Taylor Wimpey merger will mean fewer homes

John Prescott set the tone for this Government’s dislike and distrust of the housebuilding industry which still informs the attitude of his successors, particularly Yvette Cooper.

According to Prescott’s mantra, the industry built the Wrong Sort of Houses – in the wrong places, the wrong way and for the wrong people. In PPG3 he set about changing that and largely succeeded. The housebuilding industry became the flat-building industry, mainly in places where housebuyers would prefer not to live.

But Ministers wanted more – so, in PPS 3, they introduced prescription of house type and mix for market housing, which comes into effect from April 2007. Their objective is an industry that provides increasing numbers of affordable, low carbon homes, preferably on land English Partnerships packages up and on which it dictates development terms.

This policy framework has caused a dramatic restructuring of the housebuilding industry. The Wimpey/Taylor Woodrow merger, itself coming hot on the heels of the acquisition of David Wilson by Barratts, sees the emergence of an increasingly small number of super-housebuilders. They appear to be adopting low-margin, high turnover return-on-capital-employed, business models, more usually associated with contractors.

Conversely, we have the rump of mainly privately owned smaller and medium sized companies, still trying, where they can, to build houses, not flats, and looking for a profit margin that still has a two in front of it and, preferably, a three.

The super-housebuilders appear to be trying to play on the pitch rolled by the Government, believing that, if they do so, they will get land with planning permission. The latter will duck and dive and try to find the profitable gaps left, despite Government policy.

It has been argued that the combination of highly prescriptive policies for the industry and now the reorganisation of its shape and business model, amounts to the virtual nationalisation of the housebuilding industry – 21st century, not 1947 style. Certainly Government believes this is how it will get increased levels of housebuilding, dominated by affordable homes.

Sadly, all three parties – Government, large and SME housebuilders - are destined to disappointment and failure.

First, the super-housebuilder model is only viable if output can be substantially increased. Planning policies guarantee that this will not happen in the foreseeable future. Second, mergers never result in higher output than the two previously independent companies achieved; they always result in fewer, not more, homes.

So neither the Government nor the super-housebuilders will achieve their goals.

The medium sized and smaller hosuebuilders will remain quicker on their feet, but the one-size-fits-all, highly prescriptive policy framework, with the enormously increased costs, associated particularly with reduced carbon homes, means that the risk faced by private capital will be unacceptable. The quiet and generally unreported sale of companies with a couple of hundred plots, to one of the major housebuilders, will accelerate, reinforcing the contraction of the SME end of the market.

Contemplating this latest merger, Government may briefly congratulate itself that it has tamed and remodelled the housebuilding industry. The reality is that its policy framework has guaranteed a long-term output closer to 100,000 new homes per year than the 200,000-plus it needs, and an industry that has lost much of its capacity, just when it is most needed.