Prefab is the key to the housing crisis – but can we afford it?

So initially I was concerned that an economist had been placed in charge of sorting out the problems of housing supply. However Kate Barker, the chancellor's appointee, does not come across as your typical economist: she seems smart, sassy, straight-talking and apparently in possession of a finely tuned bullshit detector. Her final report will therefore make interesting reading, with an expected focus on land supply and the complexities and inconsistencies of the planning system.

I would also predict that the Barker review will be pretty ambivalent about the potential contribution of modern methods of construction to speeding up supply. Her conclusion may well be that it is difficult to get too excited about a small number of days saved on a factory floor, compared to a year-long log-jam caused by the complexities of land release or the Byzantine structure of planning agreements.

If Barker does reach this conclusion, she will be both absolutely right and totally wrong – right about the maths, wrong about the implications. Now doesn't that sound like an economist?

It is true that if we do not tackle the fundamentals of land supply, planning and financing structures, tinkering around with different construction methods will resemble a scene more associated with Kate Winslet than Kate Barker (think deck-chairs and doomed ocean liner).

But let's consider a scenario where we do start to see a more aggressive approach to land release and consent, a situation where house providers – private and social – are required to increase provision by 30,000-50,000 units a year. Unfortunately, it is the considered view of the Housing Forum and other respected commentators that, without a fundamental change in production methods, these numbers are not within reach if we are serious about improving quality standards at the same time.

The crux is skilled labour supply. It is not there and it cannot be brought on stream quickly enough; the statistics make this clear. The Construction Industry Training Board is starting to turn this around, but the benefits will be several years down the line.

There is only one way to achieve a massive increase in housebuilding: by embracing off-site fabrication. But there is a huge financial barrier to this

That leaves only two real options for the housebuilding industry – try to make up the gap with unskilled and low-skilled workers, with all the implications for the quality of the product and the brand credibility of the industry that would bring, or improve the productivity of the industry so much that we can increase supply without needing significantly more skilled workers.

There is only one way of achieving such an uplift: by embracing modern methods, including off-site fabrication. There is a huge financial barrier to the rapid adoption of such methods, however.

Housebuilders produce their homes amazingly cheaply, having driven down the costs of traditional methods over many years. A nascent factory system, operating below capacity, cannot match these costs and may not even be able to get within 15-20% of them. Over time, with economies of scope and scale and the benefits of experience, that cost difference may disappear – but not in the short term.

If the government is serious about its intention to increase supply rapidly and deal with this productivity deficit, it may have to incentivise the industry to turn to modern methods by closing the cost differential until the market matures. This could be done through a grant or a tax incentive.