Building Homes Faster – A commentary on the Government’s Plans for Increasing the Pace of Development

Introduction

The government’s housing white paper identifies the delivery rate of new homes faster, once planning permission has been granted, as ‘too slow’ and a ‘major problem’. This is a welcome new consideration within Whitehall, to join longstanding and equally valid concerns about bottlenecks in the planning system.

The proposals it suggests for tackling slow development include: removing the practical barriers to development that are identified by developers; requiring greater transparency about build rates; weeding out planning applications that are unlikely to result in a start; using compulsory purchase powers on sites that have stalled. These are all useful steps in the right direction. The white paper fails to address, however, a key barrier to speedier delivery by developers: the market absorption rate. Developers can only build homes as quickly as they can sell them and, in the current framework, they must sell them at current market prices or above.

This limits for-sale house building output, which has been in long-term decline as house prices have raised. The problem lies in the price that is paid for the land, which is calculated based on current house prices. This locks the developer into a conservative build rate which cannot exceed the rate at which people are able to buy new homes at current market prices. A site of 1,500 homes may then be built at a rate of 80-90 homes a year, for example, the development taking 15-20 years to complete.

Addressing the Housing Delivery Crisis

The government’s housing white paper has shed new light on a long-standing issue within the UK housing market: the slow pace of new home delivery once planning permission has been granted. While the document presents a range of proposals to tackle slow development, there is a notable omission regarding the market dynamics that play a critical role in delaying housing construction.

The white paper rightly identifies bottlenecks in the building homes faster planning system and offers suggestions for improving efficiency, but it overlooks the fundamental issue of market absorption rate and its impact on house-building speed. This issue stems from the interrelationship between land price, market demand, and developer behavior, which limits the pace at which developers can build homes and deliver them to the market.

The Government’s White Paper: A Step in the Right Direction

The white paper outlines several measures aimed at building homes accelerating housing faster delivery. Among these proposals are:

1. Removing Practical Barriers to Development: This could involve streamlining bureaucratic processes, cutting through red tape, and reducing delays in the application and approval processes for new housing projects.
2. Requiring Greater Transparency About Build Rates: By introducing stricter monitoring and reporting requirements for developers, the government hopes to encourage faster delivery by holding developers accountable for their progress.
3. Weeding Out Planning Applications Likely to Stall: This measure would ensure that only realistic, well-supported projects receive approval, preventing projects that lack viable funding or market demand from blocking more promising developments.
4. Using Compulsory Purchase Powers: If a site has stalled due to inaction from the developer, the government may use compulsory purchase powers to bring the land into public ownership and ensure that it is developed for housing.

While these proposals represent useful steps in the right direction, they fail to address a critical underlying issue: the market absorption rate.

The Market Absorption Rate: A Key Barrier to Faster Housing Delivery

The market absorption rate is the rate at which new homes can be sold or rented, given the existing demand in the housing market. This factor plays a crucial role in determining how quickly developers can build and sell homes.

The Link Between Land Prices and Absorption Rates

In the current market framework, developers are incentivized to buy land at prices that reflect the potential selling prices of homes once they are built. These land prices are often inflated due to the high demand for housing and the rising costs of land in desirable locations. Developers, however, can only build homes as quickly as they can sell them. The price that developers must charge for new homes is typically linked to the prevailing market rates, meaning that builders can only proceed at a pace that reflects the ability of the market to absorb these properties at those prices.

For instance, a development of 1,500 homes may take a developer many years to complete—often 15 to 20 years—simply because the developer can only build 80 to 90 homes per year, a pace constrained by market demand and pricing pressures. If the housing market cannot support higher sales volumes due to high prices or limited buyer purchasing power, developers are forced to proceed slowly to avoid an oversupply of unsold homes.

One of the major contributors to the slow pace of development is the high price paid for land. Developers base their land purchases on the expected sales prices of the homes to be built, but if house prices continue to rise, the land prices increase accordingly. This creates a cycle in which developers must move cautiously and prudently to ensure they can recoup their investment. As land costs escalate, developers’ risk aversion increases, and they are less likely to commit to large, high-speed developments.

Moreover, high land prices can force developers to focus on building homes, more expensive properties to match the high cost of land, which may not align with the broader housing needs of the population. This further limits the pace of development, as developers are hesitant to overcommit on large-scale projects that may not deliver immediate returns.

The Conservative Build Rate.

The conservative building homes rate, linked to market absorption, is another key factor hindering faster housing delivery. Developers, faced with fluctuating market conditions and the need to manage their investments, often proceed with caution when building homes. The inherent conservatism of the build rate reflects the fact that developers cannot exceed the sales rate of homes at current prices, and thus, cannot build at a rapid pace without overloading the market.

The consequence is that large developments, such as those involving hundreds or thousands of homes, can take decades to complete, even when planning permission has already been granted. This prolonged building homes, often lasting 15 to 20 years, significantly slows the overall housing supply, especially in high-demand areas where the need for new homes is greatest.

Policy Solutions: Addressing Market Absorption and Land Pricing

The government’s proposals in the white paper are a good starting point, but they need to be expanded to include a focus on the market dynamics that influence development speed. Specifically, tackling the issue of land pricing and market absorption rates is essential if the government hopes to achieve its housing delivery targets. Potential solutions could include:

1. Land Value Reform: One approach could be to explore ways to reduce the impact of land price inflation on development speed. This might involve revisiting how land is valued for planning purposes, including adopting more flexible models for assessing land value that take into account the broader social and economic benefits of housing development.
2. Subsidized or Affordable Land Schemes: To help developers manage land costs more effectively, the government could introduce mechanisms for reducing the financial burden of land acquisition. For example, offering discounted land prices for developments that meet certain criteria—such as providing affordable housing—could encourage faster build rates without compromising profitability.
3. Incentivizing Large-Scale Development: Developers might be more inclined to build large housing projects at a faster rate if they were given incentives to do so, such as tax breaks, subsidies, or streamlined planning processes for developments of a certain scale.
4. Supporting Demand for Affordable Housing: The government could also play a role in increasing demand for affordable housing by introducing policies that make homeownership more accessible, such as schemes to assist first-time buyers or increasing the supply of affordable rental properties.

Conclusion: A Comprehensive Approach To Building Homes Faster Housing Delivery

The government’s housing white paper represents a positive step towards addressing the challenges of slow housing delivery in the UK. However, to effectively accelerate the construction of new homes, the government must consider the broader economic and market factors that influence developers’ ability to build and sell properties at speed.

By addressing the issue of land prices and market absorption rates, the government can create an environment that encourages faster development without compromising the financial stability of developers or the affordability of new homes. Only through a comprehensive approach that tackles both the planning bottlenecks and market dynamics can the UK hope to meet its housing goals and ensure a steady supply of homes for future generations.