Friday, 8 January 2021

Housing developers are not greedy.

"Greedy developers!" How many times have we heard this from people opposing new housing? When the planning application for new homes lands, it is a matter of seconds before somebody is muttering about how it's all about profit and the developers don't care about the community. At times this seems to be the Labour Party's national policy - their opposition to planning reform gets framed as "the reforms are a developers charter", "this is just about helping the Tories' developer friends and funders". And Conservatives, Lib Dems, Greens - every variation of politician - aren't any better, all of them find it easy to shout "greedy developer" while mopping up crocodile tears about young people not being able to afford the rent, let alone buy a home.

The reality, as any councillor who has stayed awake while sitting on a planning committee know, isn't anything like this - indeed, while the greedy developer remains a popular planning committee caricature, those councillors will see more of developers saying they can't build because the development isn't viable than they will developers greedily exploiting the chance to build houses for people to live in.

I hear you when you say "but housing is so expensive" and assume that this is because those greedy developers are making millions. And I'm here to say that, while such sentiment is understandable, it really isn't the house builder making the greedy profits, it's the landowner. The developer is lumbered with the high land costs that make up the largest part of the house price. Remember too that these high land prices are a direct consequence of the planning system - by limiting the available development land, the planners hand a huge windfall to the landowner. The developer then buys the land at the planning-inflated price.

The planning system then imposes, often with good reason, a load of additional costs and charges on development. This starts with the cost of getting permission to build the homes at all (even when the planners have already allocated the land as suitable for housing). For a large developmnet this can run to millions as we require pre-application consultations, a series of environmental impact studies, heritage assessments, tree studies, bird counts, bat and badger searches all followed by more developer funded consultation. Then the planners, often at the request of statutory consultees like the health service, education, environment agency, highways and water companies, add further requirements, each of them adding costs to the development. Finally, there's a 'Section 106' agreement (or Community Infrastructure Levy requirement) so as to fund school places, affordable housing, parks, playgrounds and anything else the planners can crowbar into the developer's costs. Not a single footing has been dug and the planners have added millions to the cost of development.

Unless that is, the developer can demonstrate that some of these community infrastructure costs simply make the whole development non-viable. To check this the planning authority usually employs an independent valuer to see whether the developer is pulling the wool over the planning committee's eyes. In my experience, nearly every one of these council-commissioned viability studies verify what the developer is saying. There's an argument that this extra cost ought to come off the land value but, in most cases, that ship has already sailed (probably in the former landowner's new yacht).

Viability studies use industry gross margins as their test - usually 15-20% depending on land values (the higher the land value the lower the margin). And this gross margin isn't 'profit' but covers a lot of other costs for the developer - borrowing costs, options on land so as to maintain a development pipeline, up-front costs of future development, design and architects costs, valuation consultants, and the central administration required by any business. I don't expect you to weep beef tea over the plight of house builders but they are not any more greedy than any other business and are probably less profitable than lots of those businesses.

All of these things - land prices, planning costs, mitigating planning requirements, community infrastructure - may be good things but their net effect is that homes get more expensive not that developers get more greedy. And the price of homes is constrained by the housing market - the developer can't make homes more expensively than those in the second hand market. I recall a development in inner city Bradford where the cost of building two- and three-bedroom family homes was more than similar sized homes in the local market - the homes got built but ended up as rentals rather than the intended market housing.

If we're looking for greediness in our housing system, the place to look is in the reason why the land is so expensive. That reason is because we have chosen politically to restrict the supply of land at the urban fringe (indeed we have an "urban fringe" that amounts to nearly 15% of England's land area) so as to protect the interests, and asset values, of the people - you and me mostly - who live in or near those urban fringes. Meanwhile, another group of relatively wealthy self-interested people are opposing development on city brownfield sites on the basis of it not being affordable, being too tall, not enough car parking - plus, of course, the familiar objections about doctors, schools and heritage.

The housing crisis is a consequence of our greed not developer greed. We say we want housing but then say, regardless of where we live, that over the road from us is the wrong place for that housing. And politicians suck up to this selfishness (and our votes) by calling the developers greedy for wanting to make a net margin of under 5% on building the homes everybody agrees we need.



jim said...

Thank you for a clear sighted view of the housing market. Although none are innocent here. Dominic Cummings was got rid of for the very good reason he would loosen the planning system - more houses. But what is a Tory council for unless to block housing? Get rid.

Locally a scrapyard has been turned into housing. Planning permission granted for 23 houses. Quickly discovered drainage problems. Long story short, there are now 34 houses on the site. More were 'allowed' because otherwise the development was not viable due to increased costs. Builders a bit cunning, they knew about the drainage and Council a bit cunning too. They need extra houses to make up their numbers and budgets. You scratch my back ....

All this fuss may be nugatory. Who is going to be able to afford houses once the realities of Brexit get going and we see all those businesses affected by Covid decide to retrench into the EU. Perhaps the ERG has a cunning plan to fund a massive trailer park rental scheme to house the young. Then as the oldies die off the more useful properties can be bought up for the BTL market. Meanwhile York stone and drystone walling should become much cheaper as hill farms go bust and become deserted.

Andrew Carey said...

Excellent post - and useful piss-take of a phrase used a lot by NIMBYs.

patently said...

Well said. So many arms of politics regard "business" as an infinite source of funds, to be tapped whenever needed.

It's telling that so many accuse developers of being greedy and making easy profits, yet at the same time we have so many TV programmes that follow aspiring property developers planning a quick spruce-up-and-flip but who find that it's actually a lot harder and a lot less profitable than they thought.