Tuesday, June 7, 2011

£10 Billion of Public Land up For Grabs to Combat Housing Shortage

In a report in today’s Times it was reported that 1000’s of acres of public sector land that is deemed surplus near hospitals, schools and military bases must be identified by the autumn of this year to enable a potential sell-off.
Part of the proposal is a ‘Build Now, Buy Later’ plan whereby developers can pay for land once homes are completed. It is not clear in the article whether this means physical build completion or legal sales completion. The only way it would help developer/builders with a cash-flow problem is if it were the legal sales completion where money changes hands from buyer to seller.
Let’s just look at the ‘headers’ again:
·         Housing Shortage
·         Surplus Land
·         Developers/Builders with cash flow problems.

There is a housing shortage that is true. It was talked about before the more recent implosion of the financial system that helped create the current recession that has in turn caused a house price correction. House builders will not build at a loss. It’s not their ‘raison d’être’! So if it is not worthwhile building houses then you won’t. This situation has led to an increase in an already apparent shortage. It is worth examining where the ‘shortage’ actually is. Do we have a shortage of 5 bedroom, 3 bathroom, detached homes with triple garages and a pool? No. Do we have a shortage of 2/3 bedroom terrace and semi-detached homes? Probably Yes! I say probably because we are selling these homes that come to the market at prices that are affordable. So the key is price or affordability and it is primarily a social housing shortage.
If you have a shortage of any commodity, be it houses, flour, sugar or oranges then the price naturally rises if there is demand for it. It rises until it reaches a point where the buyers/consumers able to afford it drop off in numbers sufficient to halt further price increases (lack of sales) and the commodity remains on the shelf.
So the only way developers will buy surplus land to build homes on is if there is a market for the properties they build.  The tightening of mortgage lending, by increasing deposit requirements to levels unheard of before, means that the demand for these homes is there (the shortage) but the ability to buy is not. How is this equation solved? Simplistically you sell the land very cheaply so that when the build cost and profit requirement are added you have a total price that is within the grasp of these buyers. Why would any seller sell at the bottom of a cycle? If the land is surplus it was surplus some time ago!
Unfortunately, and I’m thinking out loud here, what happens to the value of similar second hand property in the vicinity of these new homes?
The other way is to create homes built by Government (our money) on surplus land (our land) to provide for the shortage. I think they used to call them Council Houses but today’s term is Social Housing!
Just to address the last point ‘Developers/Builders with cash flow problems’. Why is this the case? Probably because they can’t sell the homes they’ve already built, on land that they paid a lot more money for, at a profit and in sufficient numbers to create that cash flow.
I’m not proposing any answers here because I’m not certain there is any totally correct answer. If you think you might have then give Grant Shapps the Housing Minister  a call!

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