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Preparing for Recovery
John Stewart
Director of Economic Affairs
Home Builders Federation
13 October 2009
SHORT-TERM TRENDS
THE ECONOMY
Gross Domestic Product (GDP)
Quarterly % change, seasonally adjusted
-3.5
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
5.51971 1
1973 1
1975 1
1977 1
1979 1
1981 1
1983 1
1985 1
1987 1
1989 1
1991 1
1993 1
1995 1
1997 1
1999 1
2001 1
2003 1
2005 1
2007 1
2009 1
% c
han
ge
Bank of England GDP forecast
Annual % change; central projection (August 2009)
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
1989 Q
1
1990 Q
1
1991 Q
1
1992 Q
1
1993 Q
1
1994 Q
1
1995 Q
1
1996 Q
1
1997 Q
1
1998 Q
1
1999 Q
1
2000 Q
1
2001 Q
1
2002 Q
1
2003 Q
1
2004 Q
1
2005 Q
1
2006 Q
1
2007 Q
1
2008 Q
1
2009 Q
1
2010 Q
1
2011 Q
1
2012 Q
1
An
nu
al
% c
han
ge
Actual Central (mode) projection
Bank of England CPI inflation forecasts
Annual % change; central projection (August 2009)
0.00.5
1.01.5
2.02.53.0
3.54.0
4.55.0
1995 Q
1
1996 Q
1
1997 Q
1
1998 Q
1
1999 Q
1
2000 Q
1
2001 Q
1
2002 Q
1
2003 Q
1
2004 Q
1
2005 Q
1
2006 Q
1
2007 Q
1
2008 Q
1
2009 Q
1
2010 Q
1
2011 Q
1
2012 Q
1
An
nu
al
% c
han
ge
Actual Central (mode) projection Inflation target
SHORT-TERM TRENDS
THE HOUSING MARKET
Annual House Price Inflation
-30
-20
-10
0
10
20
30
40Ja
n-9
9
Ju
l-9
9
Ja
n-0
0
Ju
l-0
0
Ja
n-0
1
Ju
l-0
1
Ja
n-0
2
Ju
l-0
2
Ja
n-0
3
Ju
l-0
3
Ja
n-0
4
Ju
l-0
4
Ja
n-0
5
Ju
l-0
5
Ja
n-0
6
Ju
l-0
6
Ja
n-0
7
Ju
l-0
7
Ja
n-0
8
Ju
l-0
8
Ja
n-0
9
Ju
l-0
9
An
nu
al
% c
han
ge
Halifax Nationwide CLG
House Price Change (GB)
-20
-10
0
10
20
30
401930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Annual %
change
2009 is annual rate Jan-June
Price trends reported by estate agents (RICS)
Balance: prices over last 3 months, seasonally adjusted
-100
-80
-60
-40
-20
0
20
40
60
80
1001978:0
1
1980:0
1
1982:0
1
1984:0
1
1986:0
1
1988:0
1
1990:0
1
1992:0
1
1994:0
1
1996:0
1
1998:0
1
2000:1
2002:1
2004:1
2006:1
2008:1
Bala
nce,
sa
Prices rising
Prices falling
Residential Transactions & Mortgage Approvals (UK)
Seasonally adjusted; moving three-month totals
90
140
190
240
290
340
390
440
490
Ma
r-9
9
Se
p-9
9
Ma
r-0
0
Se
p-0
0
Ma
r-0
1
Se
p-0
1
Ma
r-0
2
Se
p-0
2
Ma
r-0
3
Se
p-0
3
Ma
r-0
4
Se
p-0
4
Ma
r-0
5
Se
p-0
5
Ma
r-0
6
Se
p-0
6
Ma
r-0
7
Se
p-0
7
Ma
r-0
8
Se
p-0
8
Ma
r-0
9
(00
0)
Residential transactions (>£40,000) Approvals for house purchase
Mortgage Approvals for House Purchase (UK)
Quarterly totals
0
50
100
150
200
250
300
350
400
450
50087 Q
1
88 Q
1
89 Q
1
90 Q
1
91 Q
1
92 Q
1
93 Q
1
94 Q
1
95 Q
1
96 Q
1
97 Q
1
98 Q
1
99 Q
1
00 Q
1
01 Q
1
02 Q
1
03 Q
1
04 Q
1
05 Q
1
06 Q
1
07 Q
1
08 Q
1
09 Q
1
(000)
Estate Agency Enquiries & New Instructions
-80
-60
-40
-20
0
20
40
60
80Jan-0
0
Jul-00
Jan-0
1
Jul-01
Jan-0
2
Jul-02
Jan-0
3
Jul-03
Jan-0
4
Jul-04
Jan-0
5
Jul-05
Jan-0
6
Jul-06
Jan-0
7
Jul-07
Jan-0
8
Jul-08
Jan-0
9
Jul-09
Bala
nce (
%)
New enquiries New instructions
Enquiries/instructions rising
Enquiries/instructions falling
Net Mortgage Lending (UK)
£m
-1000
1000
3000
5000
7000
9000
11000
19
93
:01
19
94
:01
19
95
:01
19
96
:01
19
97
:01
19
98
:01
19
99
:01
20
00
:1
20
01
:1
20
02
:1
20
03
:1
20
04
:1
20
05
:1
20
06
:1
20
07
:1
20
08
:1
20
09
: 1
£m
Not seasonally adjsuted Seasonally adjusted
HBF Survey: Net Reservations Balance (year-on-year) (GB)
-100
-80
-60
-40
-20
0
20
40
60
80M
ay-9
2
May-9
3
May-9
4
May-9
5
May-9
6
May-9
7
May-9
8
May-9
9
May-0
0
May-0
1
May-0
2
May-0
3
May-0
4
May-0
5
May-0
6
May-0
7
May-0
8
May-0
9
Year-
on
-year
bala
nce (
%)
Net reservations rising yoy
Net reservations falling yoy
HBF and RICS Monthly Surveys: Price Balances
-120
-100
-80
-60
-40
-20
0
20
40
60
80
100A
pr-
92
Apr-
93
Apr-
94
Apr-
95
Apr-
96
Apr-
97
Apr-
98
Apr-
99
Apr-
00
Apr-
01
Apr-
02
Apr-
03
Apr-
04
Apr-
05
Apr-
06
Apr-
07
Apr-
08
Apr-
09
Bala
nce:
% u
p l
ess %
do
wn
HBF price balance RICS price balance
Prices rising
Prices falling
Private house building (England)
Quarterly; seasonally adjusted
10.0
20.0
30.0
40.0
50.01990 Q
1
1991 Q
1
1992 Q
1
1993 Q
1
1994 Q
1
1995 Q
1
1996 Q
1
1997 Q
1
1998 Q
1
1999 Q
1
2000 Q
1
2001 Q
1
2002 Q
1
2003 Q
1
2004 Q
1
2005 Q
1
2006 Q
1
2007 Q
1
2008 Q
1
2009 Q
1
(000)
Starts Completions
Private Housing Completions (GB)
0
50
100
150
200
250
300
350
400
4501920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
Com
ple
tions (
000)
Total Forecast (Experian)
But not out of the woods yet…
Treasury review of 22 independent economic
forecasts (September)
House price inflation in year to 2010 Q4:
• 12 predict fall
• 3 no change
• 7 rise (most <3%)
Average -0.2%
PREPARING FOR RECOVERY
SHORT TERM
Economic Preconditions
• Restoration of mortgage market
• End to recession (& rising unemployment?)
Government New Home InterventionHCA Initiatives
• RSL private stock purchases (£350m+): 9,000 homes
• HomeBuy Direct (£300m+): 10,000 homes (~£2bn sales)
Kickstart: mothballed sites (£400m + £660m): 9,000 + 13,000 homes
• Public Land Initiative/Delivery Partner Panel: 1,350 homes initially
TOTAL: ~42,000 new homes (~£1.7bn) 2008-09 to 2011-12
• Affordable Housing (grant rates, Intermediate Rent, tenure mix)
• Private rental initiative
• Local authority building
Local Authority Flexibility
To restore viability:• Renegotiate:
S106 agreements
Mix, density permissions
• Review other policy/regulatory demands
New Home Valuations
• CML Disclosure of Incentives Form – restore
lender confidence
• New home valuation (RICS new guidance,
lender instructions, valuer behaviour)
Affordability
Major influences:
• House prices
• Earnings
• Interest rates
• Mortgage terms (especially higher LTVs)
HMR Affordability indices (GB): Single male
First-year payments as % post-tax earnings
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00Q
2 8
6
Q3 8
7
Q4 8
8
Q1 9
0
Q2 9
1
Q3 9
2
Q4 9
3
Q1 9
5
Q2 9
6
Q3 9
7
Q4 9
8
Q1 0
0
Q2 0
1
Q3 0
2
Q4 0
3
Q1 0
5
Q2 0
6
Q3 0
7
Q4 0
8
Ind
ex
Interest-only Capital + interest
House Price/Earnings Ratio (GB): Single male
Long-run: 1968 Q2 to 2009 Q2
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00Q
2 6
8
Q2 7
0
Q2 7
2
Q2 7
4
Q2 7
6
Q2 7
8
Q2 8
0
Q2 8
2
Q2 8
4
Q2 8
6
Q2 8
8
Q2 9
0
Q2 9
2
Q2 9
4
Q2 9
6
Q2 9
8
Q2 0
0
Q2 0
2
Q2 0
4
Q2 0
6
Q2 0
8
Ind
ex
Price/earnings ratio Long-run average
PREPARING FOR RECOVERY
LONGER-TERM
Mortgage Market
Restoration of mortgage market
• Availability of funds (wholesale, securitisation)
• Terms, especially higher LTVs
• New lenders/competition
• New build lending
• MORTGAGE REGULATION
But first, do we really need more homes?
Structural long-term housing under-supply
Demographic, social and economic
necessity to raise supply
Household Growth Average, England
Annual Increase (2006-based Projections)
0
50
100
150
200
250
300
71-76 76-81 81-86 86-91 91-96 96-01 01-06 06-11 11-16 16-21 21-26 26-31
000
1981-2006: 166,000 pa
2006-31: 252,000 pa
Structural under-supply
“I do not believe that continuing at the current rate of
housebuilding is a realistic option, unless we are
prepared to accept increasing problems of
homelessness, affordability and social division,
decline in standards of public service delivery and
increasing costs of doing business in the UK –
hampering our economic success.”(Kate Barker Review of Housing Supply. Final Report. March 2004)
Structural under-supply
“If the state controls the location of residential
development, rations the supply of permissioned land,
heavily influences housing mix, density and product,
and “taxes” housing land to the limits of viability and
beyond, then it shouldn‟t be surprised the supply of
housing is inadequate!”(John Stewart, an irate email, 24 September 2009)
Achieving the Government‟s Housing Targets
(England)
Chart 2. Net Additions to Housing Stock, England
Indicative Trajectory: Before Current Downturn
80
100
120
140
160
180
200
220
240
260
280
3001991/9
2
1993/9
4
1995/9
6
1997/9
8
1999/0
0
2001/0
2
2003/0
4
2005/0
6
2007/0
8
2009/1
0
2011/1
2
2013/1
4
2015/1
6
2017/1
8
2019/2
0
000
Net additions Housing completions
Chart 3. Net Additions to Housing Stock, England
Illustrative Trajectory: to Hit Targets with Current Downturn
80
100
120
140
160
180
200
220
240
260
280
30091/9
2
93/9
4
95/9
6
97/9
8
99/0
0
01/0
2
03/0
4
05/0
6
07/0
8
09/1
0
11/1
2
13/1
4
15/1
6
17/1
8
19/2
0
000
Net additions to hit target New build to hit target
~20% pa
Chart 4. Net Additions to Housing Stock, England
Illustrative Trajectories: Current Downturn, 5% pa Growth
80
100
120
140
160
180
200
220
240
260
280
30091/9
2
93/9
4
95/9
6
97/9
8
99/0
0
01/0
2
03/0
4
05/0
6
07/0
8
09/1
0
11/1
2
13/1
4
15/1
6
17/1
8
19/2
0
000
Net additions New build
5% pa
Maximising House Building
in the Recovery
Lifting growth above 5% pa
Affordable Housing Delivery Model
Developed in boom
• S106 private land value subsidy
• Cross subsidy
• Ready access to keenly price funds
• HCA grant
No longer viable delivery/funding model
Development Models
• Is the private „current trader‟ model broken?
• New entrants, competition?
“Strong and diverse housebuilding sector”
• What alternative models/suppliers?
• Is public „intervention‟ required?
The market will solve, if enough land!
Current Trader ModelCommon public sector views
• Returns too high (vs contractor margins)
• Need “new players”, competition
• Too driven by cycles/land market
• Low output
• Too labour intensive (labour/materials balance)
• Sales driven (“sell one, build one”)
• Inefficient
• Poor innovation (MMC)
• Poor R&D
• Excessive waste
Permissioned Land Supply &
Planning
To increased supply, you can only go
out or up
Housing Completions and Land Use, England
120
130
140
150
160
170
180
190
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Co
mp
leti
on
s (
000)
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
7,500
Hecta
res
Completions Total land area
Housing Completions and Density, England
120
130
140
150
160
170
180
1901989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Co
mp
leti
on
s (
000)
20
25
30
35
40
45
50
Dw
ell
ing
s p
er
hecta
re
Completions Average density
Chart 5. Residential Land Use, by Land Type, England
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.01989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
He
cta
res (
00
0)
Brow nfield Greenfield
Conservative Planning Policy
• Abolish
National target
Regional targets, RSSs, RAs, RDAs
• Devolve responsibility to LPAs
• Incentives to encourage LPAs to
“welcome development”
Housing Products, Mix and
Density
Home builders will only build products they
can sell (i.e. to meet local demand)
Outcome
Fewer apartments
More houses
i.e. lower average densities
Development „Viability‟
Two essential conditions for development:
• Profitable, and
• Land value sufficient to persuade land
owner to sell/exceed current or
alternative use value
Land Value Viability
Cumulative
Cost Impactof
Taxation, Policy & Regulationon
Land Value
Taxed to the limits of viability and beyond
• Regeneration projects
• Strategic greenfield with high infrastructure
costs
• Northern brownfield/infill sites
Industry Delivery Capacity
• Development finance, „excess‟ debt
• Skills – management, professional, trades, new
skills (e.g. sustainability), skilled teams
• Expand company output
• Expand number of companies
• Innovation and productivity improvements
Meeting Intermediate Demand
New Role for Private Rented Sector?
• Large-scale institutional funding, suitable vehicles/fund
managers, professional management, focus on yield,
location critical, purpose-built products, long-term model
vs short-term opportunism
• Issues: taxation, S106 demands, planning attitudes,
Affordable Housing (PPS3), right products/locations
But can it be made viable for institutional yields?
Summary: Recovery Conditions
Axioms
• Serious supply/demand imbalance
• Majority aspiration home ownership
• Private sector „current trader‟ primary
delivery model
Recovery Conditions: Short Term
• Positive market indicators 2009
• Slow, possibly halting recovery
• Critical demand constraint: mortgage
availability/terms
Recovery Conditions: Long Term• Drastically reduce cumulative impact taxation, policy,
regulation on land value
• Sufficient permissioned land, right locations
• Products, mix & density – market responsive
• Industry capacity (skills, finance) – more partnerships?
• New Affordable Housing delivery/funding model
• New model for private rented sector?
Preparing for Recovery
John Stewart
Director of Economic Affairs
Home Builders Federation
13 October 2009