Insights into changing interest rates, development finance and property loans. Find out which lenders link to the BofE base rate, pricing methods and...
After housing was notably absent from October’s Tory party conference, the Autumn Statement featured funding and reforms to boost development. But is it enough to reverse the impact of multiple failed policies, chronic austerity-driven underfunding of planning departments, NIMBY backbench-pressure, see-sawing housing targets and a merry-go-round of housing ministers?
We recently published an extensive report examining the issues behind the UK’s housing shortage, highlighting an estimated deficit of 4.75 million homes. As the first publication of its kind, the Brickflow white paper ‘Solving the UK’s Housing Shortage’ reminds decision makers of their accountability in the housing crisis, and serves as a reference point for the likely effectiveness of any reforms going forward.
Solving the UK’s Housing Shortage: Highlights from the Brickflow White Paper
The housebuilding sector contributes over £42 billion to the UK economy and supports over 770,000 jobs, yet the sector is in crisis, with SME housebuilder numbers dropping by 80% since the early 1990s.
“Throughout history, any period of real economic growth has been underpinned by construction. The government could significantly increase the UK’s economic prospects simply through strategic investment in the planning system.
All the ingredients are there; chronic undersupply of housing, an army of property developers wanting to build and strong property finance lending markets, but the planning system is categorically broken and is the most detrimental barrier to housebuilding.
Everybody in the industry we spoke to says the same thing; if the government could get the planning system right, the short and medium term prospects of the UK economy would be infinitely brighter.”
Aside from the obvious economic benefits; this matters because housing has a bigger impact on society than pretty much every other policy. Most of us do not need the NHS every day, but we do all need somewhere to live. Whether you are a tenant or an owner, the lack of housing means all of us pay too much for where we live.
Whilst there are many complex and interwoven issues hindering housebuilding, our report finds three major barriers and mutually reinforcing problems:
1. Planning: 93% of SME developers have found securing planning permission to be a major barrier to growth, with over two-thirds believing the delays are due to staff shortages in local planning departments.
2. Land supply: Prior to grappling with the planning system comes the search for a suitable site – whilst more than 90% of UK land is undeveloped, amazingly only 0.2% of land is available for development. In particular, small sites that are suited to SME housebuilders are in the shortest supply.
3. Funding: or lack thereof. The funding aspect is multi-dimensional;
- spending on planning departments has dropped by 14.6% since 2009 creating staffing shortages, recruitment issues and severe resource shortages
- inflation, higher mortgage rates and increased rents are stymieing buyer affordability
- lack of access to the specialist property finance market makes it difficult for property developers and investors to find the right finance at the right price.
The lights are on, but who’s home? Further muddying the mix is the revolving door of housing ministers – at the time of writing the Brickflow white paper, there had been fifteen housing ministers since the Tories took office. This month, that’s gone up to 16, with Rachel Maclean asked to step down in favour of a return appearance by Lee Rowley (who previously held the role for 7 weeks in 2022) making him the 6th minister in less than 18 months.
The failure of leadership by central government on this point has cascaded down. Local governments are under pressure to deliver, but are being asked to do so with no funding and no strategy.
So did Jeremy Hunt’s autumn budget offer any seeds of hope for the beleaguered housing sector and the wider property market?
An Autumn Statement to remember or forget?
The autumn statement has clearly stirred the whiffs of a potential spring election, with amorous attempts to woo voters, but alongside the headline-wins there was an array of topics, from tobacco duty and AI, to apprenticeships and triple-lock pensions.
Some key takeaways were a 2% cut to employee NIC, an increase in the ‘national living wage’ to £11.44/hr, a 6.7% increase in benefits caveated with tougher requirements for claimants, business rates discounts and investment incentives.
Growth: Hunt leaned on Office for Budget Responsibility figures showing that the economy has grown by 1.8% since 2019, with GDP predicted to grow steadily over the next 5 years. New data shows that the UK’s recovery from the pandemic was stronger than previously thought, though GDP lags behind most G7 countries:
source: House of Commons Library
Inflation: in October, inflation dropped to 4.6%, its lowest level in 2 years, and marked the steepest single month decline (from 6.7% in September) in the consumer price index (CPI) since 1992.
By the end of 2024, inflation is expected to drop to 2.8%, down from 11.1% last year when Rishi Sunak and Hunt took office. Whilst the autumn speech continued to celebrate the government achieving their target of halving inflation by the end of the year, the OBR predicts that inflation will stay higher for longer and won’t drop to 2% until mid-2025, a year later than expected.
Interest rates will therefore stay inflated, with the BoE base rate currently expected to stick around 4% until 2028, rather than drop to 3% as previously predicted.
What’s in the budget for the property professionals?
Planning: £32 million committed to clear the planning backlog and develop new housing quarters in Cambridge, London, and Leeds. A further £450 million will be allocated to local authority housing funds to deliver 2,400 new homes.
To incentivise local authorities (to speed up the system), the government will allow them to keep fees from major applications in return for meeting faster timelines. Any council failing to do so would be forced to refund fees and process the application free of charge, creating ‘a prompt service or your money back.’
Hunt also announced various other funding:
- £5m for DLUHC’s Planning Skills Delivery Fund so LPAs can target development application backlogs
- £5m to incentivise greater use of local development orders in England, to end delays for businesses so that commercial projects secure planning permission faster
- £3bn extension to the existing Affordable Homes Guarantee Scheme to help it deliver 20,000 new homes, in addition to improving the quality and efficiency of thousands more
- £3m for a range of measures to improve the home-buying and selling process (something we advocate in our white paper: ‘digitise the process of buying and selling of homes. Remove the archaic paper-based conveyancing process to speed up the buying and selling process, helping to release more properties to the market.’)
- Local Housing Allowance (LHA) to increase in April 2024, giving around 1.6 million households an average of £800 of support towards paying their rent.
Financially incentivising councils to meet mandatory targets for processing planning applications works on the surface, but it fails to address why applications are taking so long – the severe shortage of planning officers. Penalising councils who simply don’t have the manpower to process applications on time exacerbates the problems as councils will potentially reject applications just to meet the timelines.Nutrient
Neutrality + Planning: Hunt has committed £110 million to support LPA’s to ‘deliver nutrient mitigation schemes’ unlocking 40,000 stalled homes.
Earlier this year, the government attempted to scrap laws on nutrient neutrality which stop new developments that contribute to phosphates and nitrates in waterways. However, the amendment that asked local authorities to ‘assume that new house-building did not increase levels of pollutants’, even if this was not the case, was vetoed in parliament.
Whilst the government criticises Labour for preventing changes to the restrictive nutrient neutrality rules, realistically the blanket nature of the amendment was unlikely to pass environmentalists. Rather than seemingly green-lighting water pollution, a far more nuanced approach was needed, as well as addressing the main source of river pollution: agriculture and water companies. It is estimated that all existing development, including residential, commercial and the rest of the built environment, contributes less than 5% towards the phosphate and nitrate deposits in rivers.
Permitted development: consultation will begin on new PD rights to allow any house to be converted into two flats, provided the exterior remains unaffected.
In July, the government also presented proposals to make planning permission more lenient for:
- converting empty retail premises, takeaways, and betting shops into homes
- barn conversions, repurposing agricultural buildings and warehouses
- home extensions/renovations/loft conversions.
Making it easier to convert housing or retail units into flats will be a boost to housing availability. Repurposing properties that already benefit from utility connections and localised infrastructure is better for the environment and helps regenerate our towns and cities. On the flip side, there is concern over the quality of these conversions and the potential of adding more cramped, sub-standard spaces that lack windows, ventilation and decent insulation.
Mortgage Guarantee Extension: the scheme which enables buyers to take out a mortgage worth 95% loan to value (LTV), therefore requiring only a 5% deposit, has been extended until June 2025 (originally set to end next month).
Meanwhile, the Renter’s Reform Bill, created to regulate rent increases has been delayed with the departure of Rachel Maclean. The banning of ‘no-fault evictions’ has also been scrapped from the bill.
Current affordability constraints mean the effectiveness of the mortgage guarantee scheme depends entirely on the availability of eligible properties. Most first-time buyers are primarily concerned with affordability of their repayments. Lower rates, and hence monthly payments are available to those with larger deposits. With a cost of living crisis, saving for a larger deposit is increasingly more difficult. Furthermore, at 95% LTV based on the average house price, the vast majority of buyers would not even come close to meeting standard income multiples on those mortgages.
The first rung on the housing ladder is further away than it has ever been. First-time buyers were definitely hoping for more in this budget.
Business and investment: Hunt states that the total package of measures announced in the budget will help increase UK business investment by about 1% of GDP. Some of the highlights include:
- New ‘investment zones’ in Wrexham, Wales, Greater Manchester, and the West and east Midlands to increase employment in the areas
- £4.5 billion of investment in manufacturing, including aerospace, life sciences and green industry
- £500 million of funding for AI innovation centres
- £4.3 billion in business rates discounts for hospitality, retail, and leisure businesses
- £960 million for a Green Industries Growth Accelerator
- Full expensing to be made permanent, which will allow businesses to offset investment in certain items such as IT or machinery against tax.
Labour vs Conservatives: who has the right plan for housing?
With an election imminent, housing rhetoric is of course being hauled to the frontline in the political battlefield.
Whilst the Conservatives' notable silence on housing during the October party conferences no doubt prompted some of the measures announced in the budget, Labour have been busy pledging to ‘bulldoze through the restrictive planning system’ and ‘get Britain building again.’
So how does Labour compare to the Tory offerings?
Labour wants to be the government that ‘sides with the builders, not the blockers’ and build 1.5 million new homes over a parliamentary term. The Conservatives, despite having failed to meet, and therefore scrapped house building targets have pledged to build 1 million new homes over this parliamentary session.
Labour’s Housing Reform Pledges:
- A housing recovery plan; a blitz of planning reform to quickly boost housebuilding both for renters and buyers, including affordable homes; investing in local authorities and enhancing local voice on ‘how’ housing is built; tackling litigation that ‘devours time and money before shovels even go into the ground’, removing any discretionary element in decisions and preventing ‘back door deals’ over developing local plans; continuing with development where resistance is purely because of NIMBY culture
- The next generation of ‘new towns’; new communities with beautiful homes, green spaces, reliable transport links and bustling high streets
- Unleashing Mayors; a package of devolution to Mayors, with stronger powers over planning and control over housing investment (In the autumn budget, Hunt states that four new devolution deals across England have been agreed, with mayoral deals with Greater Lincolnshire and Hull and East Yorkshire, and non-mayoral deals with Lancashire and Cornwall)
- ‘Planning passport’ for urban brownfield development; with a fast track approval and delivery of high-density housing on urban brownfield sites; a database of publicly owned land
- Greenfield development; audit of greenfield land with an ability to use ‘grey-belt’ sites, e.g. disused carparks that fall under the green belt
- First dibs for first time buyers; supporting younger people the first chance at homes in new housing developments with a government-backed mortgage guarantee scheme; addressing foreign investment in UK homes that sit unused.
The very least a modern, democratic society should be able to deliver is safe and affordable housing for its population. On that criteria alone the UK is a failure.
Planning: The planning system isn’t fit for purpose – it needs systemic reform (or indeed, bulldozing) rather than dribs and drabs of funding and endless layers of sticking plasters. With a system wholly unchanged since its conception in the 1947 Planning Act, local authorities are straining under the weight of decades of built-up bureaucracy that means ‘large applications need to be delivered in a van’ (William Poole-Wilson).
Funding can help to alleviate staff shortages and upskilling, as well as digitisation and better resources (and it should be ringfenced and directed to these specific investment goals), but after being chronically underfunded since 2009, £32 million is unlikely to have much impact.
As we state in our white paper, a national framework is needed to eliminate decisions based on ulterior motives or opinion rather than a factual check-list. For example, where a constituency seat is marginal, developers are much more likely to have their plans rejected.
Likewise, devolving mayoral powers will have little effect to housebuilding and property development if there is no central government policy that mandates the need for local plans and dictates clear, long-term housing goals. The problems can’t be solved purely at a local level.
Not so green: analysis of the autumn statement has noted a disappointing absence of any definitive climate action. Energy efficiency in homes is a quick win to improving people’s lives by creating warmer homes and cheaper energy bills. Long-term investment in energy-efficiency and broad-spectrum retro-fits of existing housing stock also reduces our reliance on the volatile gas market, reduces expensive upgrades to our energy grid, creates jobs across the country and helps control carbon emissions.
Whilst the government u-turned on net-zero targets in September, decarbonising the built environment sector is still crucial for achieving any net-zero progress. The lack of dedicated measures to support the transition means it comes down to the private sector, but tax reliefs on machinery and tech may not be enough of an incentive.
A damp squib: Despite the array of funding, schemes and incentives announced by the government, it did little to buoy the housing market, with shares in the major house builders such as Barratt and Taylor Wimpey builders dropping marginally (yahoonews).
Knight Frank’s most recent Residential Land Index Report also shows a drop in average greenfield and urban brownfield land values and a dip in new home sales rates. Several developers have reported sales rates of under 0.50, below the long-run average of 0.70 sales per outlet per week. It also reveals that 60% of housebuilder respondents were offering non-cash incentives such as carpets and white goods, while over 40% offered contributions to legal fees or stamp duty.
The issues hindering housebuilding are so intertwined and interdependent that there’s no single fix. If buyers can’t afford to buy houses, developers can’t afford to build them and the shortage perpetuates. A strong housing market is the foundation of a healthy economy, bolstering productivity and supporting growth. Conversely, the current condition leeches deep into taxpayers pockets - the more people who cannot afford to either buy or rent housing means an increasing number of councils are paying for expensive temporary accommodation, which costs far more than decent, permanent housing.
Any government needs to acknowledge this and put in a long-term strategy rather than sporadic 12-18 month schemes and small cash injections here and there. Solutions have to be holistic, with joined-up thinking and strategies across all parties.
Paul Davis, Co-Founder, Nimbus: ‘The government has made a few steps in the right direction. I’m a big believer in brownfield land and repositioning existing buildings into residential, and post-covid changes to our high-street means there’s opportunity to do that [and] the locations are naturally sustainable because that’s where the employment space is.
Government policy to focus on brownfield and the ability to change the use of certain buildings has caused a lot of interest.
I think the steps the government has made around PD have been very helpful, but there’s still questions around airspace. I think repositioning brownfield sites into high-density building, in the right place with the right scheme, would be very helpful as well.’
Steve Smith, Head of Sales, Mint Property Finance: ‘Politicians always say we’re going to do this, make that easier, make planning easier, make building houses easier - which sounds great but nothing has massively changed and we’re looking at planning conditions in councils that are archaic. It needs an overhaul.
It’s easier for the government to incentivise SME’s rather than go out and build themselves. There’s things that they could do, like loans for certain areas or brownfield sites for example, but we’re just not seeing a lot of that happening at this moment. We’re all in the same opinion about brownfields, but for developers it can cost a lot of money to get the land ready for use.’
Anna Ward, Associate, Knight Frank: 'We've seen a real political stalemate in planning, with various u-turns, all of which has created a lot of uncertainty. In 2021 we saw Boris Johnson trying to push through zoning reforms which could have fundamentally overhauled the system but he had to climb down on the policy. More recently we’ve seen Rishi Sunak try to re-introduce mandatory housing targets but his own MP’s rebelled against it. Politicians face a lot of opposition, so can’t necessarily bring in the changes they want. It will be interesting to see what the next government can get through where the previous government has failed.
I agree that brownfield policy is important but inevitably we are going to have to build on green belt land, which has come to the forefront of political discussion with Labour’s ‘grey-belt’ the starting point for building on low-grade green-belt. I also think the zoning system, where you can automatically designate land for development is a good idea and could be re-looked at. Labour’s ‘brownfield passports’ will touch on one aspect of re-zoning, but it is of course just tinkering and not an overhaul.’
For more insights on these issues, watch Episode 3 of our Brick by Brick series.