Private housebuilders need a healthy not-for-profit sector

Housing associations are struggling to build houses. Last year housing starts were down 16% to 148,900 compared to the previous year. This year new homes investment is down 9% and over the next five years, the cut amounts to £20bn. One of the largest housing associations, Southern Housing, has stopped building for 2024 and 2025 altogether.

Perhaps surprisingly, Rob Perrins, CEO of Berkeley Homes, pointed out in an article in the FT that housing associations not building homes was a headache for private housebuilders.

Last year, new homes completed by developers dropped by around 20%, according to NHBC registration data, as they struggled with rising costs, while buyers were hit by the rapid rise in mortgage rates.

This comes as no surprise as private housebuilders need to cut output in a downturn when potential buyers are unable to afford higher-rate mortgages and/or are faced with the challenge of selling a home in a sticky market. Of course, this doesn’t mean that the demand for homes has dropped off. Britain is facing a housing crisis – a lack of affordable homes, whether to buy or rent, with demand far outstripping supply.

In the distant past, normally during a downturn, the then builders of social housing - local authorities and councils funded by the government - continued building while the private sector cut back. This countercyclical demand helped keep building contractors going, ready to take advantage when the market bounced back, and private sector developers started building again.

Now the grant funding model for social and affordable housebuilding is effectively no more. In 2010 the Conservative-led coalition government cut the grant to housing associations and councils by 63% with the idea that the bodies would become self-financing, using rental income and borrowing to supplement the reduction in grant finance. Only a fifth of the cost of building affordable homes now comes from the central government.

As a result, a combination of rising interest rates and limits set by the government on rent rises has meant housing associations are cutting back on housebuilding in the current downturn.

This comes at a time when building contractors and developers are short of skilled workers, but now there is an increasing risk of layoffs ahead if there is no countercyclical demand from housing associations. If retrenched, some older experienced workers may choose to retire while younger workers retrain and fill other roles, meaning that skilled workers can be lost to the sector forever. There is also the issue of fewer construction firms being around and disrupted building material supply chains. As a result, the overall capacity for building homes is eroded, taking a long time to recover, if at all. The impact is that both private and affordable/social housing providers suffer from increased housebuilding costs, delays and reduced productivity, even when market conditions improve.

Furthermore, many private housebuilders are in partnership with housing associations and the whole scheme can be stalled if the housing association partner is unable to start building work.

The solution is to have increased and consistent, long-term grant funding for housing association housebuilding to help maintain our strategic capacity to build much-needed new homes for whoever is building them.