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Dealing with the donwturn
Planning – 23 May 2008

Latest signals in the housing market pose some serious dilemmas for planning authorities about land supply, affordable home targets and revenue streams for infrastructure provision, Mark Smulian discovers

What happens when a virtuous circle turns vicious? Planners concerned with the provision of new homes are about to find out as the credit crunch sends panic waves through the house building industry.

If builders cannot build homes that will sell, they will not build the accompanying affordable homes either. This promises to be deeply problematic for the government's home building target, infrastructure provision based on the assumption that planning gain will pay for it and planners who have dutifully found five years' supply of building land only to discover that few wish to build on it.

After several months of worried noises from builders about the evaporation of mortgage finance, the alarm bells really started to ring late last month.

Persimmon Homes - one of the largest house builders - amazed the industry by announcing that it has postponed the commencement of scheduled new sites until the mortgage market improves.

The firm blames "an unprecedented tightening in the mortgage market" and media reports of the global credit crunch. These factors "continue to undermine consumer confidence", it maintains. Persimmon's revenue was down by 24 per cent in the first quarter of this year against last year's levels, at 1.37 billion. It is not a situation in which builders will think about contributing to community infrastructure from their profits.

According to RTPI policy director Rynd Smith, the downturn in development activity proves that what drives the housing market is the availability of credit rather than land.

The builders, politicians and academics who have blamed planners for a lack of new homes over the past decade are wrong, he says. "The mortgage market is collapsing and there is a shortage of products that lend even 80 per cent of a home's value, never mind 100 per cent," he points out.

"It is a situation that we have not seen before. But it makes it clear that financial market performance issues are more important than land supply ones. Land supply has not changed, but there is not the finance to start development. That is what has dramatically changed," Smith insists.

But even if people cannot afford to buy a home, they will still need somewhere to live. That factor is driving up demand for affordable housing at the exact point when its supply has been hit by the industry's travails. "We could end up with a position where people who would not previously have needed affordable housing now need it but cannot find it," Smith adds.

In its submissions to Kate Barker's housing review, the institute pointed out that it is erroneous to think that land supply is what drives the market, arguing that the single most important factor in pursuing supply is lending products. That fell on deaf ears at the time. But any pleasure in now being vindicated is tempered by the knowledge that such market dislocation will not help local government achieve its housing goals.

While Smith says the present situation shows that land supply has a far smaller impact on house prices than even the most gung-ho advocates could have believed even a year ago, he does not want housing provision to grind to a halt. He urges the government to be willing to add to public borrowing to keep the economy going and spend this to deliver its housing targets.

With public finances tight, ministers might not smile on that idea. However, it is unclear what they expect planners to do in these changed circumstances. PPS3, last revised in 2006, was a product of an era when the policy assumption was that the housing market would keep growing. The idea that it might not was barely considered.

The closest the statement comes is in recognising that where market conditions have changed it may be necessary to reassess need and demand, review the approach across housing market areas or launch a partial review of regional spatial strategies to update the local level of provision. So does that involve planners having to restrict the supply of land to avoid huge numbers of unimplementable permissions?

PPS3 has been taken to mean that enough sites should be released for housing land costs to fall. But what should be done when they are in freefall of their own volition? Again, planning policy has little to say. The Home Builders Federation (HBF) does not accept that its strictures about land supply have been proved wrong. Public affairs director John Slaughter calls Smith's contention that land supply is not the root of housing supply problems "quite bizarre".

Credit availability has only been an issue for a few months, he notes. "Credit was not an issue at all during most of the period in which we have not been building enough houses," he says. "The problem is the planning system, not planners as such. It does not release enough land and that makes it difficult to build enough homes."

Slaughter says land supply has increased by 25 per cent on 2001 levels "but there was still not enough land to meet targets". The crunch has seen the HBF lobby the government for help. It has secured agreement from the Housing Corporation to consider letting housing associations deploy public funds to buy unsold private homes for use as affordable housing.

National Housing Federation chief executive David Orr accepts that when it comes to affordable provision, a lot depends on deals with developers. "If nothing is coming out of the ground then there will be no section 106 affordable homes built either," he says. He believes that the crunch is starting to drive down land prices, with some developers buying land to sell on to housing associations for mixed-tenure schemes.

"It's an acute irony that after years of disinvestment in social housing we are seeing real political commitment and money for social rented housing - just as the development industry is in its worst state for 15 years," Orr says.

"Part of me thinks that a lot of chickens are coming home to roost."

He warns that housing associations may have neither the money nor the inclination to buy homes built for the private market that are standing empty. "Some builders are pushing for associations to buy unsold homes, but the big difficulty is with standards," he explains. "Not that many private homes meet a very good eco-homes rating, level 3 of the code for sustainable homes or our space standards. We need those or it can create maintenance and management difficulties."

DTZ director of development consulting Andrew Thomson fears that Persimmon will be the first of many house builders to pack up their theodolites as the credit crunch bites. "There will be a ripple effect into affordable housing and the three million homes target," he predicts.

While planners may be able to help developers by reducing the financial burdens of planning gain, Thomson argues that public investment may be the only way to keep up housing supply, both now and when a recovery comes. The Homes and Communities Agency could offer solutions when it begins operating later in the year, he reflects. "But I'm not sure how effective it will be unless a lot of public money is channelled into it," he adds.

Meanwhile, the industry is likely to shed skilled workers and manufacturing capacity. It could take a long time to gear up to meet renewed demand. "There is a risk that if you can't sell homes it becomes difficult to maintain the scale of operations with no revenue coming in," Slaughter acknowledges. "That is why we are talking to the government to take measures to help the situation, which is in everyone's interests."

The last housing recession started in 1990 and the market did not fully recover until 1996. If this downturn becomes anything similar, current assumptions about demand, land supply and planning gain are going to look like ancient history.

What Went Wrong?

While nothing much could have prevented the US sub-prime debacle spilling over to the UK, some home-grown factors have added to the trouble. Housing market research firm Hometrack's housing intelligence service points to an unprecedented boom in house prices, a switch in planning policy to emphasise provision of high-density flats and widespread availability of finance for buy-to-let landlords.

These three factors together created a market that attracted investors rather than owner-occupiers.

Speculation took root, driving prices ever upwards to unrealistic levels until the credit crunch choked off finance. Faced with a difficult market, developers' only option is to cut output and hope that they can sell those homes they do build for decent profits.

Hometrack is sceptical that the market will rebalance itself through falling land prices. Landowners will simply sit on their land until better times come, it points out. The firm believes that planners will have to be less ambitious on developer contributions in such a market.

Moderating section 106 or community infrastructure levy demands, along with encouraging development on publicly-owned land, could make an important contribution to maintaining supply, it advises.