Are builders really to blame for the UK housing crisis and will Theresa May’s sanctions work?

Theresa May has lambasted UK house builders for effectively not doing their job.

In a speech, the Prime Minister said developers are too slow to build houses, and that the Government would take action to punish them if they did not shape up.

“The gap between permissions granted and homes built is still too large,” Ms May said.

“I want to see planning permissions going to people who are actually going to build houses, not just sit on land and watch its value rise.

“I expect developers to do their duty to Britain and build the homes our country needs.”

The Prime Minister warned firms’ past records could count against them when they bid for new planning permissions from local authorities.

But how should we evaluate this announcement? Is Ms May right about the culpability of builders? Would her sanction solve the problem? And, if not, what else ought to be done?

Are builders really not building fast enough?

This is a highly contested question, to put it mildly. The builders insist that they are building as fast as possible.

But campaign groups insist there is a problem with slow build-out rates, arguing that developers and speculators are sitting on their land as an appreciating asset in order to book a healthy accounting profit.

In other words, they are engaged in “land banking”.

There’s certainly a substantial backlog of permissions. The charity Shelter estimates that across England planning permissions were granted for 1,725,382 housing units between 2006 and 2014, but only 816,450 had been completed after three years.

But builders say those who, like the Prime Minister, point to the large number of unbuilt permissions simply misunderstand their business model.

They explain that they need a large inventory of permissions – enough for new supply stretching many years ahead – to be viable businesses. If they had no or little land and permissions inventory, they might suddenly discover they had insufficient raw material for making sales and profits and would therefore risk going bust.

So who is right?

The evidence on land banking is patchy and inconclusive. An influential government report by respected economist Kate Barker in 2004 did conclude that the industry “at times may hold back supply”.

More recently, a report for the Mayor of London in 2014 found that a quarter of the permissioned schemes in London (where the market is especially tight) are owned by speculators and land traders, rather than developers.

It’s also clear – and perhaps understandable – that house builders are wary of putting a glut of new housing on the market at any one time (which could exert downward pressure on sales prices) and thus try to feed out new units at a gradual pace.

However, whether this is actually land banking as most people understand it, is a moot point.

One factor that was highlighted in the Barker review – which hasn’t changed – is that that new housing supply in the UK seems very unresponsive to increases in house prices, relative to other countries.

This may reflect an excessive ability of UK housebuilders to slow construction rates, perhaps due to a lack of competition.

Last year Ms May told the former minister and Conservative grandee Oliver Letwin to investigate the issues.

He hasn’t reported yet, but the fact that the Prime Minister has made today’s threat to builders suggests that she has either made up her mind already, or has had a decent steer that he is likely to find that builders are – at least to some degree – at fault.

Is this similar to what Labour has been proposing?

Back in 2013, the former leader Ed Miliband promised a “use it or lose it” regime for house builders to curb land banking.

But the latest proposal from Jeremy Corbyn’s leadership is different. The party said it is considering plans to enforce “compulsory purchase orders” on undeveloped land.

These are a provision within the law for certain state bodies, such as local authorities, to obtain private land without the consent of the owner.

Labour’s plan is to create an “English Sovereign Land Trust” with powers to compulsorily purchase land for housing at prices which exclude any prospective planning approval “uplift” value from the compensation. Labour says it would use the saving to cut the cost of new council house building.

And, actually, the Conservatives have also floated something rather similar. The Housing Secretary, Sajid Javid, recently suggested that Homes England, the Government’s housing agency, should use its existing compulsory purchasing powers more readily to speed up new developments.

He also raised the idea of “new charges” on land to ensure “the state takes a portion of that uplift to support local infrastructure and development”.

Which policy is better?

The answer depends on whether the evidence on land banking holds up or not.

If one takes the view that it is not happening and builders really are building as fast as they realistically can, then sanctioning developers could do damage because it might discourage investment in the sector.

But if hoarding is taking place, all the above plans could conceivably incentivise firms to speed up build rates – although much would depend on the design details of the policies.

So what is the solution?

Many economists would prefer a classical and simple land value tax (both for permissioned and unpermissioned land) in order to incentivise development, rather than somewhat complicated sanctions on private builders.

Others take the view that a better way to increase supply is for the Government to give local councils the resources and ability to build new social housing again – something they have not done in any kind of serious volume since the Thatcher era.

There’s also a question over the degree to which increasing supply would have a significant impact on average house prices, making them more affordable to the average buyer.

Some, such as Ian Mulheirn of Oxford Economics, argue that, contrary to perceptions, housing supply has broadly been tracking demand in recent years, and that prices have been rising mainly because interest rates have been falling, something which automatically pushes up the price of all assets.

The implication of this analysis (although many do not agree with it) is that a better policy focus for ministers would be to make life more comfortable and secure for the growing share of the UK population who are renters, rather than trying to raise the new housing supply.