, they prefer to get involved in schemes once they are built, rather than in the riskier early stages.”

All in all, the government’s policies for supporting property and construction present a confusing blend of measures – working on both the supply and demand sides; with responsibility split between the Treasury and the communities department; and often compromised by other policies. There is little sign of a clear, over-arching strategy into which the various policies fit, and no attempt has been made to align their reporting systems and measures of efficacy.

It’s clearly not beyond the government’s wit to develop sensible strategies, even in fields as complex as this one: Raynsford praises the over-arching Construction 2025 strategy as a rare example of continuity of policy towards the sector. The kind of stability that strategy sets out to achieve is required across property and construction, he adds: policy changes such as David Cameron’s new squeeze on the ‘green’ element of fuel bills, which showed that “the government is still chopping and changing its political priorities at short notice,” damaged confidence in the energy efficiency industry. Yet Construction 2025 shows that the government is willing and able to consider an industry in the round, and to design policies to support it. Making that work across the whole of the property, housebuilding and construction sector might be a much bigger challenge – both in analysing the requirements, and in reforming the government’s many and disparate policies to bring them into line – but bringing coherence to thistangled field of government activity could yield some very, very substantial rewards.