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Blast from the past
Housebuilder – June 2008

People in the industry today who survived and thrived in the last housing market downturn have some important insights to impart. Mark Smulian looks back to the early 1990s

The Spanish philosopher George Santayana has one memorable quote to his name: "Those who cannot remember the past are condemned to repeat it."

There are plenty of people still around the housebuilding industry who can remember the downturn of the early 1990s all too clearly. It was the era of John Major and Neil Kinnock, of the first Gulf war, the dissolution of the Soviet Union, and a UK housing market crash that took five years to end as soaring interest rates and repossessions scared off buyers. Builders tried to shift stock however they could, by cutting prices and by doing shared equity deals. Many also sold homes cheaply to housing associations to get cashflow.

Lack of buyers

The lack of buyers has returned with a vengeance, with Persimmon announcing that it will not start new sites in the foreseeable future and Bovis Homes warning of a 30% fall in reservations against last year. This time though it is a crisis of lending rather than one of high interest rates and unemployment. For housebuilders though the effects are similar: buyers vanish, cash flows dry up and drastic pruning can be needed to survive.

Veterans of the early 90s see their pasts flashing before their eyes; for those who have known only boom conditions, it is time to consult the history books.

The HBF's executive chairman Stewart Baseley was chief executive of the upmarket housebuilder Charles Church in 1990. He recalls: "We were in desperate financial straits, the management had to do some very drastic things to survive and unfortunately most of the savings had to come from people."

Church's nine regional offices were pruned to one and only around 60 of the 330 staff remained after the cost-cutting programme. The company recovered and was sold to Beazer Homes in the late 90s.

Baseley says: "It was hard because we were getting rid of good people, not people who were performing poorly, and redundancies take a huge toll on managements because you have to deal with the human consequences."

Church's nine regional offices were pruned to one and only around 60 of the 330 staff remained after the cost-cutting programme. The company recovered and was sold to Beazer Homes in the late 90s. Baseley says: "It was hard because we were getting rid of good people, not people who were performing poorly, and redundancies take a huge toll on managements because you have to deal with the human consequences."

Once a company has got its staff and overhead costs under control it must "stop buying land and be very selective about what you do build, since there is no point in building what you cannot sell," he says. "Companies go bust because they run out of cash, and that makes cashflow the number one priority." It was still possible to sell homes in the early 90s but only if builders observed the highest standards.

"You had to make sure the property was very well presented, the site was spick and span and that you had targeted your marketing very carefully. "Of course builders should always do that, though candidly, standards can fall in easy markets, but it is essential now."

Roger Humber, who was the HBF's director in the early 90s, also sees different causes of the same difficulties.

"What caused the problem then was very high interest rates at the end of a period when the government had panicked about inflation, and it turned into an economic downturn and it hit housing," he says. "It's different this time because so far employment is still unaffected, although the lack of affordable mortgages at a time of higher living costs has made people unwilling to buy."

1990

Not that that is much comfort, indeed he predicts a downturn that will last between three and seven years. "If you have more costly outgoings and mortgages it will all add up to the same situation as in 1990." Humber says that although the economy began to recover by 1993 it took until 1996 for the housing market to do so fully because "prices came down but it took time for earnings to rise, and there is a tension there". He recalls that the government was of very limited help to the industry.

Although the then chancellor Norman Lamont devised the housing market package - an initiative with a whiff of panic about it that asked housing associations to spend almost 600 million in just 100 days to buy 180,000 empty private homes - builders' pleas generally fell on deaf ears in Whitehall.

"Government did not do very much, although we campaigned for lower stamp duty and there was a temporary change, but they refused to temporarily restore mortgage income tax relief and the Treasury did little," he says.

Humber is worried that the effects of this downturn on the industry will be as difficult as last time, when many small firms failed and medium sized ones were forced into mergers by their bankers. "The severity of the current downturn has taken everyone by surprise, where the money markets have dried up and it's got worse just in the past few months.

"I guess we are at the start of this thing. There are starting to be discounts and part-exchange deals again and the majors are trying to offload land, but so far no-one is taking because it is the stuff no-one wants and they will wait until the good land comes along. "Things won't change until people can afford mortgages again, and that takes time to catch up even after the market recovers. I think recovery will take three to seven years."

Terry Fuller, now chair of the HBF affordable housing group, was a land manager at Barratt East London 15 years ago. "What happened was people piled into housing association work and refurbishment of council stock," he remembers. "Also, builders sold stock in joint ventures with finance houses where, in our case, the Woolwich Building Society bought the land and we built and split the profits.

There is no reason not to do that again." He recalls deals where builders would sell a 100,000 home for 75,000 and then take 25% of any profit when it was sold. Others offered guarantees that for three years they would buy a home back for at least the price paid. There were even more exotic inducements at the top end of the market among builders stuck with unsaleable homes.

"There were stories that buyers would find a Porsche in the garage provided free by the builder, but that was only in very sexy highend firms, most of which I think no longer exist," he comments. He argues that builders can still find work for housing associations because, while 65% of their output is tied to the private market through planning gain deals, 35% is not, and still needs to be built. This is a change from 15 years ago, when most association stock was built in effect with public money, and so there may be thinner pickings now. Fuller suggests builders might turn to public sector refurbishment work.

Decent homes standard

"There is work on social housing going beyond the decent homes standard," he says. "Work to meet the standard has largely been done, but there is a whole green agenda now and I think very few council homes would be anywhere near a 'good' code on sustainable homes score, so there is that if builders were willing to move into refurb."

Paul Pedley, former deputy chairman of Redrow, says this downturn is "fundamentally different from the early 90s because that recession was housing market driven and this one is financially driven." He sees the industry's salvation in successfully lobbying the government to be helpful.

"One of the biggest issues is to convince the government and the Bank of England of the issues of liquidity, what they have put into the markets is welcome but unless that finds its way to lenders it will not be effective.

"If we are to protect housing the government must get the money markets moving again. "That is not something any housebuilder can do alone. The HBF is crucially important here and it needs to bang the drum with government about just how vital it is to get the markets working."

One day, the market will recover. As Baseley says: "There is always light at the end of the tunnel, and the great thing about housing markets is that they always turn round."

The causes of this downturn, and its solutions, may differ from its predecessor, but the responses that housebuilders need to make - cost control, high quality work, imaginative discounting, making friends in the social sector - all sound eerily similar.