Housing: meeting demand
The challenges for UK housebuilding
28 June 2011
Many people have theorised about the housebuilding industry in this country and its failing efforts to meet multiple demands for quantity, quality, environmental sustainability and affordability. Now, in a new RICS Research report, Dr Chris Goodier of Loughborough University and Dr Wei Pan of the University of Plymouth analyse the elements of success or failure in the future, starting with six challenges the industry faces
The UK housebuilding industry currently faces significant challenges, some long-standing and others triggered by the economic downturn. Some factors, such as changing demographics, are external to housebuilding, while others, such as increased standards and legislation, come from within the sector itself. It is assumed that external macro-drivers, such as climate change, will have an impact on the housebuilding sector in future, but little consideration has been given to how these might intersect with internal dynamics, such as the organisation of the sector, or the skill requirements of the housebuilding process.
This raises questions about the extent to which housebuilding firms and practitioners are able to intervene and influence the processes of change – e.g. what actions could be taken by firms and others to increase the overall volume of offsite within the industry? Or to readdress the industry’s paucity of trained workers? Or even to take into account the problems of a changed climate decades from now?
The most significant barriers facing the UK housebuilding industry include housing undersupply and mismatch, the economic downturn, land supply and planning, climate change, the slow take-up of sustainability and skills shortages – not necessarily in that order.
1. Housing undersupply and mismatch
The number of annual dwelling completions in the UK since World War II reached its peak (425,830) in 1968, before embarking on a steep downward trend until the early 1980s, when it plateaued around 200,000. In 2001, construction of new homes fell to its lowest level (173,770) since the War. After a gradual increase in the boom years from 2001 to 2007 (225,330), the number of housing completions dropped dramatically in the face of the downturn, with annual completions at 182,960 in 2008, 151,510 in 2009, and 66,620 in the first two quarters of 2010 (Source: CLG Live Tables 211 and 241).
At the same time, there has been a significant rise in the number of households in the UK. In 2000, the then Department of the Environment, Transport and the Regions (DETR) forecast an increase of around 150,000 each year until 2021, but Barker (2003) and ODPM (2005) suggested this might be an underestimate; the real figure per year might be 39,000 more than that. The Joseph Rowntree Land Enquiry in 2002 suggested that around 225,000 new homes would be needed each year in England alone until 2016 to meet the demand arising from demographic changes and other needs. According to the latest CLG Live Table, the number of households in the UK is projected to increase gradually, from the current 27m to 33m by 2031.
Figure 1: Household estimates and projections by household type. England. Source: CLG Live Table 402
Not only has the volume of output not responded to demand, but the 2004 Barker Review of Housing Supply found that the nature of housing being produced did not meet the needs of consumers and society as a whole. While the population is rising, the average household size is decreasing. One-person households have increased from 19% of the total in 1971 to 33% in 2010 (Figure 1).
Houses account for 82% of the dwelling stock in England, while the split between houses and flats in new build in recent years has presented a trend towards equilibrium, reaching 50/50 in 2008/2009 (Figure 2). Despite the fast growth of high-density, smaller one- and two-bedroom flats in individual blocks in the first decade of this millennium (Figure 2), a recent Knight Frank report (2009) speculates that high-rise apartment buildings are very unlikely to be attractive to either the supply or the demand side in the near future, after the economic downturn.
Figure 2: New-build completions by dwelling type. England. Source: CLG Live Table 254, Chart 254a & 254b
It may seem paradoxical that household types are becoming smaller, echoing the rapid increase in smaller new-build units from the late-1990s to 2008/09, while the market for medium- to high-rise blocks of apartments (which normally offer smaller units) has almost disappeared in the face of the recent recession. This seems to be the result of the interaction of various factors: land use planning, mortgageability, increasing regulatory and political burdens, and the risk profile of housebuilding itself. A purely statistical view of housing supply and demand does not rule out the possibility of a revival in the construction of medium- to high-rise apartment blocks in the future, given the longerterm household-size projections.
2. The economic downturn
It has been suggested that the private housing sector has suffered most in this downturn, taking the level of activity well below the level reached in the depths of the 1990s recession in real terms. In theory, a much higher level of funding in the 2008-2011 Affordable Housing Programme (AHP) should have delivered much more growth in the public housing sector. However, social housing providers have been hit by stricter lending conditions, in terms of both their ability to access funds directly from private lenders and the income generated from sales of units under low cost home-ownership schemes. Delivery through section 106 agreements has also been problematical, as the number of private developments where social units could be sited has dried up.
A developer generally needs 18 months to two years to bring a new site into production, which in reality is seldom achieved
Between 2010 and 2014, UK construction output is expected to average 1.7% growth each year. However, the balance between public and private work will change. As economic conditions improve, stabilisation and then recovery are expected for private housing, although the timing of the upturn will vary across markets. By contrast, the public sector is facing large expenditure cuts. There are signs of rising levels of both mortgage approvals and loans in recent months, although these indicators are not returning to what would be considered ‘normal’ levels and lending conditions still remain tight.
It is possible that the present crisis will change the distribution of development, with housebuilders focusing their efforts on bringing forward the most profitable sites nationally and regionally and turning away from those with significant physical or planning constraints locally. Although this particular impact may well be short-lived, the effect on lender and borrower behaviour may be more fundamental. Changes in the banking system might reduce access to mortgage credit in the long term. At the same time, borrower behaviour might change. The average age of the first-time buyer has risen considerably in recent years, partly due to the banks’ more cautious approach to lending and increased deposit requirements. This can only get worse with the introduction of even higher university fees from 2012. Perhaps enthusiasm for home ownership will be stifled. There is a strong likelihood that the second home and buy-to-let markets will shrink, taking a significant slice off the overall demand for housing.
With profitability reduced, risk weighing more heavily on decisionmaking, constraints on access to developable land and finance, and reduced capability and skills as a result of the downturn, housebuilders are less likely to make longer, more strategic commitments to housing supply. They will be more cautious when addressing the risks associated with land development, building processes and housing sales.
3. Land supply and planning
Many studies of planning and land supply have criticised the planning process for being lengthy and costly. An analysis of 64 individual case studies of major developments for the Killian Pretty Review (2008), showed that more than half of them encountered significant blockages and delays during the processing of their planning applications. Other research has shown planning approvals for developments of more than 10 homes taking an average of 25 weeks, instead of the targeted 13, and the whole process, from pre-application discussion to the start of construction, taking almost 98 weeks on average. Securing a reduction in this timescale requires action from both authorities and applicants.
A common finding of many studies and reports, including the Barker Review of 2004, is that the planning system restricts land supply and thus acts as the most significant barrier to housing supply. The Calcutt Review in 2007 identifies ‘running out of land’ as one of the major risks for housebuilding. A developer generally needs 18 months to two years to bring a new site into production, which in reality is seldom achieved. Failure forces a builder either to buy ‘oven ready’ sites at very high prices, or to increase volumes at existing sites, which calls for price discounting.
4. Climate change
One of the main challenges facing housebuilding in the near and more distant future is the need to respond to climate change, both to reduce carbon emissions (mitigation) and to cope with it (adaptation). The UK government has an ambitious long-term goal to reduce carbon emissions by 80% by 2050. With the domestic sector accounting for around a quarter of the UK’s carbon emissions, and the built environment overall responsible for nearly half, it is clear that we will need to drastically adjust the way we design, build and use our homes, as well as modify the way we live. Adapting to the changing climate will impact on the design, construction, location, cost and operation of all new homes and other buildings in the next few decades.
5. Slow take-up of sustainability
Becoming more sustainable as an industry, and a country, will mean changing and adapting our lifestyles, moving towards less energyintensive domestic practices and seeking alternative technological solutions. DCLG launched the Code for Sustainable Homes (CSH) in 2006, which has since become the most significant policy framework for environmental sustainability in housebuilding. However, concerns exist over its practicality, as it precludes any use of community or off-site-based energy systems. The definition of what exactly is ‘zero carbon’ is still in consultation.
Given the scale of the challenge, every attempt should be made to reduce unnecessary risks and uncertainties. A lack of appreciation of the technical aspects of energy saving poses a threat to the achievement of targets and places substantial costs and risks on the housebuilding industry, which has to invest substantially ahead of time in land acquisition, planning applications and the increasingly demanding technologies required to meet rising targets. Sites that are currently of marginal or negative financial viability are badly affected by any increase in cost or risk, and it would be unfortunate if they were lost to housebuilding on environmental grounds.
Without changes in labour productivity or automation, even a modest growth in output would create a need for around 70,000 more employees in the housebuilding industry
Code level 3 already creates substantial changes in the way homes are built and improves their sustainability; raising the level to 6 presents a major challenge to the private housebuilding industry, as well as a cost increase to the consumer. Implementation to date has exposed a lack of co-ordination between tiers of government, technical challenges and risks, and a lack of consumer buy-in. The recession has also affected the programme, with less building meaning less experience and capacity, so that the resource base and supply chains are more limited than they would otherwise have been. To date, dwellings built to CSH levels represent a very small proportion of total new-build homes and 90% of them are level 3, indicating that most certification is prompted by local authorities’ requirements for social housing.
Research shows there is a widespread resistance to speculative building to higher than mandatory levels because homeowners will simply not pay the premium involved. Many housebuilders have serious concerns about whether microgeneration and renewable energy technologies can deliver the energy generation requirements of the code. There are further concerns that failure to maintain the new systems and technologies adequately might expose homeowners to health and safety risks. In addition, there is considerable concern over inconsistencies in the requirements of local and central government bodies and a lack of clear central leadership.
6. Skills shortages
That skills shortages represent a challenge to housing supply has been highlighted in a series of studies. Barker reported, back in 2003, that more than 80% of firms found it difficult to find bricklayers, plasterers and carpenters, and that wages for skilled craftsmen were increasing faster than wages in the economy as a whole. Without changes in labour productivity or automation, even a modest growth in output as the economy recovers would create a need for around 70,000 more employees in the housebuilding industry. A more substantial expansion might push the need to 280,000 people.
While construction companies generally are operating in an increasingly competitive environment for skilled labour, the housebuilding sector is affected more severely because of employment issues, an ageing workforce, the need for new skill sets in the technological era, the increased use of imported labour and the introduction of innovative forms of construction.
ConstructionSkills predicted in 2009 that construction should begin a long, slow recovery in 2010, but that even by 2014, output was still likely to be well below the 2008 level. In a recession, falls in employment tend to lag falls in output, as employers try to hold on to experienced and skilled staff for as long as is practicable, which means that a recovery in output does not immediately mean a rise in employment. It predicted that employment in the industry would fall until early this year and then start to pick up. However, it is still likely to be 250,000 below its 2007 peak in 2014. To match the level of output growth forecast for 2010- 2014, an average of nearly 48,000 new entrants to the workforce would be needed every year.
Despite the challenges outlined above, the future of housebuilding is likely to be driven by a combination of evolving government policy on sustainability, the legacy of the economic downturn and the fast evolution of innovative technology (including offsite production, modern methods of construction, renewable energy, new materials and advanced information technology) in the short and medium term. Current policy is markedly focused on the introduction and implementation of the CSH and achieving zero carbon homes in a few years time… though whether this can be achieved by 2016, and with what definition of ‘zero carbon’, remains to be seen.
In the longer term, housebuilding is likely to be driven by a more complicated profile of forces, including demographic shifts, policy evolutions and climate change. Such issues as global competition, in particular foreign entrants to the market, and aspects of sustainability other than energy, such as water, waste and ecology, are likely to become increasingly dominant. However, whatever happens, the nature and form of future housebuilding will remain heavily reliant on land-use planning and the market.
Dr Chris Goodier is a member of the Structures and Materials Group in the Department of Civil and Building Engineering at Loughborough University.
Dr Wei Pan is Reader in Sustainable Construction at the University of Plymouth