Developers can’t afford to build – the consequences?Make Text Bigger
Landlord’s Log, the Personal Blog Of Mark Alexander, the Founder of Property118
Earlier this week a comment was left on one of our articles by a property developer who explained in very simple terms why developers can’t afford to build.
Right across the UK, building sites are being mothballed but why is this happening if we have a housing shortage?
This isn’t because people don’t want to live there or that the developers don’t want to build. It is partly because the developers can’t sell them for as much as it costs to build them and partly because people either can’t raise the finance or are too nervous to do so due to uncertainties in the economy over job security and interest rates.
The following comment sums up the issues from a developers perspective:-
“As a small-scale property developer I know full well why not enough housing is being built: a lack of land, a deeply conservative planning system (and existing resident public) that costs a huge amount to battle through, a hostility to ‘garden grabbing’ (a.k.a. more efficient use of existing land) and presumption now in favour of large estates on land controlled by the big firms, a lack of development finance to supplement my own capital, and an inability of buyers to raise enough deposit.
On top of this, the costs to build keep increasing as we move to zero-carbon homes: all the requirement for this is being placed on new homes, whereas existing home owners are required to do absolutely nothing to help with global warming. And on top of this, developers have to pay £20K per house in S106 taxes for new infrastructure, again with existing homes and businesses not paying a penny towards all the new schools, roads, playgrounds and so on they’re receiving.
And finally, worst of all, new private homes are unaffordable because they also have to cover the cost of so-called affordable homes: for every five houses built, two have to be given away to a housing association! The Government gets a completely free ride off private house builders and buyers, and they wonder why housebuild levels are so low. The big developers have to keep the supply of new houses low and the prices high, to pay for all these extra costs and to pay for all the social housing given for free to people who live off the state and contribute nothing to society.”
The consequences of insufficient property development must not be under-estimated. The Office of National Statistics are predicting that more than 10 million more people will live in the UK within 20 years.
The way I envisage the problem is that the housing market is in a pressure cooker. The pressure is building and building and at some point there will be an explosion. We are already seeing that happen to rents in some parts of the country and it will spread as the pressure continues to build with demand. If the pressure is allowed to build too much, as soon as finance availability and confidence is restored the explosion in demand to purchase property will occur. The problem is that very little will have been built. When demand exceeds supply prices go up and where does that leave us? Here we go again, yet another property boom and bust scenario. Values will shoot up beyond affordability, lenders will compete for business, slash their margins and take silly risks and we will be right back to where we started. This didn’t start in the Credit Crunch by the way, it’s been going on since the invention of the house!
We are not like other countries here in the UK. We don’t have over supply of housing issues such as Dubai and other countries.We are an established economy and we thrive on growth of population. We have a boom and bust economy that’s so intrinsically linked to our housing economy it’s unbelievable that it can’t be recognised and managed by so many successive governments.
Property values and rents are not the only issues associated with getting the supply and demand balance for housing right though. There are social implications too and social unrest can affect us all as we saw in the riots earlier this year. Lack of supply of housing will create over-crowding and homelessness. It will also encourage profiteering from the criminal elements. Earlier this year we reported on landlords in the South East renting beds in sheds. Then there are the constant stories of rogue landlords. None of us want these people operating in our sector but when an opportunity for profiteering occurs the rogues will spot it. Only when the supply of safe affordable housing is met will the rogues exit the sector.
Mark and his family have been investing in property since 1989, initially in the Norwich area but more recently across the length and breadth of England. Mark created Property118.com as a social network for landlords with a vision of becoming the UK’s largest online property investor directory.
Mark’s experiences and strategies as a landlord are shared here
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