Developers’ profit margins should not be dictating UK housing policy

In the run-up to the general election, a slew of housebuilding promises have been made. This week, Labour has renewed its pledge to build 1.5 million new homes over the next five years, which was trumped by the Conservatives’ manifesto commitment of 1.6 million homes over the same period.

Meanwhile the Liberal Democrats have announced they will build 380,000 homes a year, with 150,000 of them being affordable, while  the Greens have set out a similar target for social housing.  

Although these numbers appear seductive, it is worth bearing in mind that the last time such ambitious development targets were met was nearly half a century ago.

Moreover, while the election’s housing focus is clearly on the urgent need for more homes, the quality of construction and the delivery mechanisms to achieve these goals are not in the limelight, with a few notable exceptions. The Green Party manifesto calls for all new homes to meet Passivhaus or equivalent standards, mirroring the devolved Scottish government’s proposed Scottish Passivhaus equivalent policy. The Lib Dems have pledged to “immediately require all new homes and non-domestic buildings to be built to a zero-carbon standard”.

Housebuilders and developers have historically accounted for around a fifth of election donations

One of the reasons why the critical issue of higher energy performance standards is not featuring in either the Labour or Conservative manifestos may be linked to the fact that housebuilders and developers have historically accounted for significant proportion of election donations. Which raises the question of whether developers’ profit margins should be dictating UK housing policy?

Lost energy savings, in the nine years following David Cameron’s 2015 decision to drop the “zero-carbon homes” standard and effectively ban onshore wind, are estimated to have added over £3.2bn to UK taxpayers’ bills. According to Ofgem the average UK household spends approximately £1,800 per year on energy bills, which represents about 6.5% of the average UK salary after tax.

For those on low incomes and benefits, the situation is dire. According to National Energy Action (NEA) in 2021 there were 4.5 million UK households in fuel poverty and that figure is now estimated to exceed 6 million.

This means that nearly a quarter of all UK households cannot afford to heat their homes to the temperature needed to stay warm and healthy. The only way to mitigate energy price volatility is to make homes as energy efficient as possible.

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Debates around higher building standards, such as for the Future Homes Standard and Scottish Passivhaus equivalent, are often hamstrung by the assumption that calling for higher standards will reduce the number of homes delivered. It is worth noting, however, that the undersupply of homes actually began as local authorities progressively withdrew from the housing market during the 1970s.

Recent UK government studies have identified a range of factors constraining housing supply, but higher building standards are certainly not listed among these. The 2023 report Tackling the Under-supply of Housing in England identified a range of solutions to stimulate housebuilding including major public sector investment in housebuilding, more reasonably-priced land suitable for development, properly-resourced planning departments, and better support for SME building firms.

While multiple factors have contributed to the current situation, the speculative nature of housebuilding is likely to be the dominant factor in perpetuating the UK’s housing crisis. The 2024 Competition and Markets Authority’s Housebuilding Market Study commented that, “under the speculative model of housebuilding, housebuilders that build homes for private sale have an incentive to match, but not exceed, the absorption rate”.

A 2023 report found that by controlling the supply of housing land and housing delivery and securing state support for initiatives that benefit their shareholders, the “big three” UK housebuilders have been able to substantially increase their profits without increasing the number of homes they build.

It is important to challenge the assumption that higher building standards will cost significantly more

Government action is needed on multiple levels to stimulate housing delivery, including increasing funding for social housing built to higher energy efficiency standards, supporting non-profit development models such as community land trusts (CLTs) and self-build housing. Research has shown that, compared to renters and traditional homeowners, CLT homeowners report having the lowest monthly housing payments along with the highest quality of life.

It is important to challenge the assumption that higher building standards will cost significantly more. Building to the Passivhaus standard has an estimated uplift of 4% to 8%, which would go down when delivered at scale. Since residential land in the UK typically comprises around 67% of the total property value, an uplift of 6% in the build cost would equate to less than a 2% increase in the final house price. It is also possible that any additional costs could be absorbed through adjustments to land values.

Moreover, building to the Passivhaus standard would cut home heating demand by up to 80% compared with current building regulations.

Adopting such standards would address fuel poverty, reduce the strain on the national grid and save the NHS money. These combined societal benefits far outweigh any small incremental increase in housebuilding costs.

The manifestos we have seen emerging this week are promising to deliver little more than the status quo. Instead, a radical new approach is needed to address the root causes of the UK’s housing, energy, and fuel poverty crises.

Robert McLeod is professor of building physics and sustainable design at Graz University of Technology