Will the government’s new housebuilding plan really make homes cheaper?

The government's planning white paper is stirring a growing backlash in the Tory shires, promising as it does to increase housebuilding in areas of peak demand in and around London. But what is less clear is whether these plans to build more housing will actually make housing more affordable.

Most people would assume that as the supply of housing rises to meet demand, prices will fall. After all, this is how it works with virtually all consumer goods and services, from taxis to TVs. But housing is different. Once a developer has secured planning permission to build houses on a plot of land, it will generally choose to build them deliberately slowly so that it doesn't flood the local housing market with a glut of new properties that bring prices down.

To the layperson, this might seem inexplicable—all those housing targets and planning rows, and yet increasing the housing supply doesn't actually make housing more affordable.

The reason is that the “build-out” rate of a plot of land—the pace at which houses are built once planning permission has been granted—is based on how quickly the developer thinks new houses can be brought to market without reducing the price at which they can be sold. This is called the “market absorption rate"—how many new houses the market can absorb without diluting the sale price. Build houses too quickly, and the laws of supply and demand will reduce the price the houses can be sold for.

"I've had it said to me that the last thing housebuilders will do is actually reduce the price of the home they're trying to sell," says Neal Hudson of Residential Analysts. "They'll pay your stamp duty and they'll buy you a car or send you on a foreign holiday before they'll actually reduce the list price of the home."

Despite appearances, this is not due to profiteering—not by developers, anyway—but the fact the value of land is based on the predicted sale price of the houses that might be built on it, like a precious metal that could be mined and sold. When developers come to buy land, the price they are willing to pay depends on how many houses of a particular type they are planning to build, and how much those houses sell for on the local market. If the developer then builds out quickly and gluts the local market with housing, the sale price will drop, and its profit may even become a loss on what it paid to acquire the land and build the housing—especially in areas of high demand, where land is expensive." Everybody's acting rationally in this system. There's a system which has incentives, and people are responding to those incentives," says Anthony Breach of the Centre for Cities think tank.

In 2018, the government published a report commissioned from former cabinet minister Oliver Letwin into why it was taking so long to build out housing developments in areas of high demand, once planning permission was granted. Letwin reviewed 15 large development sites in high-demand areas. The median build-out period for these sites was 15.5 years; the slowest site took more than four decades to build its full complement of permitted housing. He concluded that slow build-out rates were caused by developers' need to maintain the sale price of their new housing, based on the price they'd paid for the land.

The problem isn't uniform around the country. Hudson says the cost of land accounts for less than a fifth of the cost of homes built by the big developers. But in the highest demand areas, especially around London and the south east, land values can skyrocket.

Andrew Whitaker, planning director with the Home Builders Federation, says housebuilding can't bring down the cost of homes because 90 per cent of transactions are for used homes, and because of that dominance it's these used homes that determine house prices—the new-build tail cannot wag the second-hand dog.

The HBF says that even if new housing developments were built at a rate that lowered their sale price, buyers would just sell the house at a mark-up in line with the price of local second-hand homes, thereby pocketing the difference. One solution might be for the government to buy land more cheaply so that it can sustain low-cost housing, as proposed by Labour at last year's election via a Sovereign Land Trust.

Another is to use supply and demand to reduce the cost of land, which would then cut the cost of housing. The government's plan opens up some greenfield sites for potential development—but maintains the Green Belt, which critics argue curtails badly needed housing around high-demand cities such as London, Bristol, Cambridge and Oxford.

The government needs to “make much more land available for development, to make land cheaper for the developers so they don't need to build out at this slow rate," says Breach. "If the supply of houses was much looser... it wouldn't be possible for developers to go to an absorption rate, because another developer would just come in and undercut them and build way more houses and scoop up all the profit from that particular development."

The problem with this is political—local residents in high-value suburbs often oppose large-scale housebuilding. The planning white paper is already running into opposition from Tory councillors and MPs. Whitaker says residents often explicitly state that they object to proposed housing developments because they would reduce the value of their own homes. "We call it the Daily Mail dichotomy—it's the idea that you want house prices to be as high as possible if you own one, but you want them to be as low as possible if your kids want to get on the housing market."

Breach counters that the current system, which restricts the availability of land, leads to large amounts of housing being dumped on one or two sites in each area—creating traffic congestion and construction noise and alienating residents. By opening up far more sites to less intensive development, he argues voters could be won round.

This would require an overhaul of our planning system more radical than even that proposed by the government, whose plans open up more land for development but leave the Green Belt intact. But without changing the existing model, the consensus seems to be that house prices cannot come down. "You need to go right back to the Kate Barker review [a government housing report in 2004] where she said the best you can hope for is to build enough housing to control the increase in house prices, rather than actually decreasing house prices," says Whitaker.

The Letwin review recommends diversifying large development sites to include more subsidised forms of housing—both social housing and subsidised models such as shared ownership. "If you want to get these homes built out faster you can't be building them for private sale. You're going to have to build them into a different demand, and that's where social housing comes in," says Robin White of homelessness charity Shelter.

Because there is so much demand for social and subsidised housing, and because the people looking for these types of housing aren't the same as those looking to pay full price, these homes can be built much quicker without reducing the sale price of other new-builds, increasing the build-out rate.

The government's planning white paper appears to support this approach, while kicking the details down the road. An MHCLG spokesperson said: "We are overhauling the country’s outdated planning system to deliver the high-quality, sustainable homes communities need...”

"Our proposals will increase the supply of land available for new homes where it is needed to address affordability pressures, support economic growth and the renewal of our towns and cities."

But the white paper still leaves funding for social housing dependent on cross-subsidies from the sale of private homes—a process that has thus far failed to deliver anywhere near enough social housing. Whitaker, Hudson and White all agree that the most logical option is for the government to directly fund new social housing.  As White puts it: "The government can't outsource solving the housing crisis."