Way back in the prehistoric past of 2009, a young opposition politician wrote an article for Building Magazine in which he likened building homes to Buckaroo! For those that don’t remember the legendary game, it involved loading more and more items onto a plastic donkey before it finally bucked, throwing them all off.
“The reason Buckaroo is so illuminating,” the politician explained, “is that it underlines the eternal truth that if you pile too much onto even the most willing bearer of burdens then you end up getting nowhere. Which is what this government has done with developers.”
Little over a decade later the author of that piece, Michael Gove, found himself appointed as the Secretary of State responsible for the planning system giving him the opportunity to remove some of those burdens. He didn’t take it, choosing to add to them instead.
It increasingly looks as though we’ve reached the point where the donkey is bucking.
The Housing Forum, an industry body, estimates the average cost of building a new home to be just over £240,000 not including any land value or developer profit - more than house prices in about one fifth of England. Zoopla, a property website, calculates new housing development is unviable across 48% of the country. The economics of building apartments, which are more expensive to build than houses, are even worse. Molior, a market research company, reports that new housing development is no longer viable in half of London, even if the land were free.
As Jack Airey, a former housing advisor at No 10, explained in a recent blog, “Time and again, new taxes, regulations or levies on the sector are presented to ministers as painless interventions that will be absorbed by industry or passed through to land values” and that there was “little understanding of how incremental burdens accumulate on the ground.”
When the cost of building a home exceeds what it can be sold for, home builders just stop building. That’s partly what has happened in London, where housing starts have plummeted to all but zero and Sadiq Khan, the Mayor, is scrambling for political cover to reduce affordable housing requirements to kick start development.
The other factor in London, besides build costs, is delays securing approval for new high-rise schemes from the Building Safety Regulator. A sign-off process envisaged to need 12 weeks is instead taking an average of 9 months. The investors who fund high rise projects are turning away from the sector as a result. Yet another regulatory burden imposed on the development industry adding cost and delay.
Too often, developers are seen as a blank cheque.
Every local authority has its own mix of policy requirements, although they are not all widely publicised and are often only discovered after an application has been submitted. To secure planning permission for new homes, developers are variously expected to provide affordable housing and serviced plots for self-builders, commit to using local labour, build with swift bricks, bee bricks and provide hedgehog highways, in addition to delivering a 10% net gain in biodiversity value (something that will become harder to achieve as farmers are encouraged to increase the ecological value of farmland).
Minimum space standards must be met, homes designed to provide cross-ventilation and others provided specifically for older people. In some parts of the country, fully serviced “rollback” plots must be provided at a discounted price for those whose current homes are at risk from coastal erosion. Electric vehicle charging points are increasingly becoming mandatory.
Parks, sports pitches, allotments and community orchards must be provided and contributions made towards unspecified “public realm” improvements. Some local authorities require 1% of the build cost of a new development to be spent on public art installations. In the Chilterns, developers must deliver new natural green spaces for the public so that further damage to an area of protected habitat is avoided despite the National Trust, who own most of the site, operating a very popular cafe. It is not unusual for developers to be asked to subsidise an existing, loss-making, bus service. One builder was asked to pay for a new composting toilet for some nearby allotments.
Home builders are also being asked to make up existing shortfalls in infrastructure investment that have little to do with the new homes being built. To limit pollution from nutrients in rivers, the industry is being asked to fund the upgrade of sewage works that water companies should be funding themselves or pay pig and dairy farmers to stop farming - despite new homes contributing less than 1% of nutrient pollution. In some areas, new homes aren’t allowed to increase water usage despite the last new reservoir in England opening more than 30 years ago.
Funding is demanded for new school places, GP surgeries and even acute medical care when new homes don’t create new people, they just spread out the existing ones. Some police forces are asking for contributions towards new vehicles and “staff set-up costs.”
Updates to Building Regulations add new cost burdens too. Apartment blocks of more than 18m in height must include two staircases, even though the government’s own research suggested it will make little difference to the speed of evacuations. Bars are now required across windows to stop people falling out, despite that being so rare that such incidents aren’t even recorded. The upcoming Future Homes Standard, which requires new homes to be more energy efficient, will add £6,200 to the cost of the average home according to The Housing Forum. A new Building Safety Levy, to cover the costs of replacing unsafe cladding, will add around £1,000 to the cost of the typical new home.
Demonstrating compliance with all these requirements makes planning applications slower and more expensive. Planning consultancy Lichfields calculates the cost of the supporting evidence for an outline planning application has increased by 450% since 1990. It now takes almost two years to secure outline planning permission for a scheme of 100 homes.
Yet faced with an apparently free way of delivering other policy objectives, politicians still can’t help themselves. Grey belt development is only allowed if additional affordable housing is provided, rendering it unviable in large parts of the country. A recent consultation on build-out rates suggested compelling developers to provide some homes on larger sites for market rent. An amendment proposed by some politicians to the Planning and Infrastructure Bill would have made swift bricks a legal requirement for all new homes, although the government seems to be resisting this one - at least for now.
All of these requirements are reasonable in isolation. Nobody is saying any of them are bad things. We will all strongly believe that some of them are incredibly important. But it is the cumulative burden of these wide-ranging policies that is impacting the viability of development.
The glib, populist answer to this challenge is that these costs should simply be taken off land values - but that can only be done up to a point. An important, but often overlooked factor in development is that landowners don’t have to sell their land. If they don’t think it’s worth their while, they will hold onto it and hope for better times ahead.
Land values are what is left after build cost and developer profits are deducted from the estimated selling price of the new homes, and usually track house prices as a result. Today land is worth roughly the same as in 2021 depite house prices being 25% higher. Since 2007, house prices have risen by 50%, and land values fallen by 20%. That isn’t because developers are making more profit. In 2015 Persimmon reported an operating margin of almost 22% compared to just 14% last year, for example.
That tells us that virtually all of the increase in house prices has been absorbed by higher build costs. It also tells us that land values have reached, or are close to reaching, the point below which owners won’t sell.
And The Housing Forum, Zoopla and Molior are all reporting that, in many places, building new homes isn’t viable even if the land were free in any event.
We need to ask what the planning system and development industry is actually for. Are these policy requests all really required to mitigate the impact of the development on the surrounding area, or they making up for a lack of public sector funding elsewhere or simply trying to provide nice things?
In the midst of a housing supply crisis, delivering new homes is a good thing in its own right, improving housing outcomes for everyone. If we want development to contribute to a plethora of other government policy objectives too, we need to accept that will be at the cost of housing delivery. How much of a reduction are we prepared to accept?
The 170,000 children living in temporary accommodation would love to have a home where they can play Buckaroo. The cumulative burden of planning and development regulations is making that less likely. Not even the strongest of mules can carry an unlimited load.