December 3rd, 2014
The Government’s plan to commission, build and sell 10,000 homes at Northstowe just north of Cambridge have been heralded by some in the media as radical. It hasn’t been done since the 1970s.
That anyway is a line taken by a slice of the media as it absorbs carefully-crafted press releases that complement the thin detail in the National Infrastructure Plan 2014.
Unsurprisingly as we head deeper into the run-up to a General Election, the media was duly given some extra spice for its stories by the Liberal Democrat Chief Secretary to the Treasury Danny Alexander, who seems to want to claim ownership of this idea. He provided a quotable quote that seemed to suggest a threat to house builders: “If you don’t build them we will”.
In reality the plans are far from radical, even taking the most radical interpretation of the little detail revealed.
Meanwhile, they represent no real threat to traditional house builders as far as I can see. If anything they present potential opportunities.
Most importantly, in my view, this sort of approach should have been adopted by this Government at the start not the end of its stint in office. It is five years too late.
In his blog Sky News economics editor Ed Conway uses an interesting phrase. He writes: “In a sense, it is hinting that it may soon be a developer of last resort.” This is exactly the role I suggested the former Chancellor Alistair Darling should take almost six years ago as the house building industry went into freefall. Homes and the fabric of the house building industry, however, it seems, are less important than banks.
I remain convinced that Mr Darling should have taken this advice and so too should George Osborne and David Cameron taken similar advice subsequently.
If you accept the broad thrust of various calculations made over the past few years (and the assumption that the housing market would broadly recover by 2014) we would now have hundreds of thousands of new homes (mostly in or destined for home ownership), the construction industry would have 150,000 more in its workforce. The supply chain would not now be struggling to respond to an increase in demand from private sector houses builders.
The nation’s debt would now be between £10 billion and £20 billion less (far better off if the building programme had been bolder) and the wider construction industry would not be faced with a bill of similar proportions to rebuild its beleaguered supply chain. And builders would not be facing rapidly rising costs for materials and labour, with the associated delays and uncertainty.
To this we could add a large figure for the benefits of wider multiplier effects, such as those created by employed construction workers spending in their local shops.
Further we could add the cost of lost opportunity. The Government is far better placed to test new ideas. Some may fail, but some will succeed. But the state’s size and role mean that it can be entrepreneurial in ways firms cannot (see Mazzacato, The Entrepreneurial State for clues here).
It could, by way of example, have trialled bespoke building to deliver the type of homes that would suit institutional investors. This may have kick started an aspect of the industry that has received more hot air than hot action over the past decade.
So what’s this plan?
The detail is hazy on exactly what is the “new delivery model” mentioned in the National Infrastructure plan. But a conveniently-readable news story at GOV.UK tells us this:
“One of the key proposals is for the government to master-plan, directly commission, build and even sell homes. A pilot programme on a government-owned former RAF base in Northstowe, near Cambridge, will see the Homes and Communities Agency leading development of 10,000 homes, twice as fast as conventional approaches. This is the first time in a generation that the government has owned land, led a development on it at this scale, and considered commissioning homes directly for sale. This approach will fast track the development by providing certainty making new homes available more quickly.
“The government will make an upfront investment but expects that later costs will be met through the sale of land and homes. The government will also evaluate the feasibility and economic impacts of rolling out this model on a wider scale, to support and accelerate housing supply.”
Is this really radical?
No. Someone would have to stump up huge sums to provide the infrastructure needed to deliver this massive site, roads, schools, affordable housing, health services (on the site or nearby), drainage etc. Given a broad figure of £20,000 a plot (possibly an underestimate on industry estimates), it would mean finding £200 million to fund the infrastructure at Northstowe. Yes, you could try any number of financial mechanisms from TIFs to CIL to Section 106. But such arrangements can get messy and slow progress.
So as a major landowner at Northstowe with a desire to get things moving fast it makes perfect sense for the Government, through an agency, to deliver this infrastructure directly and deliver serviced plots. This it clearly intends to do. But it can’t wait around once it has cash in the ground, so it must be prepared to directly deliver homes if it is to protect its risk and realise its investment. Furthermore as it shapes the development, most likely, it will become more attractive for private builders to bid for land on which to build. This could be major builders, smaller builders or self-builders, all of which the Government is seeking to encourage.
Is it a threat to house builders?
Not as far as I can see. They are quite happy to build what they build controlling as much as they can their risk and profit. What’s more, the text is clear: “… later costs will be met through the sale of land and homes.” This means the way is open for house builders to operate at Northstowe. There will in all probability be nice “oven ready” plots on sale on which house builders can build homes within a market where both prices and demand have been established. This means risks and rewards are much more narrowly defined and easier to calculate, free (hopefully) from uncertainty over price or time-consuming negotiations over planning obligations.
So it’s no surprise to see the Home Builders Federation welcome the “commitments by Government to bring forward larger sites”.
Its take on Northstowe was this:
“… successive Governments have been trying to develop land earmarked for housing for 20 years now. If contracts can be developed that bring sites forward quickly, in a way that is attractive to developers, the area could contribute to much needed housing numbers. Such a model could be particularly attractive to smaller developers if upfront costs are reduced. Delivery must be closely monitored and if sites don’t come forward as anticipated, alternative sites must be allocated elsewhere to ensure housing needs are met for the area.”
So it’s not radical. It’s not a threat to traditional house builders, other than, perhaps, adding extra suction to a desperately weakened supply chain.
This leaves the big question. Why didn’t the Government do this earlier?
I can see excuses for Mr Darling. The heat of the global meltdown was still fierce. He can be forgiven for eschewing this path of action. And in his defence that administration did pull forward planned spending on housing and helped house builders shed some overhanging stock, freeing their balance sheets.
For Mr Osborne there is no excuse. He has had the best part of five years in which house building completions have remained pretty much at or below the level he inherited. The inevitable consequence was that the supply chain rebased to a lower level while homes were not built.
His half-baked notions about debt and deficit and his ideology appear central to why such action was not delivered earlier.
His inaction is made more painful by his argument that the Government has had a long-term credible plan, which today seems farcical. The long-term qualities to Osborne’s economic plan only seem to have definitional value on the basis that the plan’s very failure means it is taking longer than originally planned to reduce the deficit (the central measure of its effectiveness). On this measure it would seem the plan currently appears in danger of working in reverse. Worse, the plan for me clearly lacks credibility when even his Prime Minister appears unable to distinguish between debt and deficit.
What is intriguing, since his original position was established in 2010 he has seemed increasingly to be undertaking a slow verbal if not actual volte-face on his position on more interventionist capital spending (a point hinted at in Ed Conway’s blog). We see this too in his growing fondness for announcing grand projet.
This is (partly) why I am so angry with George Osborne.
Under his watch the house building supply chain has sustained needless damage, jobs and skills that could have been saved were squandered, more people live in worse homes than they need, we spend more on housing benefit than we need and the nation’s debt (his central focus, ironically) is larger than it would otherwise have been.
If George Osborne can sanction this approach now, when his deficit reduction plans are going awry, why could he not have done so at the start of his reign as Chancellor?
Or have I missed something?
ps. While I see merit in the Northstowe announcement, I have reservations over what type of organisation is established to oversee the development. The organisational body established needs to be carefully considered. I sense for it to be successful it must be a single-purpose time-limited organisation with a clear remit and with highly-transparent oversight and accountability. It needs to be capable of responding to changing local and national political imperatives, but be set free from ad hoc political interference.