Perhaps it is forty years ago that I learnt a vital lesson. One never to be forgotten. Because it seems to defy common sense. The lesson is a vital and obvious insight into the financial priorities of developers, builders and land speculators who control new homes supply when it is understood. But until it is understood and accommodated, the government’s housing supply objectives will be frustrated. Therefore it is a lesson government ministers, planning commentators and journalists who want to understand the housing market must learn too. They too must see when and why their own intuitive insights about the market do not always apply. Put in other words their idea of developers commonsense may not match market reality.
Decades ago I was instructed to let an empty industrial unit, part of a terrace of identical units. The client, a developer who jointly owned and had built the entire estate of small industrial units was desperate to let it. It was the last unlet unit. His profit share agreed with the investment fund who had provided the funding to buy the land and build the units was based on the open market rental value of the units. But his problem was a collapse of business sentiment had slashed rental demand. Industrial rents had dropped sharply. As always in the Thames Valley, new supply shortages are the norm so typically rents always increase year by year. But short lived business reversals also happen. My client was caught by one of these short term, 1-3 year demand set-backs. For him, it was life and death. So when I had a good quality, good covenant tenant lined up, willing to proceed but offering a rent 20% below all the previous agreed rental lettings (he too had taken advice) my client’s reaction was anger and abuse. He pointed out that his funding investor would, correctly in fact, say all the other units were therefore in the new and more depressed market over-let. Basically the rents being paid by existing occupiers no longer reflected open market value. So my client’s buy-out multipler, or the yield by which the capital value is calculated on which his profit share depended would be sharply squeezed. It was his decision to accept or reject the new offer. He rejected the offer. For him it was better to keep the empty unit empty than admit that the open market rental value had dropped by 20%, therefore quantifying a reduction in the capital value of the total investment. And this is what happened. Two years later his profit share was eroded to nil, the empty unit was then let by the investor at the lower rent. But the investor, in it for the long term merely shrugged off the short term cash shortfall.
Why does this apparently trivial mind-set matter for the government? On the Laura Kuenssberg Show yesterday morning, (9 February 2025, 9.0am BBC1) interviewing the Deputy Prime Minister Angela Rayner personally a penny dropped. Suddenly a dark corner became clear. Both had made a cardinal error, which AR seemed to accept. At. least she did not reject LK’s off the cuff claim that sales of houses would stop if consumer confidence fell. Both showed muddled thinking. . LK said, in a debate about new housing supply, that if due to a slowing economy or higher interest rates that house builders would fail to sell their homes because buyers could not afford the prices demanded. In other words the prices for the houses asked by the developers would be too high. Anyone reading this blog will instantly say, of course the developer will reduce the asking price. Obvious isn’t it! But you will be wrong. This is not what they will do. The asking prices will remain unchanged, although a few tweaks (which do not directly change ‘values’’) may be introduced: like contributions towards this or that.
Instead the developer will wait, and wait and wait until a naive buyer comes along who can be persuaded to pay his asking price. If the delays in completing all the sales mean he breaches his bank loan conditions the bank, or his investor partner will let him absorb the fall in profit until his equity in the scheduled is extinguished. Typically this transition will take two or three years. In the meantime more and more newly completed but empty units will be seen; and no doubt used by developers spokespeople like the NHB as evidence why the government should give more help to buyers.
How is this market impasse to be broken? There is no rocket science involved. Developers with inflated price expectations will only change their minds when they see new housing supply under construction close by, and within their own marketing time horizon. But who controls the key raw ingredient, land with consent to build? Local councils of course. If they sharply and quickly step up the supply of house building land, prices for newly completed homes will start to ease, and may in some cases actually fall. If not, developers will continue to play the system. They will continue to exploit the highly profitable consequences of land supply scarcity. It is a game at which they are skilled. The sustainable answer is so obvious. It is for local councils, when their local plans expire, to take control of all future land use changes in their areas. By doing so, local councils will be able to manage future housing land supply to suit their residents, and stop the spatial the spatial game of ‘haphazardly’ . This intervention will be a rare example of nationalisation that will work to the benefit of consumers.
Ian Campbell
10 February 2025
