The 60,000 pound question

The reaction from housebuilders was predictable. ‘John Prescott certainly got himself the headlines he wanted by suggesting homes could be built for £60,000,’ said Stewart Baseley, chairman of the House Builders Federation. 'It sounded good on two counts by promising homes for first-time buyers and bashing “fat cat” housebuilders at the same time. Frankly we’re rather disappointed at this cheap shot.’

Part of the bluster involved in this is political. Ahead of the next election Labour needs something to appeal to first-time buyers priced out of the market – and someone else to blame for soaring house prices. Meanwhile the housebuilding industry has historically been home to some of the biggest supporters of and donors to the Conservative party in British industry.

According to Prescott, the builders are ‘riding a gravy train’ and run an industry that is backward by comparison with its European competitors. According to the housebuilders most of the problems can be laid at the door of his own department with its over-zealous regulation and failure to reform the ramshackle planning system.

Inevitably the truth is more complicated than that, as we report on the next two pages. Between them, after all, the builders and the government have presided over the lowest levels of new housing starts since the war.

Much of the mutual suspicion stems from different views of what housebuilding is about. For the government the fact that building costs have risen so far ahead of inflation is hard evidence of profiteering or backwardness, or both. The same goes for their reluctance to employ the sort of off-site construction methods used elsewhere in Europe and the United States. Hence Prescott’s challenge to developers ‘from here and abroad’.

For housebuilders, the government fundamentally misunderstands the economics of their industry. They are developers rather than merely builders and that means land assembly and borrowing costs are at least as important to their business as building costs. The longer the planning process takes, the longer they have to pay interest on their borrowing without any money coming in from sales.

Meanwhile, high levels of subcontracting and self-employment mean wage costs are ultra responsive to the state of the market. Most salaries rise slightly ahead of inflation whatever the state of the economy. Day rates paid to construction workers can fall during a downturn and rise rapidly in an upturn like the one we have seen since 1997. According to cost consultant EC Harris, in the three years to June 2014 day rates rose 27 per cent whereas RPI inflation rose just seven per cent. The economics are different when housebuilders are working for housing associations because they are paid as they do the work rather than having to wait until the homes are sold.

But this has a limited impact on builders’ balance sheets. Social housing represents less than 20 per cent of their business and the distinction between it and market housing is becoming increasingly blurred as more and more affordable housing is provided as part of market schemes.

However, social housing is crucially important to future construction methods. The Housing Corporation’s pledge to reserve first 25 per cent, then 50 per cent, of the new homes budget for modern methods will give manufacturers the confidence to invest in extra capacity. This should bring the costs down to a level that will encourage builders to use them in homes for sale.

More details of Prescott’s £60,000 plan will be published in the ODPM’s five-year strategic plan for housing before Christmas. Whatever he comes up with – and it is possible to produce homes for that amount if enough costs are taken out of the equation – it will only be part of a much wider debate about new homes.

Builders and the government need to work together if output is to rise to anything like the levels the Barker review said were needed to control house price inflation. That will require a recognition of the reasons why output is still so low in a booming market, and of why we are still so reluctant to adopt alternative construction methods.

After all, if Prescott really thinks housebuilders are so greedy or inefficient, why is he about to hand them a huge chunk of social housing grant? And why do ODPM spending plans assume this will lead to efficiency gains?