Profits before Housebuilding? Major housebuilders and the crisis of housing supply
Tom Archer and Ian Cole
Sheffield Hallam academics Tom Archer and Ian Cole bill their paper as making up for the “insufficient attention” which, they say, “has been given to the structural changes taking place in the housebuilding industry itself.” Although the hypothesis that business dynamics in the private development sector work against maximising housing output has been the subject of debate in the sector for a long time, they are right, in my view, that it deserves a serious, evidenced, discussion. At under 30 pages of core text, the paper does not claim to be comprehensive (the authors themselves say “it only scratches the surface.”) Nevertheless, it is a serious and well-argued read; and, for many Thinkhouse readers, its relative brevity is likely to make it more accessible. Arguably it combines the best features of the academic and think tank genres, the combining careful assembly and use of evidence characteristic of the former with the readability and focus on policy-makers’ and do-ers’ concerns found in the better examples of the latter.
Drawing together official data and information derived from the published accounts of 9 of the biggest homebuilders (one is not a public company), the authors make three important points. First, the majors have increasingly come to dominate private housebuilding over a period of decades, from 9 per cent in 1960 to 47 per cent in 2015. Second, in the period since the financial crisis, revenues, and even more so profits and dividends, have grown by far more than the number of units built. Third, private developers’ output falling well short of meeting housing demand is “not some kind of temporary aberration.” It is “integral to the business model” of major housebuilders, indeed what those in charge of delivering value for shareholders in this sector, in the economic and regulatory context in which they operate, are pretty well bound to do.
The report has less to say about what the public policy response might be, assuming policy-makers want to secure higher output and tackle unaffordability. The answer on which the paper focuses is direct public investment via councils and housing associations. Maybe the paper should be judged on the good job it does of laying out the problem, but a fuller discussion, or “what do we do about it” sequel would, I suggest, need to look at a range of other options, including radical reform of the planning system so developable land is a much more plentiful commodity, the hoarding of which is a less compelling business strategy, and direct intervention by government, national and/or local, as the strategic developer, with the private sector role (including smaller firms) being as constructor, financially incentivised to build out speedily and to high quality, rather than to manage land-holdings and build-out to maximise profit, as it is now.