Meeting new housing demand means lower profits for house builders.
Chris McLaughlin, MD of MIS AMS
We hear much in the news about how the UK has fallen woefully short of the 240,000 homes the Labour government promised in 2007 would be built by 2016. However, the bottom line is that the business model our house builders’ follow doesn’t promote building houses in volume, and in fact works against it to a degree.
In a recent report by Sheffield Hallam University and the Centre for Regional Economic and Social Research, the practice of ‘profit before volume’ was explored. The report highlighted that between 2012 and 2015 the output of the UK’s nine largest private house builders grew by 33%, revenues increased by 76% and profit before tax was up by nearly 200%. It goes without saying that private house builders are commercial organisations with shareholders and their goal first and foremost is to make a profit. So is that holding house building back?
The short answer is ‘yes’. Failure to build in sufficient quantity is a long standing issue. There are nine builders in the UK that account for 50 to 60% of new housing – an oligopoly if you will. It’s simply not in their interest to chase volume – volume leads to demand being met and that means lower house prices. They’re out to protect their margins.
Generally speaking, outside of the London bubble, the housing market is resilient in the regions as there is a better affordability ratio and a better balance between supply and net demand. But the issue of land also plays its part.
Residential land values have fallen in London since the Brexit vote which means that the house builders aren’t buying up as much land at present as they were before, which plays nicely into the hands of the housing associations. They are being offered sites that might usually have been snapped up by the private players. It provides them some room to manoeuvre.
But how do we fill the housing gap? It’s wrong to believe that the private house builders can or will do this, but HA’s along with smaller builders can help meet the demand. They can diversify their income across the marketplace and invest whilst the bigger private providers make cuts. It’s not a utopia, but whilst the system seems stacked against providing the houses we so badly need, housing associations play their part.