The Death of Affordable Housing

Outline situation.

Across the UK, we have an immediate need for millions of new homes. A couple of years ago I recall data being published that put the estimated number at over 4.5m. A recent study based on comparisons with the rest of Europe using a different formula coincidentally came up with a number of 4.3m. Additionally, it is estimated that around 2m UK homes are well past their use-by date and will soon need to be replaced.

Once we factor in the additional needs of the thousands of people in desperate situations entering the UK - from boat crossings of the channel and the Syrian conflict, to Afghanistan refugees and the recent invasion of Ukraine, the number of people in need of housing is continually increasing. Given that these people were not part of previous studies, we must therefore assume the actual number of homes required to be far greater than the 6.5 million estimates noted.

Fundamentally we have a critical housing situation that needs to be solved.. Fast!

This situation is not unique to the UK. Almost all European countries and the United States are declaring a critical shortage of housing, as well as many more cities, and regions across the globe. Singapore, Paris, Rome, Hong Kong, Dublin, Barcelona, Auckland, Zurich to name but a few. Fast developing regions such as the UAE also face the same problem as people flock to these regions with the attraction of high salaries. This is placing pressure on housing at all levels.

Whilst it is not our direct responsibility to take care of other areas of the world, we certainly have a duty to improve the UK’s housing needs.

Data on housing requirements.

In the UK we can access online documents from the various local authorities who publish local development plans (or equivalent). In doing so, you begin to build a worrying picture. The amount of homes required across each region and the numbers are staggering. Many thousands of homes, across every single authority throughout the entire country.

This is Great Britain! We have been told our entire lives that we live in one of the greatest countries in the world, yet we have embarrassing levels of homelessness and families living in unfit and unhealthy housing. We have housing stock awash with mould, dampness, rot and other terrible conditions. We have evidence of housing with extremely poor energy efficiency leading to unaffordable situations, where families must choose between heating and food, and families waiting decades for housing that is suitable for their needs.

How can our most important and fundamental need for a home, a basic human right of every person in our country, be so badly wrong?

I believe there are several reasons:

Decades of under investment, incompetence, greed, selfishness, naivety and bureaucracy. All of which compound the situation.

Whilst the reasons are easy to identify, implementing a successful solution to our crisis will be far more challenging.

Is the “Affordable Home” likely to become extinct?

Sadly I think the answer to this question is yes - and we may already be too late to stop it. Over the past years there have been a huge number of influencing factors that have continued to erode housing output and increase cost. The industry has been in decline throughout the entire time I have been in construction, and those tasked with reversing this decline, are the very people who are now causing its acceleration.

Why do I believe this to be true? I will be blunt, it’s because they have never lived a life in construction! They do not fully understand or appreciate the people who work hard at ‘grass roots’ level every day to create our homes and our cities. I often refer to this as our “Men are from Mars, Women are from Venus” situation.

Instead, Government Ministers and industry professionals believe they can dictate the future ethos and attitudes of the workforce through additional rules, new guidance or ‘re-education’. They tend to look down on our trades workforce condescendingly as being “only construction workers” rather than the highly skilled, well trained, and highly experienced professionals they are. Admittedly, the average tradesperson may not have a university degree. The are probably not much of an expert when it comes to document control or managing tax affairs, but this should not be a reason to presume they are of lesser intellect (This is certainly not the case). Some may argue this has led to a degree of opportunism by the “well educated” where the odds are always stacked against the contractors. Construction contracts have become so complex that most contractors do not fully understand them. It’s a ‘Casino always wins’ system. This format results in all the risk being placed on the contractor with fixed costs being demanded, unworkable payment terms, employer designs being forcibly novated, contract administrators being employed by the employer, adjudications being complex and expensive and the ability to make profit almost impossible. Thousands of construction companies fail each year in the UK with many thousands of hard working people losing out on much needed income on every occasion.

As we look ahead into 2023, the division between the industry workforce, and the industry professionals has never been further apart. When our great trades men and women feel they are always on the “losing side”, are continually begging for payments or even being bullied, they eventually choose to move on, never to return.

Undoubtably labour is the most important issue in our industry, holding back our ability to build. We simply do not have the labour resource to build the number of homes required each year and the attrition rate continues to far exceed the numbers entering the industry. Because the resource is so scarce, costs continue to rise and the overall cost of new home construction increases.

The time it takes to replace an experienced tradesperson ‘like for like’ is anything between 10 and 15 years. Having an apprentice programme in place is one thing, keeping them in the industry is another.

Attracting and retaining new talent is vital to the survival of UK construction yet there has been no real efforts to deal with this. A first year apprentice will earn £4.81 per hour and this even includes the age 19 and over in their first year. This same person can earn 2 or 3 times more by taking a job at a supermarket with far less pressure and never likely to be working outside. To put this into perspective, over the term of their apprenticeship, they could have earned around 40k more by not becoming a tradesperson.

Whilst the average tradesperson can now earn serious money once they become experienced, most young people live in the here and now and simply want to earn as much money as possible right away.

Affordability.

We are told by all Governments that their desire is to create affordable homes across the UK. There are a vast number of variables influencing our sector, but first we must ask the question: What is an affordable home?

One might argue any home that has been sold was affordable to the purchaser, therefore every home is affordable. I have yet to find any clear answer to this question but in my opinion, the average family income (by area) should be able to comfortably afford the cost of living in that home to be classed as affordable. Whether this was a private sale and therefore paying a mortgage, or a long term rental, the cost of living in this home should be within their means.

I appreciate everyone has different views on affordability but lets be honest, this also comes down to choices. In my own home, which is a very old and inefficient property, I have low energy costs. This is not because I have used my years of experience to upgrade the fabric of the building to make it super insulated, it is primarily due to the fact I am at work a greater number of hours than most other people. I spend little or no time watching TV and do not have an enhanced TV package such as sky. I don’t subscribe to online platforms such as Netflix, (other platforms available !) I do not smoke, I only drink alcohol occasionally, and I have no other expensive habits that I spend money on. My children no longer live at home and my days of trying to look cool in designer clothes have long since gone. A result of this, is my monthly outgoings are greatly reduced. Theoretically, I could afford to spend more money on a home should I choose to do so. This may even be compared to someone else on the same income as I, but with completely different circumstances and lifestyle choices. Decoupling choices from genuine affordability is important to strike the right balance.

Affordable homes might therefore be assessed on take home earnings. For example 25-30% of the household monthly salary might be a good way to assess rent or mortgage payments, with utility bills and home luxury packages being over and above.

What of the Tenure mix? For many years we have been indoctrinated into the home ownership mindset in the UK, but I believe this is beginning to change. Across Europe home ownership is not considered the norm, with many families living contently in rental properties.

Partly by choice and partly due to current circumstances, the next generation of UK occupiers are seeking a new way of living. Flexibility is becoming ever more important as people no longer see careers as lifelong, so why be tied to a house for life. Renting allows the occupier the option to pack up at short notice and go, whenever a new direction in life comes along. Does this in itself present a risk to building new homes? No it does not. But it does change the way in which developers have to look at financing their projects and that certainly has an impact on the number of annual completions taking place.

Cost controls.

Materials have been a huge challenge over the past few years, even before Brexit and Covid-19. We have gone through unpredictable challenges with cement, plasterboard, timber, chipboard products, insulation, and steel based products to name but a few. The list is endless and ultimately there will never be true stability in the supply chain for the construction industry. This is especially true when Governments intervene and announce new schemes to improve the nation’s housing stock.

A prime example of this being home insulation: This was a relatively stable product with price increases being only a few % each year. As this regular annual increase was anticipated, contractors could make allowances on project forecasting and therefore this was not seen as a high risk factor in a development appraisal. As soon as the Government announced national programmes to insulate homes with grants being available and talk of tens of thousands of jobs being created, the cost of insulation increased significantly.

Why you may ask? Because Government money was involved and greed kicks in.

Was this a successful project and was the promised Money successfully allocated? Were the number of intended homes improved and did the thousands of jobs materialise? Sadly, the answer to all of these questions is no. The scheme was abandoned, having achieved almost none of its targets and the only real outcome achieved was a far more expensive base rate for insulation.

Material cost and availability remain a large factor in the number of homes being constructed, and the outlook for the foreseeable future does not permit an increase in national completions.

Skilled Labour:

One of the most critical issues we have in housebuilding is the availability of good quality, skilled labour. Without the workforce required to build our homes, it is simply impossible to deliver them. Every year the number of people leaving the industry increases and we are seeing a great reduction in the number of people entering the sector.

This is a very complex issue, but some of the reasons behind this have been ongoing for decades and many attempts to attract labour have failed. Some of the reasons are as follows:

·      Challenging working conditions, often in all weather

·      Low wages at entry level with as little as £4.81 per hour

·      Low uptake and retention of apprenticeships

·      Fewer apprenticeships being offered by employers

·      Construction is not promoted at school level with University being presented as the best pathway into high paid employment.

·      Young people do not see the industry as an attractive career.

·      Existing trades and labour being starved of funds via poor or biased contractual mechanisms, encouraging them to exit the industry.

·      Too many workers loose out on payments when a contractor business collapses, again encouraging them to exit the industry.

·      A constant need to re-train as industry standards continually change

·      Construction is hard work. Other forms of employment can often provide better conditions and less effort to gain the same or better income.

·      Many simply leave as they are frustrated from carrying out their job efficiently.

·      The professional sector continues to look down on tradespeople which has created a 2 tier system, and a demoralised workforce.

Unless the industry can find a way to deal with the UK labour shortage then our ever decreasing workforce will continue to impact house completions and therefore, house prices.

Additional Cost Factors:

There are many other factors that are causing housing to becoming ever more expensive. These have impacted development costs and therefore increase the end value of any new build home.

·      Contractor Levies - we have everything from Grenfell cladding and railway upgrades, to affordable housing and school contributions. All of which add cost to the overall development and therefore the home value required to justify the project. Only this week Scottish medical professional bodies have called for a legal requirement to be introduced for housing developers to be liable for upgrading healthcare facilities to prevent surgeries from being overwhelmed by new residents. UK citizens already have a right to healthcare so they certainly do not need an extra ‘tax’ added to their homes.

·      Suez canal – you may laugh, but the blockage resulted in materials being delayed into UK ports and was another reason for construction delays and supplier cost increases.

·      Brexit – not much explanation required! But this has certainly created cost increases and continues to impact lead times on materials coming from the EU into the UK.

·      Scottish Independence - uncertainty reduces investment. If independence is to be a natural progression for Scotland, it certainly is not possible in the current environment. This should be parked to one side for the foreseeable future and efforts placed into improving the Scottish economy, creating jobs, and ending the housing crisis.

·      Covid-19 – The damage from the pandemic will take generations to recover.

·      Statutory changes - by this I mean the constantly moving target on standards which housing and construction have to maintain. We must leave new builds alone for a fixed period such as 5 years and allow the industry to stabilise. Tougher standards and regulations should be brought in progressively and on a 5 year cycle allowing time for consultation, ratifying changes, and implementation.

·      Halting the use of natural gas – Heat pumps – Energy efficiency - Net Zero – Passivhuas – solar panels – car charging – battery storage. All of these plans are fabulous, and will improve our housing, but only over time. Allow the market to dictate rather than forcing these on every home. The changes are happening too fast, and there are too many all at the same time. Something has to give or the industry will come to a standstill.

·      Training and qualifications are becoming very onerous due to the rapid changes being proposed. A 5-year bedding-in period for new standards will allow the time to deliver training and gain experience which could be harmonised with a 5 year roll-out on new building standards.

·      Environmental challenges such as Blue Green infrastructure and Nutrient Neutrality are placing huge burdens on developers. This reduces land values, lengthens planning timescales, and in many cases, halts developments altogether. It has been estimated that over 120,000 homes across England are currently stuck in planning due to Nutrient Neutrality.

·      Professional teams have become a huge overhead cost for projects with a very top heavy approach to construction projects now being quite normal. I’m certainly not suggesting that professionals should not be used, but merely that the costs of these services continue to  increase without necessarily increasing value.

·      Special Purpose Vehicles (SPV’s) have their place, but should never be used when public money is involved. Local Authorities and housing associations should only be permitted to engage directly with contractors when procuring housing projects. Many contractors, having been “burnt” through the use of one-off companies (who act as a go between on housing contracts) are now turning their backs on ever carrying out affordable housing projects as the risks are too high. Those who do, now heavily load the cost to build in protections. SPV’s that have been created just prior to a project commencing are far more likely to extract the easy funds from the project and when the risks increase or project costs remaining are insufficient to complete, it is too easy for the SPV to fold and walk away. This leaves the contractor hugely out of pocket, and the Employer an additional cost to find a way to unpick contracts and finish the project under a new package.

·      Mortgages and interest rates will always impact UK housing and with the recent increase in the BOE base rate, mortgages are considerably more expensive than those of recent years. When interest rates rise, so too does the cost of borrowing for the developers and this cost must be recovered. If a development appraisal does not stack up financially, then funders will not lend and the project stalls. The only way to combat this is to increase the sales value of the homes to cover all costs. In many areas, it may not be possible to increase values and as such the project is unable to proceed.

·      Availability of contractors for the construction of new homes is becoming ever more scarce. With the demise of many construction companies over the past 3 years, there is a large number of available projects on offer for those still trading. It does not make commercial sense for any business to voluntarily enter into low margin contracts with very onerous obligations, including contractor bonds and guarantees. Building affordable housing does not provide the yield that many other construction works can bring and they are simply making the wise choice to protect the future of their business.

• Land is extremely expensive and difficult to obtain for the construction of new homes.
• Private land owners want top dollar and try to influence the type of homes constructed on this land to ensure maximum values are achieved.
• Often, land is bought and sold several times over before a genuine developer secures the site. Before a single spade has been put in the ground cost has already been inflated.
• Local authorities have to demonstrate to the public that they have secured a fair land value but this a difficult balance as they also have housing targets to meet.
• Perception – Rich developers: The value of brownfield land varies greatly across the country, so a site in Yorkshire might be worth 60k per plot with a sale value of a complete property at £450k… but this doesn’t mean land in rural Scotland should be worth 50k with a completed house sale value at £250k. Materials and construction costs do not vary that much but land sellers have this belief that all developers are rich and should pay more.
• Buying land as part of an ongoing development strategy involves a different finance model from construction. Often the land is purchased, but could take 2-3 years to obtain all the necessary consents before being able to commence works. This makes it impossible for SME developers to secure long term order book.
• Utilities are one of the most challenging aspects of building a new housing development. The work involved in the design, approvals, and co-ordination of this work is immense and should never be underestimated. Once the utilities have been laid and connections made into the houses, there then comes the challenge of arranging meters. Dur to the ongoing energy crisis, many shippers are opting not to take on new customers, meaning new builds are very low on the priority list. Some developers have reported that certain regions across the UK are looking at over 1 year to gain a meter connection.

Summary:

Housing is a basic right of every person living in the UK. It should be of the upmost priority that the government and devolved governments place housing needs above all other responsibilities. All too often, developments are being stalled or compromised to satisfy the ‘needs’ of someone or something else. The voice of those sitting comfortably in their own home is being heard, whilst those without a voice are being overlooked.

When contractors are unable to build housing within the available budget,… When local authorities are unable to afford the cost of employing contractors to build,… When housing associations are unable to afford the current standard of homes without further government support, and when home occupiers are no longer able to pay mortgage costs, or the rental value to live in the homes we may eventually create…

I think we can agree UK housing is no longer “affordable”

Is there a solution to this ever declining turmoil? The short answer is yes, but that’s for a future article!

One final point of note.

The reduction of housebuilding numbers over the coming years will directly impact our overall UK economy, it will reduce employment numbers across many sectors not just construction and impact our national tax receipts. Affordable housing programmes relay on private development and will slow, possibly even stall. Developer levies will dry up which to date, contribution towards schools, play areas, doctor surgeries, railway upgrades and many more.

Most importantly, it results in an even greater failure to resolve homelessness or improve housing standards for those living in terrible conditions across the UK. This is the part we should all be ashamed of.

Eddie Wighton 16th March 2023