If you fancied some light reading…Like the proverbial buses, studies of the housing market can arrive in clusters. There have been three recently. The Redfern Review in its examination of long term trends in home ownership provides a good overview of the responses of the house building sector to demand cyclicality. I quite like the phrase “reduced demand environments”. Among other detailed analysis, it provides some good practical insights into the perspectives of the volume house builders on housing supply issues. To me, one key message is that to survive in reduced demand environments house builders have often had to contract sharply but are then unable to expand capacity quickly.
Production capacity that can take 6-12 months to cut back can take 4-5 years to recover.
The next day another report from ResPublica advocated a National Housing Fund that would use funds raised from government bonds to fund housebuilding that would have a guaranteed buyer (housing associations) and promote supply by SMEs. It sounds like an idea that David McWilliams proposed a while back and I described in a previous blogpost. The report has little to say on land prices and the transfer of wealth to land owners that such development would involve. JLL seem to have done a lot of work modelling the process but. in the absence of detail, it’s hard to know what is implied about land prices/costs.
The Lyons Commission members also produced an Update Report last week. It also put a lot of emphasis on SMEs. It also raised something that my colleague, Peter Wyatt, and I have been (quite superficially) looking at recently – the role of options and promotion agreements in land markets which are described in the report as dysfunctional.
The initial Lyons report called for greater transparency in the land market, in particular in relation to options agreements to make it easier to assess land availability and the extent to which land is held by those who intend to bring it forward for development. Such a change would be timely as the government considers the future of the Land Registry and it will be important this opportunity is not compromised by any sale of the service.
I’d agree that it is difficult to get data on the use of options and promotion agreements in the land markets. However, our impression from preliminary discussions with a few market participants was that specialist land promoters such as Gladman (it’s worth a look at their website) are highly incentivised to identify sites with development potential since they typically get 15%-20% of land sales. By bearing all planning costs (in return for the share of the land sale proceeds) , they effectively de-risk the planning process for land owners. Since they are dealing with numerous sites and are highly experienced, promoters are specialists in this function and can bring sites forward through the planning system more effectively than potentially passive, risk averse, ‘amateur’ land owners would.