Killing the goose that lays the golden eggs: Considering “use it or lose it” proposals

The Government loves house building and house builders. In recent months George Osbourne and the Treasury have fallen over themselves to encourage a climate in which both demand for new homes and their supply can be greatly increased. Tax breaks for first time buyers and some relaxation of the planning rules has meant greater numbers of homes being built and sold. They, like most recent governments, understand that encouraging more house building is a cheap way of using tax payer’s money to encourage economic regeneration, employment growth, and to show the government is committed to a home owning democracy.  

However, the Government has a problem. Despite all of these good works the number of new homes being built is still well below the number the Chancellor has set as his target and also well below anything that can match current demand. The Treasury mandarins have had their calculators out. They have discovered that there is a large gap between the number of homes consented and the number being built. Why is this they ask. If the demand is huge and mortgage availability positive surely every plot with a consent should be under construction? And if they’re not there must be conspiracy. It would be too easy to identify local markets, negative land values or industry nervousness in a softening market.

The conspiracy is, of course, that house builders are land banking. Refusing to build houses that they can sell because it will cause the prices to rise and they will make even more profit at a later stage. The answer to the conspiracy: to force house builders to agree to a fixed timescale by which all houses on a site must be build and available for sale.

Source: HM Treasury flickr
Source: HM Treasury flickr

The reality is that if house builders can see a sale, they will build and sell. Waiting to make a profit tomorrow if they can make a decent profit today makes no sense. But building houses on a site with a negative land value, or in a softening market, or in an area where fifty unit sales a year is outstanding equally makes no sense.

However, the bigger danger is that forcing house builders to build homes they cannot sell will have enormous consequences for their business model.  House builders take significant risks to build. Millions can be lost on an unsuccessful planning application. Houses have to be built before buyers arrive. These proposals only add greater risk in a very risky business environment. This in turn will discourage investors, bank lending and for the major volume house builders, the City.

In short, these proposals fail to understand how house building works and why investors stand by these businesses.  What’s needed is additional support for sites with large costs and low land values; a continuation of greater mortgage availability and the feel good factor that comes from economic growth.

Forcing them to build more homes than they can sell will ultimately lead to a reduction in new homes being built. Something the Government certainly doesn’t want.

This article was written by MPC Chairman, Ian Thorn.