A wall, high, around the Earth

Back in the heady days of July, when it was possible to dream that we might have a summer, things were looking rosy for the housing sector. House prices were rising steadily, and the government’s green paper, with its call for 3 million new homes by 2020, gave the industry confidence in a guaranteed workload well into the future. Four months later, the mood has grown frosty, but prime minister Gordon Brown’s homes targets remains, and the National Housing and Planning Advice Unit warned last month that even this would not be enough, making the case for 270,000 homes a year to be being built by 2016 rather than the target of 240,000.

The industry is expected to deliver ever more private homes, and to meet local and central government’s drive to meet affordability and sustainabililty standards. But can it? Some think not. City analysts have been slashing their forecasts for housebuilders, and the housebuilders have been warning that they may reduce their exposure to the market by scaling back production. But the message from many in the sector is that this will not necessarily derail the targets - provided that the government lends a rather large hand.

Housebuilders on the rack

The 3 million target was always going to be extraordinarily difficult to hit, simply because the more homes you build, the more you push up the price of land and the greater the strain you place on the planning system. Nevertheless, given the strength of the growth in house prices, the basic market mechanism seemed to be in place.

It is not obvious that this is still the case. The view of the market is dominated by the five interest rate rises imposed since last autumn. Then there is the unease brought on by the weakness of the global credit market, which is affecting developers’ ability to acquire land and consumers’ ability to get a mortgage. Then there was the report from the IMF saying UK house prices were overvalued by 30%, and the possibility of investor flight from buy-to-let properties as rental yield drops below the cost of mortgages. So it did not come a complete surprise that Halifax reported that prices in September fell 0.6%, while Hometrack recorded its first fall in two years in October.

All of which is certain to affect housebuilders’ willingness to raise their production. In the third quarter of 2007, the share price of every single listed housebuilder tumbled compared with the same quarter in 2007. The value of the sector as a whole fell 25% against the previous quarter after allowing for inflation. Its performance for the year to date also rings of a cacophony of alarm bells: share values have fallen 32%, which means that they have underperformed the stock market average, the construction sector and even its fellow sufferers in the real estate sector.

But how justified is the City’s concern for housebuilders’ prospects? The big housebuilders did their best to talk up the market after the Northern Rock crisis, but even then they were undeniably cautious, and a fresh wave of jitters at the start of November has worsened the situation, with Redrow and Bovis Homes the latest to issue profit warnings. Meanwhile, government figures show that housing orders have dropped 12% from the spring quarter.

Barratt, the UK’s second largest housebuilder after Taylor Wimpey, has forward sales of £1.7bn and 53.8% of its full-year sales target assured after four months, but the company said in its latest results statement that: “It is not yet clear how quickly the market will recover, but we have to assume that there will be downward pressure on volumes and price inflation in the short-term.”

Despite analysts’ warnings, the industry consensus is that it should be possible to meet the targets - if the industry increases its output by 30% over the next eight years. The problem is that this is a lot more than it has achieved in recent history (see graph). According to the sector’s biggest players, it cannot do it now without government help.

Permission to build

The first thing the state could do is to cut interest rates. This is widely tipped to happen at the beginning of next year despite members of the Bank of England’s Monetary Policy Committee voting in favour of a hold at 5.75% in both October and November. “I expect that there will be a softening in the market but I don’t think that it will lead to all-out meltdown,” says Tony Pidgley, chief executive of Berkeley Homes. “It’s still realistic to try to get those big numbers that the government wants as liquidity could well come back into the market with a cut in interest rates.”

Mark Clare, Barratt’s chief executive, agrees. “The market fundamentals are strong,” he says, “but if we are to deliver, we would like more information on where and when land will be available, and on top of that, whether it is going to get planning.”

Planning and land availability are central to a raft of inquiries - including the Callcutt review of eco-friendly housebuilding and the Office of Fair Trading’s investigation into efficiency and consistency of supply - but Clare does not believe this will deliver change at the speed required to meet government targets. “I would really hope housebuilders can sit down with government and say how do we do this?”

Regulation, particularly on planning, is another bugbear. Clare, who joined the industry from the energy sector, is scathing about the lack of progress in freeing up land. “I came from an industry that is heavily regulated, but this is far more complex.” The crucial aspect is councils’ interpretation of central government’s directives, particularly when it comes to private developments. Clare says: “Some local authorities are right out in front, and recognise that private developers are contributing to their areas. But then you go somewhere else and find a “we’re not interested in that here” mentality. The government needs to look at incentivising local authorities - it’s not necessarily about large chunks of money, but about growing the area economically.”

Pidgley agrees. “I have no doubt that the government is keen to increase housing numbers. But they are underestimating local politics - this is what dictates the flow of planning permissions. I’m not sure they’ve found a solution to this.”

Affordable housing is a key part of the government’s housing delivery strategy. Brown has called for 70,000 more to be built by 2010/11. Of these, 45,000 will be social rented housing - more than double the level built in 2004. The green paper also includes a goal of 50,000 new social homes a year.

The figures do not give the industry much time to up its game, particularly when, for the quoted sector at least, there is intense shareholder pressure to ensure margins do not crumble. Perhaps more so than in private housing, the government has begun taking action to help the industry to increase its supply. Next year, a bill will be introduced to create the Housing and Communities England regeneration super-agency, which will have the power to bring surplus public land into use for housing and eco-towns, another facet of the government’s housing wishlist.

The government is also placing a firmer hand on the shoulders of local authorities when it comes to affordable housing. The Housing Corporation has launched an £8bn investment programme that will be channelled to councils as well as to housing associations, which currently receive the bulk of public funding for housing.

Housing minister Yvette Cooper is encouraging local authorities to choose one of six models for building council housing, with the most likely being a local housing company run in partnership with a housing association. This would mean that councils provide land and retain a stake in the rental income of the properties.

Steve Douglas, the Housing Corporation’s acting chief executive, said of the moves: “The government has set out with clarity and ambition to meet the country’s need for social rented homes, to tackle housing affordability and to support quality and sustainability.”

The government has also made it clear that councils will be looked on favourably for a slice of the £8bn fund if they sell sites at a discount, which will again be a welcome relief to housebuilders in the current financial climate. In September, Douglas wrote to authorities to say that “the provision of land at a discount will be taken as clear evidence of a good fit with local priorities, particularly on large schemes or regeneration projects”.

In a further measure to push the housing agenda, Cooper has also announced a new £500m housing and planning delivery grant. This replaces a £120m planning delivery grant.

On the whole, housebuilders are behind the government’s affordability drive. Several have launched their own first-time buyer initiatives - including Barratt’s Ipad initiative, and Taylor Wimpey’s G2 division. “We have to be very concerned that the product we sell is becoming less and less affordable,” says Clare.

However, according to Clare and many of his colleagues, the government needs to start treating its housing targets as a single issue rather than three separate entities of affordability, volume and sustainability, and apply the initiative it has focused on the affordability sector to finding a workable solution that will address all three deliverables. “The more pressure we’re under to go faster, the more affordability seems to be pushed”, says Clare. “The challenge for us and for government is to balance these things.”