The way ahead

The way ahead

Christmas is the time of year for headaches, and customarily they are alcohol-induced. However, the housebuilding industry’s seasonal headaches are not being caused by an excess of Christmas cheer: that commodity is in short supply. The market is slowing and the planning system is showing no signs of improvement. At the same time as the government is calling for accelerated delivery, it is launching a welter of initiatives and regulations aimed at making housebuilders’ product more sustainable and better quality. Crucial elements of the Planning Act, Planning Policy Statement 3 on housing, Part L of the Building Regulations and more are on the agenda.

Planning and housing minister Keith Hill said earlier this month that the new Planning Act was simply the start of the government’s change process: “A new planning system is not an end in itself, but a means of delivering sustainable communities, places where people want to live and work.”

But housebuilders may need more than an Alka Seltzer and a quick lie-down to deal with the headaches involved in making that happen.

The Planning Act

By far the biggest change on the agenda for next year is the reform of the existing planning framework through the ongoing implementation of the Planning Act. Although the act itself received Royal Assent in May, it only provides a legislative framework, and most of the detail is contained in the subsequent parts being introduced over the course of a year or more.

The act changes the planning system at regional, local and development control levels. It ditches county structure plans, and replaces regional planning guidance, local plans and urban development plans with regional spatial strategies, local development frameworks, and local development schemes. The new modus operandi for development control is outlined in Part 4 of the act, and is due to come into force in full next year. This will reduce the time limit for implementing a planning permission from the present five years to three years, and will prohibit developers from “twin-tracking” planning applications, ie submitting more than one planning application for the same site. Outline planning applications will also have to be accompanied by new supporting information, notably a statement of design principles and community consultation.

All of this will have a big impact on housebuilders, especially the greater detail required with planning applications, argues development consultant Roger Humber. “The point of outline planning permission is to test the acceptability of development. This is front-loading a huge amount of development risk.”

The House Builders Federation also believes that the new planning application format could be problematic. “The more detail you have to provide, the more complex the decision-making process becomes and the more delay is likely,” says spokesman Pierre Williams.

The ending of twin-tracking, which developers perceive as a time-saving measure, could also have unhappy consequences. “There will probably be even more appeals, because if housebuilders aren’t able to twin-track, they may get frustrated by delays and opt to go to appeal,” says Stephen Turnbull, partner in real estate at law firm Lawrence Graham. “The appeals system is already under pressure and it will get more so.”

The Planning Inspectorate is already finding it difficult to cope with the present level of appeals following the introduction of two regulatory measures over the last year: the introduction of planning delivery grant, which encourages local planning authorities to process applications swiftly without engaging in lengthy debate, and the reduction of the deadline for lodging an appeal from six months down to three months. As a result, planning appeals in the queue face a one-year wait for a site visit on written representations cases, causing delay and added costs to developers. Understandably, a repeal of the three-month rule is being mooted for next year.

Under-resourced local authorities, which are estimated to be short of something like 4000 planners, are struggling with one of their main challenges of the new act: the need to generate new local development schemes (which set out a path to local development frameworks) for submission to the ODPM by the end of next March. “The whole system is creaking,” says Iain Gilbey, planning partner with law firm Shoosmiths. “The change is causing a lot of local plans to be ripped up or stopped, and sites that had been allocated for development are being de-allocated, and that is causing more uncertainty. The problem with the act is that it upsets the existing local plan framework and tinkers with the development control framework.”

But there could be light at the end of the tunnel, says Kelvin MacDonald, director of policy and research at the Royal Town Planning Institute. “It will be hugely challenging. But if you see the act as part of the whole change of planning, taking on board culture change and all the other things that are happening, it will, after the inevitable teething troubles, make things better. The system has been criticised for being regulatory. This brings the system back to enabling positive change. It has to be better to front-load community involvement and test a local plan in the round, than to be endlessly having objections to development. But I know it is quite a leap of faith to see that.”

Taxes, taxes

The other issue that could make a big comeback next year – especially if Labour is on the look-out for third-term policies after a general election victory – is development land tax. The prospect of taxing sites on the increase in value arising from residential development was promoted by Kate Barker’s review, which called the tax a planning-gain supplement. “It won’t go away,” says Lawrence Graham’s Turnbull. “It will probably be seized on by the government as it makes money and would be politically acceptable to the general public.”

The RTPI’s MacDonald agrees. “It could overshadow the changes to the planning system in importance to developers next year. But there are key details that are yet to be worked out, like whether some of the money comes back to local communities, as Kate Barker recommended, or not. If that didn’t happen, then it could be a taxation without many benefits,” he says.

Section 106 is already under revision. The proposal to replace it with a standard charge or tariff, as outlined by planning and housing minister Keith Hill earlier this month, has been welcomed by the HBF. “We broadly support what the government’s trying to do in getting some clarity out of a protracted and difficult subject,” says HBF’s Williams. “This will help in giving developers some kind of idea of potential costs and provide a starting point for negotiations.”

Two further thorny issues are the Housing Bill and PPS3. The Housing Bill was making steady progress through parliament until early this month, when suddenly the House of Lords tossed in a googly. It wanted the bill’s proposed mandatory requirement for all home sales to be accompanied by home information packs to be downgraded to voluntary status. This has posed a problem for the government: under EU law, it is committed to ensuring that every building has an energy performance statement, and these statements have been worked into the home information packs.

Assuming the bill still receives Royal Assent by the end of the year, home information packs will come into being in 2007. The bill will also herald the arrival of social housing grant for developers. Housebuilders wanting to access social housing grant will bid to the Housing Corporation for a share of a small pilot fund of £200m in the first year, but there is already talk of making more or even all of the £1.5bn annual Housing Corporation pot available to the private sector if the initial programme is a success.

PPS3 has proved another contentious issue, with early leaked drafts of the revised PPG3 giving local authorities the power to dictate the type of private housing developments. The housebuilding industry has protested vociferously against the idea that local authority planners might tell them to build family houses where they want to build apartments. Following a series of high level meetings with ministers, the new PPS3 is expected to be more of a compromise solution. But this issue may not be the sum total of revisions to PPG3. If more of the recommendations of the Barker report are implemented after the general election, as is expected, then a major re-write of PPG3 could be on the cards.

Joined up regulations

We'll continue to try to deliver more homes, but we are looking for improvements in planning, and they are not coming through. We are still getting more constraint rather than less

Ian Robertson, group chief executive, Wilson Bowden

Ongoing revision of the Building Regulations continues, with the arrival of Part P governing electrical safety at the start of the year, and the more significant amended documents – Part L governing energy efficiency and Part F dealing with ventilation – taking effect in summer 2005.

The sustainability agenda will be reinforced at the ODPM’s communities summit in January, by which time the draft sustainable buildings code should be announced. Already the industry is grappling with the latest changes to the EcoHomes system of environmental measurement for new homes, announced earlier this month. The new EcoHomes will take into account renewable energy use, but will now not give a credit for the use of HCFC-free insulants. Significantly, the transport category of EcoHomes now recognises urban and rural transport differently, and only rewards urban schemes that are served by a 15-minute bus service during rush hours. “That is very onerous. In most urban areas out of London that will be impossible,” says Christine Smith, energy and environmental manager with NHBC.

EcoHomes is likely to change again once Part L comes into force, and there is likely to be more regulation to come. The passing of the Sustainable and Secure Buildings Bill in September gave the government power to use the Building Regulations to improve the sustainability and security of buildings. “There are a lot of changes – so many changes that it must be difficult for the industry to keep up,” says Smith.

Smith’s remark could be applied to almost every aspect of housebuilding policy, and that in itself is cause for concern, says Shoosmiths’ Gilbey. “I see the big housebuilders doing better than the niche small and medium players, who are struggling to keep up with the changes. There are an increasing number of requirements for housebuilders, such as environmental impact assessments, EcoHomes and design codes. There could be regulatory overload and it could mean it’ll cost more to deliver a unit.”

The experts’ forecasts for the housing market

Predictions of the demise of the housing market are widespread, and that in itself is an issue of concern for the housebuilding industry. Whether grounded in reality or not, any prediction of downturn has a nasty habit of becoming self-fulfilling.

The influential voice of Professor David Miles, chief UK economist at Morgan Stanley and author of a Treasury report on mortgages, has added weight to the bears’ contention that the market is heading for a fall. In October, Miles said that house prices were overvalued by up to 25%, and that they could be driven down even without an all-important push from negative influences such as rising interest rates or increasing unemployment – not what the housebuilding industry wanted to hear.

But the forecasters’ voices are not quite unanimous (see How to read the market reports, page 16). More bullish forecasters continue to state that the market is fundamentally sound. “There’s affordability out there, especially if interest rates stay at 4.75% and then go down. As soon as sentiment improves, the market could regain some speed,” says Richard Donnell, director of FPDSavills’ research division.

Key influences

Market sentiment is becoming a key determinant of the market, and could potentially be affected by a range of factors, from newspapers’ prophecies of doom to actual interest rate rises. John Wriglesworth, housing market economist for Hometrack, reckons that the chances of a significant fall in house prices is practically zero, and that realistically only two factors could wreck the future health of the UK housing market. The first is if the government decides to raise stamp duty significantly on house purchases. The second is if the Monetary Policy Committee decides to raise bank interest rates by a significant amount, to say in excess of 7%. “Although these events are not predicted in the marketplace, they are nevertheless possibilities,” concedes Wriglesworth.

With a general election around the corner, the government is not expected to do anything to increase consumer gloom in the very short term. Government regulation could, however, have the effect of making the market appear gloomier than it really is. At the start of November the Financial Services Authority took over statutory regulation of mortgages, and while lenders are adapting to the new regime, the flow of mortgage products and lending could be slowed. This in turn could have a negative impact on market reports based around mortgage lending figures.

Once the election is out of the way, however, tax rises are likely to be on the agenda. These, along with possible interest rate rises and other factors, are likely to prompt a fall in house prices, the Centre for Economics and Business Research believes. The forecaster says that a protracted period of what it euphemistically calls “negative growth” could drive down the price of the average house by around £10,000 between 2005 and the cycle’s predicted trough in 2007 (see below). The CEBR believes that the ongoing undersupply of housing will save the industry from a more dramatic downturn. On the bright side, this is considerably more optimistic than Professor Miles’s prediction.

How housing design could change

PPG3 and a booming investor market have spawned a surfeit of highly priced, two-bed two-bath urban apartments. The government has considered using PPG3’s revision to stem the flow by giving local authorities power to dictate housing mix, but such intervention may not be necessary. The market and a little design ingenuity could be solving the problem.

The market is swinging away from investors and back to owner occupiers, says Jonathan Seal, managing director of Hamptons Residential Development and Investment. “What’s needed now is realistically priced affordable properties that are clever, light and spacious, but not flash,” he says.

Neither buyers nor housebuilders are likely to be splashing out in 2005. With house prices slowing but land prices bullish, housebuilders could be squeezed, especially in the face of rising build costs. “The margins are not great,” says Seal.

High land values reduce the commercial feasibility of re-introducing more houses, and therefore a greater housing mix, to urban areas, but Seal reckons clever design could help. “There are ways of creating the feel of a house, in the use of space, the way you enter the home and the external space.” There are also ways of squeezing greater density out of houses. Designers are now taking high density away from the stock solutions of townhouses or apartments and creating more integrated mixed schemes that draw on the traditions of the back-to-back house. Here’s how they work.

Back-to-office houses

At Community Housing Association’s upcoming mixed-use scheme in Kingsland Road, Hackney, east London, 73 affordable homes are cleverly integrated with 1800 m² of office and retail space. The development of four mixed-use buildings includes a block that has been split vertically, with a row of three-storey townhouses facing west and two floors of commercial space facing east. The whole is topped by a floor of apartments. The commercial element of the block effectively provides an acoustic buffer for the housing, shielding it from a railway viaduct that is destined to be used by the East London Line. “The solution came from the conditions of the site,” says Julian Dickens, project architect with scheme designer Jestico + Whiles.

“The idea of an acoustic buffer was in the London Borough of Hackney’s brief so it wasn't one that came from left field. … it could be applied to other sites to achieve high density,” he adds.

Dickens acknowledges he has essentially designed a row of back-to-back houses, a product that with its single aspect and lack of a back garden has become unpopular. The architect has therefore put a lot of effort into overcoming those disadvantages in the up to 7 m deep, four-bedroom houses. “We’ve located bathrooms and staircases at the back of the house and put the living areas at the front. The lounge is at first floor level to let as much light in as possible,” he explains. “We’ve countered the lack of a rear garden by creating a front garden entrance that is also private.”

If government inaction on planning is coupled with revisions to PPG3, further interfering with market forces, the industry will simply be unable to meet the demand for homes

Tim Hough, chief executive, Miller Homes

Contractor John Laing Partnership is finalising enabling works on the site and expects to begin building in February on the 18-month programme. “Considerably more upfront time has gone into this scheme. There are a lot of issues about the mix of uses that we’ve had to learn about,” says Peter Marten, development director with John Laing Partnership. Other partners in the project include MacConvilles as employer’s agent and QS, and Alan Conisbee and Associates as structural engineer.

The scissor house

Architect Benoy has come up with a range of ways of incorporating family homes into high-density development to free urban communities from the apartment monoculture and it is incorporating the proposals into site masterplans now in the pipeline.

Like Jestico + Whiles, the architect has explored the potential for back-to-back houses with apartments above. “The design is based on the principles of density, efficiency and sustainability,” says Russell Gay, director at Benoy. Features of the design include enhanced privacy by lifting the family homes off ground level and on top of the car park, and setting the block back to give each unit its own private garden space at first floor level adjacent to the family area and bedrooms.

The architect has also come up with a scissor design for a three-storey townhouse following similar principles. Two houses are situated on a single footprint, with the lower unit having car parking and living space at ground level opening onto bedrooms on the first floor. The upper house has ground floor access and parking leading up to bedrooms at first floor level and second floor living space with a rooftop terrace garden. The two houses are separated as much as possible by a central courtyard which brings natural light into the homes.

“The research and development of this design fits with the tone of the recent London Housing Federation report, which calls for family rooms in high density, affordable housing schemes. It also highlights the importance of the role of architects in achieving this goal,” says Gay.

Gay is confident the designs will be developed. “Funding partners and developers have responded very positively. The design concept has been embraced and, more importantly, the team has agreed that it fulfills its responsibilities to the community,” he says. “Concepts like this will form a part of housing developments of the future.”

How to read the market reports

John Wriglesworth, Housing market economist for property database company Hometrack

Over the last year, the amount of information published on the housing market has grown enormously. The traditional purveyors of house price information – Halifax, the Nationwide Building Society and the Land Registry – have been joined by the new kids on the block: web-based companies Rightmove and Hometrack, and a revitalised monthly house price index from the ODPM. Also available are regular surveys from the RICS and the National Association of Estate Agents (NAEA). Even the Financial Times has got into the act with its own house price index. Every week, new house price information is published from one source or another.

What is all the more confusing is that all these different sources seem to contradict each other. For example, in a set of surveys for October, Rightmove reported a 0.6% house price increase, whereas Halifax and Nationwide reported increases of 1.4% and 0.2% respectively. On the other hand, the NAEA reported a 1.6% fall in house prices, and Hometrack calculated a more moderate 0.6% price fall. What are we to believe? And if no one can agree on what has happened in the past, what hope do we have of forecasting the future health of the housing market?

The most important explanation for the apparent conflicts in house price information is that each information provider looks at a snapshot of price information at different points in the buying process.

Property website rightmove.co.uk constructs its house price index on the basis of asking prices published on its website, adjusting the results for the mix of different types of houses. About four weeks after the asking price is set, an agreed offer is made. This is the information on which Hometrack bases its index, gathering data through a survey of more than 4000 estate agents nationwide.

Typically, another four weeks after this, the buyers’ mortgage is approved. Both the Halifax and Nationwide build their own house price indices on house valuations at this stage. Yet another four weeks later, mortgage completion takes place. Prices recorded as this stage form the basis of the ODPM’s house price index.

If this was not enough, up to six weeks after the mortgage completion, the transaction is registered with the Land Registry. Some weeks later, the Land Registry publishes its own house price index.

In other words, there is a total of approximately six months between the time the asking price is set (Rightmove’s house price index) and the housing transaction is registered (Land Registry house price index). As the housing market can change immensely within six months, there should be no surprise that the above different indices will reveal different statistics in any one month. Generally, if you “time adjust” the indices – for example, by comparing Rightmove’s index published in August with Halifax’s index reported in October – the information becomes more consistent.

The other main reason why there can be big differences in reported house price changes is that the indices do not aggregate the house price information in the same way. Important differences come with the fact that Hometrack, Rightmove and the ODPM all construct house price indices which estimate changes in the value of the nation’s housing stock. On the other hand, both the Halifax and Nationwide measure the average price change of a typical house.

This difference needs a little elaboration. Suppose that the country’s private housing stock was made up of 50% detached houses at £200,000 each and 50% terraced houses at £50,000 each. If detached house prices went down by 10% and terraced house prices rose by 10% both Halifax and Nationwide would report a 0% overall change in house prices.

By contrast Hometrack, Rightmove and the ODPM would report falling prices, reflecting the larger absolute house price falls of the more expensive detached houses.

There are many other differences that explain why house price indices seem to contradict each other but these are too numerous, and complex, to mention here. Suffice to say that the confusion over house prices will continue but we will all continue to read every housing market story with keen interest.