Unlock productivity to boost housing delivery

With the housing market valued at £1.6trn, equating to 21% of UK net wealth (BPF 2019), it is not surprising that policy-rallying headlines permeated all media outlets in the run up to the 2019 general election: the promise that increasing supply reduces house prices; more regulation would bring better housing; and that bricks and mortar are the best investment. All partly true of course, but still largely misleading.

The UK housing market is large and complex, so what can we do to influence policy makers and demystify the rhetoric, to instil greater market confidence? With real estate contributing £94bn to the UK economy annually, and a real and present need for accelerated housing delivery, the number of houses we need to build is merely the starting point for a meaningful and informed discussion.

In order to improve housing delivery and establish mature debate, GL Hearn is leveraging its understanding of the real estate sector to manage investors’ attitude to risk and changing socioeconomic dynamics to inform local planning policy. It is about helping the public and private sectors work together to establish a common discourse to unlock productivity.

It is the finance leverage, coupled with the former mortgage tax relief, that has made housing asset performance so beguiling, particularly in specific locations over time

So, whether it is calling for simpler planning processes, debating the release of green-belt land for development, or working through affordable housing requirements, the common denominator – and many would argue, the problem – is that current planning policy gets in the way of the natural operation of the market. The protection measures placed on land place obstacles between people and their place of work.

Not all obstacles are bad, and there remains a need for balance, between economic and social benefit and a flexibility that affords local government the freedom to make locally relevant decisions. Subsidiarity in turn ensures that central government is making the decisions that knit the country together, while local government focuses on what is unique, special and valuable at a local level.

In advising across our clients, we always look for the broadest possible picture, while focusing carefully on the needs of the local area. Our advice is simple – the right homes in the right, well-connected places will be most successful, for investors and for the communities they are built to serve. If the market is too sticky, it makes it expensive and difficult to move around, which, in turn, reduces the assets’ agility to a potential investor.

By understanding what is happening locally we can help to shape positive outcomes with the right advice that addresses local need, and thus centres on the best route to release supply. With the work we are doing surrounding garden communities, for example, we are influencing councils to think differently about their long-established requirement for developers to peer into their crystal ball and predict the financial viability of a scheme over the next 25 years. It is unrealistic at best. It simply slows development down and stalls housing supply.

Phenomenal house price inflation

Looking back at the past 25 years, house price inflation has been phenomenal, running at more than double average income growth, with average rental yields tumbling in the past 25 years from around 12% to just under 6% – both classic signs of an asset bubble. Yet today, the real yield on a 10-year index-linked government gilt is about -2%, implying that money is not just free, but that one pays to have it looked after.

The mathematical logic of housing as an asset becomes notably more obvious in this context, particularly with leveraging finance, so that, say, 3% financing costs against 6% rent coupled with 6% to 7% value inflation can lead to investments acquired at virtually nil cost.

Commentators acknowledge that the sustained decline in real interest rates over the past 35 years has accounted for most, if not all, of the doubling in house prices relative to disposable incomes. However, it is the finance leverage, coupled with the former mortgage tax relief, that has made housing asset performance so beguiling, particularly in specific locations over time. The gross unleveraged average regional performance, in real terms, has largely been significantly below the stock market performance of UK or global equities over most chosen time periods, especially if modelled with the reinvestment of dividends.

The need for more housing is undeniable, and most urgently for more affordable housing, especially for those who will never be able to obtain a mortgage through circumstance. The low-interest environment is critical if we are to ensure greater residential investment, although it will also continue to drive house prices up. Cheap public debt frames the case for greater infrastructure investment, but today’s political imperatives have turned to more radical reform to drive the speed of housing development.

Typical of the current discourse is the Policy Exchange’s new paper ‘Rethinking the Planning System’, which departs from the past housing reviews calling for better collaboration, coordination and consistency. There is a call from the real estate sector for stability and simplification to the tax and planning regimes of the future.

Desire to invest for good

For many of our developer clients, investment in housing is becoming increasingly personal, with a new barometer for investment to do good. While historically, least costly was the private sector’s preferred path to tread, there is now a move to a more sustainable and considered development, and greater certainty in planning policy and taxation would better facilitate this.

The winners are most likely to be the development teams that collaborate to help facilitate investor visions and local authorities able to share in these visions for creating better-connected communities. This is challenging market dynamics, when for so long the balance sheet was permission enough.

So, while returns with lower risks would almost certainly always attract private capital, it is a broader understanding and response to the broad macroeconomic context that exists with any development that reveals the real drivers of housing demand, supply and pricing: economic growth, demographics, inflation and real interest rates, which are then filtered through mortgage credit structures, tax regime incentives, rented housing regulation constraint and the land planning vagaries.

In a post-Brexit economy, housing has a leading role in supporting the UK’s long-term economic development. The promise of stability is on the horizon, as the large majority Boris Johnson and his party managed to achieve provides a platform for change.

While we do not yet fully know the prime minister’s plans for the next five years (or 10, if he has his way), we do know that as an industry we need to focus on the most important issues – the need to cut regulation, stabilise policy, and increase productivity – if our collective voice is to be heard in establishing a new age agenda for this brave new decade.