Housebuilding needs to learn the lessons of the 1930s

The rate at which economic slang becomes defunct puts teenagers to shame. The term ‘credit crunch’ now sounds rather quaint and archaic, belonging to a more innocent time.  The term ‘double dip’ also seemed confined to history’s rubbish bin – until this week’s shock GDP figures.

The construction industry was by far the biggest contributor to the decline, with a dizzying 3.9% fall in output. Sceptics will probably think back to the implausibly high figures given for construction growth earlier in the year, and either treat the whole exercise with disdain or assume this is a correction for earlier errors. It is also debatable how much of this is a result of December producing weather more usually associated with Siberia than Swindon.

Nevertheless, construction – and housing in particular – had been feeling the icy chill for at least a few months before the snow arrived. The NHBC’s registration figures have been on a downward trend for a few months, and the Government’s house building statistics paint a similar picture. A browse through the latest batch of financial reports hardly suggests an industry ready to expand.

“Our priority continues to be maximising the value achieved for each home completion rather than looking to grow volumes,” states Taylor Wimpey. “Our focus continues to be on optimising selling prices rather than pursuing volumes,” adds Barratt. “We continue to focus on achieving the best possible selling price for our new homes rather than increasing volumes,” echoes Persimmon.

This year should see the statistics dominated by the return of the executive home

The post-crisis strategy has, for some time, been on developing ‘traditional’ family homes in more typically suburban settings, with a bias to the south-east. The proportion of flats built has only dropped slightly so far, but that is presumably the result of building out historic sites.

This year should see the statistics dominated by the return of the executive home. This means lower numbers for two reasons: these are built at lower densities, and, in any case, there really are not that many sites with consent, or likely to get consent, for the sort of house that builders want to build.

The mortgage market is also enforcing lower numbers. With wholesale funding rarer than hen’s teeth, competition muted and banks focussing on rebuilding balance sheets, there is a real limit to the number of loans that can be written, no matter how much government and house builders implore the industry to lend more. And, ultimately, developers will trim supply to suit the number of loans available.

This also means they can be picky. In a troubled world, traditional, tried-and-tested products look most secure, and so it is with housing. Moreover, there is a real undersupply of family accommodation in desirable parts of the country, and the birth rate remains at a historically high level – the highest since the 1970s.

But there are other, more fundamental, issues at play, and it all stems back to the mortgage market and the distribution of property wealth around the country. To get a loan to buy a house, in most cases you need to have a deposit of at least 20% of the value. For the sort of properties in question, that’s probably a lot more than the £25,000 required for an average first-time buyer’s home.

People with that sort of capital tend either to be older – and if they don’t have children, they might be thinking of them – or they have sufficiently wealthy and generous parents. And they are concentrated in the south-east and a few other affluent areas, partly because, thanks to booming house prices, they have the most housing equity. It helps that this dovetails with the areas that so many economists think have the best employment prospects over the next few years – and rather low levels of public sector jobs. (London, with its still-booming economy and its international appeal remains a case apart. It is also the only place in England which still has a spatial plan and housing targets, but that is a tale for another day.)

But the private sector is clearly not yet restored to health

Activity in the conventional private sector, though, is probably not the most significant issue troubling the wider house building industry. It is easy to understate the extent to which the state has supported residential construction over the past two years. In the year to Q3 2010, the National Affordable Housing Programme – which dispenses housing grant for social homes and shared ownership properties – resulted in some 46,358 starts, according to Homes and Communities Agency statistics.

That is a whopping 45% of all housing starts during the year – and that doesn’t take into account schemes where generous provision of grant made the private sale portion viable. Nor does it end there. Over 15,000 of those units were kick-started by, ahem, the HCA’s KickStart programme. And over 8,000 purchases were part-funded by HomeBuy Direct.

It may not have escaped the reader’s notice that the budget for housing grant has been cut back by around half moving forward – and that both HomeBuy Direct and KickStart are now closed for new business. Moreover, housing associations are still digesting the changes to how housing grant will be dispensed and used. It is hardly surprising that the industry is scaling back activity.

The year ahead looks very difficult. There will be no serious increase in mortgage funding, and everyone will be getting to grips with very different planning and social housing systems. House prices look weak almost everywhere outside London and, maybe, a few towns in the south-east. The end result could be even lower build numbers than we saw in 2008/9.

But in the background is the endemic, structural lack of housing in this country – something that remains one of the most significant domestic policy challenges. If all we do for the next few years is build houses for a small number of affluent families in the south-east, a more general economic recovery will bring with it a supply shortage and a housing boom that will make the statistics in the Barker Review look positive in comparison.

Most people now understand the need to reduce public spending, and some reform of social housing was overdue.. Providing some form of intervention or support – and it may be something very different to that employed before –  would not only help ameliorate the housing crisis, it would also prepare the industry for better times and provide much-needed employment.

During the 1930s, Britain was hit by the global depression – but did not suffer as much as some other countries. Part of the reason for this was the unleashing of an astonishing building boom, with well over 300,000 homes built each year throughout most of the decade.

This produced the archetypal semi-detached suburb and vastly improved the living standards of ordinary people, while keeping huge numbers of people in work. Of course, there were big differences in the financial condition of the country – the Building Societies were well-capitalised and ready to lend, and build costs were dropping – but it still demonstrates how important house building is to both individuals and the economy. Government would be unwise to ignore it, even if its growth does upset the Home Counties.

Jon Neale, a partner at King Sturge, with the first of a regular series of housing columns for Building.co.uk