Analysis: Housing benefits

Earlier this month housebuilder Persimmon plunged into fresh controversy regarding the scale of its management bonus package set, which is to distribute £250m between its top three execs, and hundreds of millions more to 140 other bosses. The Times calculated that the payouts to chief executive Jeff Fairburn, financial director Mike Killoran and managing director Dave Jenkinson under the long-term incentive plan (LTIP) have added £3,100 to the cost of every single Persimmon house sold since it set it up five years ago. In fact, the package as a whole, worth over £500m and described by Liberal Democrat leader Vince Cable as “obscene”, comes in around an eye-watering £7,000 per house. 

The furore over this astonishing package already cost the jobs of both Persimmon chair Nicholas Wrigley and remuneration committee chair Jonathan Davie before Christmas. However, so far Fairburn has hung on to his £100m-plus bonus. Likewise, bosses at Berkeley Group pocketed £92m this year despite 16% of shareholders voting against the remuneration package.

These controversies, however, are simply the latest in a lengthening charge sheet held against volume housebuilders by their critics. Aside from excessive pay, large housebuilders’ role in the leasehold homes “scandal” under which homes were sold with escalating ground rent charges, the deterioration in customer satisfaction with new homes, alleged slow build-out rates on large sites, the use of viability arguments to escape affordable housing obligations and, above all, the rate of progress on increasing supply, have together conspired to put them in the dock of public opinion. There are growing signs the government is losing patience with a sector it has steadfastly supported since the depths of the recession.

But while housing secretary Sajid Javid has directed some criticism at housebuilders in recent speeches, and chancellor Philip Hammond has set up a review of the pace at which planning permissions are built out, the UK is still reliant on private housebuilders for more than 80% of supply. Therefore, ministers will have to be brave to force any significant changes that might jeopardise this supply.

Frustration

While David Cameron and George Osborne held the reins of power in Downing Street, big housebuilders saw funding and policy initiatives tailored specifically to stimulate their businesses, while support for other players in the market – most notably, grants to housing associations – was reduced. Most transformative for housebuilders was the launch in 2013 of Help to Buy, which saw the government support new home sales with loans worth 20% of the cost. A spokesperson for the Home Builders Federation (HBF), which represent most major builders, says the scheme “played a big part in delivering the significant increase we have seen in housing supply”. Launched alongside a similar mortgage guarantee product, within a year the number of new house starts was up by a third.

”It’s indefensible […] It’s hard not to argue that a significant chunk of their profits are down to a benefit the government has introduced across the whole industry”

Kevin Cammack, Cenkos

 

However, with the arrival of Theresa May as prime minister came an administration instinctively more sceptical of big business, and a new agenda pushed by a fresh secretary of state, Sajid Javid. The subsequent housing white paper stressed the need to bring in new types of businesses, claiming delivery had been held back by “a construction industry that is too reliant on a small number of big players.” 

Since then, however, as fears over the track record of the big firms have heightened with the leasehold “scandal” and the quality problems at Bovis Homes that partly prompted the departure of its chief executive, David Ritchie, the evidence suggests ministers have got even more sceptical about the large firms.

As well as Hammond’s commissioning of the Letwin Review, in December Javid clamped down much harder than expected on the sale of leasehold homes by banning ground rent charges on new leaseholds entirely, and floated the idea of a new housing ombudsman, previously resisted, to deal with buyer complaints. 

The increase in output seen since the introduction of Help to Buy is the basis of housebuilders’ defence to their critics. While the HBF counters that the industry is working with the government to solve the leasehold problem and is investing in training, and that the planning system is to blame for preventing builders getting on site quickly, its fundamental point is that homes output has increased 74% in the last four years, largely because of the actions of its members, making serious inroads into the housing crisis (see above, “Have Housebuilders Delivered?”). A spokesperson said: “The industry has delivered huge increases in supply in recent years. Housebuilders are committed to continuing to deliver further increases and supply even more high-quality homes. The industry is recruiting and training tens of thousands of new workers and revising all its systems to ensure it can supply the number and type of homes people want to live in.”

“[it’s] very foolish from an industry in receipt of a lot of government largesse. It is the behaviour of a sector that thinks it’s capable of getting away with anything. It’s just greed”

Nick Raynsford, Heylo

The problem, says Susan Emmett, head of housing and urban regeneration at right-leaning think-tank Policy Exchange, is that as housing has risen up the political agenda, housebuilders are under a lot more scrutiny. Meanwhile, the level of subsidy enjoyed by major builders, particularly through Help to Buy, which has now had £30bn of government money committed to it, has left ministers feeling they have a right to expect more back. 

Emmett says: “Output has increased, but a lot more is needed. Meanwhile these stories come out that influence people’s perception of whether housebuilders are really acting in the public interest. It’s a massive pain for ministers. They’d desperately like them to play nicely and deliver more.”

Help to profit

Moreover, analysis of the impact of Help to Buy has shown that it has not only supported more construction, but also raised prices overall and boosted housebuilder profits. Alastair Stewart, analyst at Stockdale Securities, has calculated that purchasers are paying 5-7% more for a Help to Buy property than they would otherwise, with the bulk of this increase going directly to housebuilders’ bottom lines. 

A report from Morgan Stanley last year reached a similar conclusion. Kevin Cammack, analyst at Cenkos, says while Help to Buy has probably boosted production at major builders by 10-15%, it has also underpinned record profitability. “For housebuilders, the profit per unit is much higher on a sale with Help to Buy than without. Most housebuilders will spend around 3% on incentives, but with Help to Buy your incentives budget is usually zero – Help to Buy is your incentive.”

This use of public money explains the level of media anger directed particularly toward Persimmon, where half of sales are supported by Help to Buy. Cenkos’ Cammack estimates the additional profit Persimmon can directly attribute to Help to Buy is pretty much what it has committed to pay out in bonuses: “It’s indefensible and it tarnishes the reputation of the sector. It’s hard not to argue that a significant chunk of their profits are down to a benefit the government has introduced across the whole industry.” 

Meanwhile, a similar bonus scheme at Berkeley Group, where Help to Buy aids less than 5% of sales, has generated less publicity. Former Labour housing minister Nick Raynsford, now chair of housing association Heylo, describes Persimmon’s bonuses as “grotesque” and “very foolish from an industry in receipt of a lot of government largesse. It is the behaviour of a sector that thinks it’s capable of getting away with anything. It’s just greed.”

A Persimmon spokesperson defended the policy, saying it was approved by shareholders in 2012 and was “designed to drive outperformance through the housing cycle and to incentivise the management”, during which period output had soared 70%. He said: “From the launch of our long-term strategy at the start of 2012 to 31 December 2017, the group has made a significant contribution to UK housing supply, delivering 80,700 new homes.”

Disgraceful

Nevertheless, the level of concern about big housebuilders is such that crossbench peer Lord Best earlier this month organised a debate in the House of Lords. He told Building that he believed “most major ‘volume’ housebuilders have let us down”, accusing them of reneging on affordable housing agreements, perpetrating the leasehold homes “scam”, “shoddy workmanship” and a “disgraceful rejection” of the need to train the next generation of workers. He said: “Not only is it crystal clear that private sector housebuilders will never get us anywhere near the 300,000 homes we need, but dependency on this sector now means relying on a very small number of huge firms.”

Asked if the industry’s reputation had been tarnished, putting it under political pressure, a spokesperson for the HBF said that the whole industry – including local authorities and housing associations – was under pressure to deliver more homes and that “the industry is very conscious of the need to work with all parties to ensure more high-quality homes are provided in the coming years.”

A source close to the government said ministers wanted housebuilders “to do more” on supply and that “they have not historically behaved as well as they should have done.” Even more than increasing supply, though, the source said ministers were concerned about build quality. In a speech to the NHBC in November, Javid said that “too many new-build homes are simply not good enough. I see it in the media. I see it my postbag. Roofs that leak, front doors that don’t properly close, insulation that has been promised but never fitted.”  

“Help to Buy needs to be more targeted […] This may mean making it conditional on caps on excessive bonuses, or requirements to deliver affordable housing”

Susan Emmett, Policy Exchange

His comments follow an all-party parliamentary group report on new housing in 2016, which branded build quality as “unacceptable.” Chartered surveyor and peer Lord Lytton says his professional experience backs this up, having encountered numerous problems including “instances of occupiers who couldn’t get themselves warm, in new houses where insulation has not been put in properly, or even at all.” Lytton says: “At the last election many MPs were caught on the stump by voters asking what they were going to do about the poor quality of their new homes.” 

Overall customer satisfaction with new homes, measured by survey, has fallen from 90% to 84% since 2014, with 98% of buyers now reporting snags. A spokesperson for the HBF counters that the declines in customer satisfaction levels, which came as output increased significantly, “have been stopped and are now being reversed” and that the industry was now “massively focused” on quality. “Satisfaction levels remain extremely high and are at a level that compares with any other sector or product,” he said.

Higher standards and greater diversity

Nevertheless, a spokesperson for the ministry of housing and local government said it wanted to hold developers to a “higher standard” on quality, and repeated Javid’s pledge to consider setting up a new ombudsman. The spokesperson said: “This government is looking to improve redress – including whether housing, like other sectors, should have a single ombudsman. It could help drive up standards across the whole industry and increase protections for consumers.”

With these concerns in the air, there is increasing consensus – supported by government and, indeed, the HBF – of the need to diversify the suppliers of new homes. Since publishing the white paper, the government has committed £750m to SMEs, and those using modern methods of construction, allowed local authorities to borrow £1bn to build homes, and increased affordable housing funding by £2bn. 

But critics want the government to do more. Top of the list for many is reform of Help to Buy. Theresa May in October announced a further £10bn toward Help to Buy, ensuring its continuation until 2021. The HBF is campaigning for the government to commit beyond that, and says it wants to help government “shape the scheme in a way that best provides confidence for the industry.”

However, there are increasing calls, such as by Lord Best, to phase the support out or at least introduce some kind of quid pro quo which requires housebuilders using the subsidy to give something back. This could also potentially free up funding to be directed instead to other players.

Crossbench peer Lord Kerslake, the former head of the civil service, says: “Help to Buy needs to be more targeted; the government needs to expect more. This may mean making it conditional on caps on excessive bonuses, or requirements to deliver affordable housing, or only where it’s needed for scheme viability.”

But any reduction would have significant consequences. Policy Exchange’s Emmett says: “As the market slows, Help to Buy becomes even more important in underpinning sales.” Raynsford says: “It’s got to be phased out, but the problem is you can’t cut it out without dire consequences. It’s a drug.” Cammack says housebuilders are frightened change is coming, while industry sources suggest that the HBF is privately concerned that the furore over Persimmon’s bonuses might persuade the government not to renew Help to Buy. 

This raises the stakes for government. Raynsford, for one, doesn’t have high expectations, viewing the government as too weak to risk investing in other providers. He says: “Who else apart from the major builders have ministers got to turn to? Unless they are prepared to put the effort and money in to really exploring alternative providers, then nothing will change.” While the volume housebuilders themselves may take some comfort from this prognosis, it is likely that few others will.