The role of profit in ambition for housebuilding

We have planning permission for around 8000 units granted and unstarted in Sheffield, and numerous brownfield sites which are considered unviable for development. The authority is in danger of not meeting its housing land supply, and a green belt review is looming. This is a northern perspective, and I daresay the issues are different in the south.

Now a common feature of the planning system as it operates in practice seems to be the negotiation between planners and developers to add conditions and extract gains from developments to serve public interest goals, such as:

  • aesthetic standards
  • provision of affordable housing
  • homes of a different size to what the developer wishes to build
  • higher or lower densities
  • building to particular eco and other standards

A planning policy is supposed to be clear what is allowed and what isn’t, and often developers will stand by their own interpretations and appeal if necessary, but others will negiotiate and make concessions.

This came up at a recent scrutiny committee looking into the problems facing house building in the city. Planners explained how, for example, they had persuaded one developer to build two storey houses rather than bungalows at one edge of a development so that the aspect from the district centre was more in keeping. A councillor complained that this had delayed the development for a year.

Some developments which are delayed by a year will never happen. Developers might get board-level authority for the capital spend valid for 6 months, and if a council cannot complete the sale of land and grant planning permission in that timescale, the opportunity may be lost.

My point today is nothing to do with how strict or lax planning law and planning policy are. This is about a process whereby planners are doing their jobs correctly by extracting every bit of gain they can from every development.

I would always prefer a public gain over a windfall profit to some developer, though some demands are of much less value than others in relation to their cost. But the aggregate effect of always extracting the maximum gain is that there is less profit to be made, and less appetite among developers of getting on with the job of building houses. There is a viability test with a generous sounding profit margin which gives developers some assurance. But this “minimum” profit margin in policy may be more like a maximum as all profit above that margin is extracted in gain or restricted by conditions, and the downside of commercial risk is still present.

When I questioned the process, it was flatly denied that allowing developers to make more profit would encourage them to get on with the job of developing. The most basic understanding of economics, or of how to run a business would confirm that it does. But even for asking the question I have been condemned in full council, never mind that I didn’t get as far as asking the next, more interesting question: how much housing are we losing for these policy gains and is it worth it?

You will never get the trade-off right if you deny that it exists at all, preferring to whine at developers for not building, and whine at the government that land-supply rules have forced a green belt review.

In any other business shortage leads to high prices, and it has in housing. In any other business high prices lead to high profits, but we employ people to squeeze the profits out. In any other business, high profits attract investment, boost production and thereby deal with the shortage. Not in housing.

If we are serious about building 300,000 homes a year, maybe it is time to become more relaxed about profit.

* Joe Otten was the candidate for Sheffield Heeley in June 2017 and Doncaster North in December 2019 and is a councillor in Sheffield.

Read more by or more about or .
This entry was posted in Op-eds.
Advert

25 Comments

  • @ Joe Otten “If we are serious about building 300,000 homes a year, maybe it is time to become more relaxed about profit”.

    Here we have it – the dichotomy between social liberals and the classic economic liberals of the Orange Book tendency where the market provides all the answers (a form of Blair/Cameron lite).

    The bit of the equation missing in Councillor Otten’s analysis is need …… the need of the thousands trapped in low paid jobs and soaring rents owned by buy to let landlords. The real need is to tackle that end of the spectrum rather than to tinker with corner cutting of standards to the benefit of powerful developers.

    I’m old enough to remember the 1950’s when successive governments did tackle post war reconstruction by encouraging the building of council houses using Parker Morris standards. It did produce 300,000 houses under Hugh Dalton (Labour) and Harold Macmillan (Conservative). They were used to the idea of state and local government intervention after the war years……. what we have now is weak kneed jellyism in the face of powerful vested interests who make huge contributions to the Tory Party.

    So sorry, No Go Joe..

  • Development that fails to provide the accommodation that people need is using valuable land wastefully. If a town/city needs starter homes, flats and family houses then a developer that is catering for the executive housing market is of no use whatsoever in tackling the housing needs of an area.

  • I live in Stratford, London E15, near the Olympic Park. Partly thanks to the former Stratford railway goods yard brownfield site, this area has been in a housing boom since the last housing price collapse here in the mid 1990s.

    Since the end of the Olympics we have seen a huge growth in housing and house prices continuing to rise as the Labour one party state of Newham continues it’s efforts to gentrify.

    A special case for certain but one that convinces me in my long held Liberal belief that if we are to be serious in encouraging new build affordable housing then that can only be reliably done via Housing Associations and Housing Cooperatives. The market has been a miserable, illiberal failure at doing the job, no matter how much market focused politicians have tinkered with it.

  • Peter Davies 15th Dec '15 - 11:37am

    What drives development is not whether developers as a group are making profits but whether those that actually develop are making larger profits (or smaller losses) than those that don’t. We need to align profitability with building more homes fast. In particular, we need to get rid of council tax (which favours putting up a small number of big houses slowly) and introduce land tax (which favours putting up lots of homes fast).

  • Alastair Ross 15th Dec '15 - 12:02pm

    Development land prices are way too high and its not just a “southern” phenomenon. Of course some bits of land will command lower prices usually because of development difficulty or low market desirability. But put yourself in the p!ace of a developer. First of all you are a member of a fairly exclusive club each competing with others but also sharing a lot of common interest too. Why would you drive down prices in the marketplace? Your competitors can retaliate and begin a race to the bottom. But it’s in no developers interests to drive down prices. Nor are they likely to build any faster than they can sell their houses at target price. Why would you do that when it simply drives down your profits?

    Simply letting developers make larger profits is insufficient? I have no problem with profit, but I do have a problem with the slow build out rate and the very high price of pretty basic houses.

  • Tom Papworth 15th Dec '15 - 12:06pm

    I think the basic point is sound, Joe – the more profit (or rent) that a developer (or landowner) can extract, the more likely they are to develop. That much should be obvious.

    The problem with Development Control is not that the Council tries to capture all of the rent. They don’t – there are still fat windfalls to be made. The problem is the manner in which they go about it.

    As you observe, what the local authority tries to extract is a combination of
    – Poorly understood S.106 agreements that require the council to determine the cost in additional services and then extract a present lump sum based on the discounted future demand for services. This is an inexact science to say the least, and generally devolves into planners trying to get as much as they can get away with while developers bark “prove it!”.
    – All the aesthetic standards, affordable housing, design meddling, density fretting and eco standards that you highlight.

    All of this is highly inefficient. The system would work a lot more smoothly and quickly (and there would be a lot more development) if we had a zoning system with general rules and no negotiations. So zone 1 might require developers to pay the local authority xx% of their profits from redevelopment, and to meet broad standards regarding density, height and quality.

    The site-by-site and unit-by-unit interference drags the process out, wastes money on lobbying/negotiations (thus dissipating returns to nobody’s benefit but the planners) and reduces the amount of much-needed development.

  • Phil Rimmer is right.

    My daughter and her husband live in a 2 bed rented flat for £ 2,100 per month and can’t afford to buy despite two well paid jobs in a major arts institution. How on earth nurses, police, local government white and blue workers manage is beyond me.

    Sheffield has plenty of folk who don’t live in the leafy suburbs, Joe, as you know , and a major programme of affordable property to purchase and in addition an increase in social housing provision would have my priority – but then – I’m an old fashioned social Liberal who believes in state and local government intervention. I don’t believe in sacrificing planning standards to boost profits.

  • Eddie Sammon 15th Dec '15 - 2:44pm

    My experience is that generally politicians are not good at understanding business. It’s a different mindset. People bash developers, but what about the people who work for the developers? How do they earn a good living with a pension and holidays? They can’t if they are just getting bashed all the time. Employees have votes.

    So politicians will then say they will increase the state pension, but who will pay for it? We can’t even afford our bills as they are. The road to financial ruin.

  • Peter Davies 15th Dec '15 - 2:55pm

    Tom Papworth is right. General rules and no negotiation is a more efficient way of dealing with private developers. It is also inherently less corrupt.

    Incidentally, encouraging private development does not mean opposing government intervention. I have no trouble supporting it at the same time as supporting local government commissioning new build for social rent, market rent or sale and national government setting up new-town corporations. I don’t think the average over-occupier cares where the new homes come from.

  • Often disagree with David Raw , but do respect his perspective , , as someone in my late forties who re located from London to Nottingham in my mid thirties only because of housing , really , like the comment , above .Joe Otten , I think you are a wise man , can I add , if , however you need any imput in your Liberal Reform housing policy development I have been round the block on that , and as someone in the hideously unequal arts , like David s daughter , but having seen a real struggle , have strong views and ideas for our party .

  • Also I would like to say we need to sound , as David mentions help to buy schemes , more like the Liberals did before I was born and less like an odd mix of classic socialists and classical liberals, on housing , as on many issues . The right , desire , call it whatever , to buy a property of ones own is human nature and very Liberal .It was a cornerstone of the Liberal constitution , when Hetty was a child . It leads to independence from the state , and ,from worse , from the often expoloitative private landlord .Because we see the crisis in social housing and do not want to force housing associations to have to sell to tenants , does not mean we have to sound like old Labour . Leadership, Tim, etc, please , at least pick old Liberal .

  • Graham Evans 15th Dec '15 - 4:56pm

    No-one seems to have mentioned that when house building was at its peak, in terms of both social and private housing, the land on which these houses were built had often been bought by the Housing Corporations and LAs at agricultural land values. Only once planning permission had been granted did the value of the land increase, and of course the “profit” accrued not to the previous land owner but to the Housing Corporation or LA. Later, In the 1970s, Essex County Council embarked adopted a similar approach when it developed South Woodham Ferrers new town. It compulsorily purchased the land at agricultural land prices, granted itself planning permission, and laid down certain housing standards for development, before selling on the land to private developers (as well as Chelmsford District Council which built social housing). Developers made a fair profit on their building, but knew from the start knew what was expected of them. It seems that this model no longer applies, as it is the existing agricultural land owner who now accrues the profit on the increased land value. Perhaps its time to turn back the clock.

  • A Social Liberal 15th Dec '15 - 10:31pm

    I have an alternative suggestion. How about Sheffield Council building on the brownfield sites the developers stick their collective noses up at, build to the old standards discarded by those developers with useful extras like, oh – I don’t know, ground source heat pumps or solar panels. Then sell those houses markedly lower than the developers are selling their equivalent but with the proviso that if the buyers wish to sell within a certain time then they either have first to recompense the council to the amount the council lost or they sell back to the council at the same markdown they bought at.

    This will relieve the pressure of housing in Sheffield, raise the standard of unit build and force the developers to up their game.

  • The street of family houses in which I grew up 50 years ago in now occupied by very elderly people who can’t move from what is now totally inappropriate accommodation. Poor planning in the past has not allowed for a mix of housing to enable people to move around when they need to but stay in their communty. What’s worse is that we carry on making the same mistakes!

  • Joe,
    You could build a million house at the moment and the price would not drop. The reality is that market is inflated because personal debt is grossly inflated which means that if market forces were really allowed to play out as they did in 2008 there would be a major financial crisis. Despite the claims, there isn’t a massive shortage of housing in Britain. The existing houses are simply too expensive to buy. Most of the l the advocates of “market forces” have been backed in a financial corner by making private borrowing the dominant market force. The point is that the private sector wants to loosen things like planning permission precisely because the profit looks so good on paper, not because their is a huge demand for their grossly overpriced product. If you really believe in market forces you lower the price until people start buying again, you don’t keep developing ever more schemes inflate borrowing and to keep the prices higher than people can pay.

  • Simon,
    I understand why you would make that argument, But I disagree. Sure, logic should dictate that building more houses would lower the price. However, I suspect it would not move a them a jot and possibly even lead to an increase because a)too much money rests on maintaining the inflated value of property and thus b) mortgages would simply become easier to obtain with a longer timescale to pay them back. I also suspect that inflated property prices are the result of weaknesses in the wider economy and operate as a sort pyramid scheme with the people toward the bottom being squeezed to stop the bigger investors taking a hit .

  • Thanks for all the comments.

    A Social Liberal, the council is doing pretty much that on a couple of sites. At least one project has turned into a considerable cash drain on the council, but I think by your specification, you would intend it to be a large cash drain from the outset. The money isn’t there for that sort of thing.

    Tom, we have brought in CIL in Sheffield replacing S106 for residential developments, and the CIL rate in large parts of the city is, rightly, set to zero. Incidentally, all the arguments made here against allowing developers any more profit also apply against this zero rate, but nobody seems to have made that point.

    “Affordable housing” for those who don’t know is jargon, and doesn’t mean that housing is affordable, merely that it is below market rents – “affordable housing” 60% of market rent and “affordable rent” 80% of market rent. Affordable housing to buy is difficult to do because a home that is sold outright can by definition be sold again at the market price. As an attempt to thwart the market, it helps a few people who can convince the authorities that they are worthy of it, but it does little to change the overall picture. I am trying to shift the whole market in an affordable direction.

  • William Davison 17th Dec '15 - 4:53pm

    Re “If we are serious about building 300,000 homes a year, maybe it is time to become more relaxed about profit.”

    That should read “If we are serious about building 300,000 homes a year, maybe it is time for a Land Value Tax”
    In Pennsylvania, they found cities that had Land Value Tax, had 16% more construction for every 1% LVT shifted from traditional property taxes, so a 3% LVT as parts of Denmark have, could create 48% increase in construction.

    This idea that throwing good money after bad at developers (eg. help to buy) or somehow tweaking the planning system is going to change the incentive to speculate on land and land bank, sometimes for decades, is fantasy. Most businesses have to get the maximum income out their assets as they depreciate each year or they go bust. But land does not rust or become obsolete like capital assets. Land grows in value over time without the landowner doing anything with it, especially if they can persuade some gullible politician to give them money or build infrastructure for free. LVT would force landowners to use it or sell it to someone that will use it. Many small developers like the idea because the big developers with their land banks and ability to outbid them means they are locked out of the market. If a manufactures leaves capital assets idle they go bust. Land Value Tax makes the developer’s business model the same as every other business, i.e. there is no unearned increment from owning land.

    As Winston Churchill – Speaking in 1909 for the People’s budget said
    “Roads are made, streets are made, railway services are improved, …water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still… To not one of these improvements does the land monopolist as a land monopolist contribute, and yet by every one of them the value of his land is sensibly enhanced.”

  • Richard Underhill 17th Dec '15 - 6:14pm

    Joe Otten 17th Dec ’15 – 1:40pm Please state the current balance on the council and which party abused you.
    1) In the analysis please say something about public land. Is it possible to ensure that the first owners benefit from the planning gain?
    2) If new housing is built for those unlikely to sell it, such as the disabled and some of the elderly, can this be made to work?
    3) Did you see Channel 4 Grand Designs about Swindon? Aesthetic design need not cost money. For instances, two different clours of roof tiles sell at the same price. Laying them alternately gives a speckled effect without extra purchase cost. There are other good ideas.

  • Peter Davies 17th Dec '15 - 7:03pm

    @Richard Underhill
    1) Why do you want the benefit to go to first owners rather than the whole community?

  • Richard Underhill 5th Apr '17 - 10:26am

    Grand Designs 4/4/2017 was instructive. Cynics might say that when experience meets money the person with the experience gets the money and the person with the money gets he experience. In this case an old lady was downsizing by building a new house in her back-garden and financing it by selling the house in which she had lived for decades and which overlooked the plot for the new house, so no land cost. She employed an architect who had an idea about a curved building which he had used once before. The experience is that the idea is problematic on curved building/s, but would be very useful for building quickly and not just on individual bespoke houses.
    Polystyrene moulds are light and easy to stack, interlocking like giant Lego bricks. Wet concrete is poured into the moulds and becomes structural when set. The polystyrene acts as insulation to which an exterior cladding is attached. The architect was wrong to decide to pour concrete for more than one floor at a time, as the builders feared. The customer got delays and increased costs but did not sue. Joining up different curvatures was also problematic, but straight lines and rectangles would not be.

Post a Comment

Lib Dem Voice welcomes comments from everyone but we ask you to be polite, to be on topic and to be who you say you are. You can read our comments policy in full here. Please respect it and all readers of the site.

To have your photo next to your comment please signup your email address with Gravatar.

Your email is never published. Required fields are marked *

*
*
Please complete the name of this site, Liberal Democrat ...?

Advert



Recent Comments

  • Alex Macfie
    Pandering to anti-immigrant sentiment, or any other far-right narrative, will not win the progressive tendency any votes. People inclined to vote for populism w...
  • Peter Martin
    @ Chris Moore, ".....we need to ....persuade left behind voters that their interests lie in a liberal alternative to right-wing populism." The ...
  • AlexB
    When you listened to his incoherent ramblings on the last televised debate, you wonder what he is going to be like mentally when he's 82 in four years time. Wor...
  • Jenny Barnes
    Maybe it was a case of the lesser of two evils still being too evil to vote for....
  • John Waller
    Patrick Cockburn writes a scary article in the iNews today. Well worth reading. The 2020s look increasingly like the 1930s, the so-called “devil’s decad...