- Lyons, Redfern, Barker, Raynsford, Taylor, and now Letwin. We may have been short of new homes over the last 10 years but no shortage of reviews on how to build than.
- But one thing sets the Letwin Review apart from the others – the level of detailed investigation into how private housebuilders build out large sites. Digging deep into all the 17 sites under review, talking to the staff who build and sell the homes. Asking the right questions and getting the right answers.
- So it came as no surprise that his interim review was accepted as a solid analysis. I tend with agree with both Civitas who described it as, “a strong diagnosis”, and David Montague the CEO of L&Q who said that, there was a Mexican wave across the sector that someone finally gets it”.
- Letwin has pointed to the need for greater diversification to achieve faster build rates on larger sites. Nobody is arguing against that. And despite the protestations in some quarters of disrupting and deconstructing the housebuilding sector there doesn’t seem to be any agency, review body or think-tank suggesting that volume housebuilders are not going to be crucial in achieving the 300,000 per year target.
- But even Letwin, like all the other reviews, does not appear to have studied the history of speculative housebuilding and housebuilders. Understanding the people and the businesses who built the homes and the lessons to be learned. With this in mind the post below is intended to assist the current policy debate on the structure of the sector.
1930 – 1955
- There is much to be learnt from the 1930’s, setting aside the obvious point that it predated the planning system. Speculative housebuilding, in the sense that the builder speculates that the land purchase and construction cost will be outweighed by future home sale revenues, began here. Prior to the 1930’s builders tended to be fixed price contractors acting for developers and landlords who were taking the land and sales risk. Land was cheap due the absence of planning and the early pioneers included Ideal Homes, Henry Boot, Wimpey, Taylor Woodrow, Costain and Laing. Generally smaller builders, often from a contracting background, selling less than 1500 homes per year. They were all freely buying and developing large landholdings on the edge of cities, in particular London. The driver for was easy funding from building societies, who would also fund the customers mortgages. Prices were set by customer affordability and build rates were fast as the market allowed.
- The 1939-45 war and the 1945 election killed off speculative housebuilding until the mid 50s. During the war housebuilders turned to Government contracts, on decent margins, to help the war effort. Henry Boot, Costain, Laing and Taylor Woodrow helped build Project Mulberry (the floating harbour for the D Day landings) whilst Wimpey, Henry Boot and other housebuilders worked flat out building airfields, military camps and barrage stations.
- The new Government in 1945 virtually banned speculative housebuilding by maintaining defence regulations, controlling the supply of steel and timber, requiring a licence for any private housebuilding and introducing a 100% Development Land Tax via the 1947 Planning Act. All new homes were to be Council houses. The remains of the entrepreneurial 1930’s speculative builders either took on housebuilding contracts for Councils or continued with general contracting work.
- The 1951 Macmillan Government removed the controls and reopened market access for speculative housebuilders. Whilst the reforms took a while, by the late 1960’s the sector was spawning new names such as Barratt, Bellway, Whelmar and Broseley. Longer standing housebuilders such as Wimpey, Bovis, Leech, Bryant, Bellway, Bett and McLean grew rapidly.
- Learning lessons from post 1955 means looking at both the conditions which created growth and then the effects of downturns. The new planning system created opportunities for highly skilled entrepreneurs to use land buying and marketing skills to accumulate land and then secure planning consents, via by the 1947 Planning Act. Once achieved, the ‘rationing’ of these consents gave some protection against market saturation by competitors. At the same time customer demand for owner-occupation strengthened through the late 50’s to the early 70’s. Rapidly rising house prices transformed the sector from builders to marketeers – all selling the dream of home ownership, supported by positive policy.
- Total housing output rose significantly, from c250,000 completions in 1960 up to c350,000 in 1968. Drivers of private housing growth were economic growth, easier customer access to credit and no Green Belts (other than London). But also, and crucially:
- High profile entrepreneurs like Godfrey Mitchell at Wimpey, Laurie Barratt, Tom Brown at Whelmar, Danny Horrocks at Broseley and Frank Sanderson at Bovis. They all took risks and they drove their businesses hard, sometimes targeting a flotation;
- Bigger commercial contractors found the margins in housebuilding eyecatching and moved into the speculative housebuilding sector. Examples included Wates and Galliford.
- In contrast to the 1930’s, highest growth tended to be in the North and Midlands given that the London Green Belt had diminished the ability to secure large sites on the edge of London – a deliberate policy linked to the development of public sector led new towns.
- Speculative housebuilders grew significantly. Either organically, (Eg Wimpey) or through business acquisitions, (Eg Barratt) or by diversifying into other development activity such as commercial property and/or contracting.
- The oil price crash in 1973 brought the good times to an end. The subsequent downturn hollowed out the industry. Only a few survived intact including Barratt, Wimpey, Leech, Bellway and McLean, and all with dramatically reduced volumes. Many of those who had diversified into the speculative housebuilding sector from contracting either died or rapidly reversed out.
1974 – 1991
- Cash management was the key to surviving the 1973 crash. Those who ‘dashed for cash’ during 1971 and 1972 fared best. They had slowed landbuying land, slowed new home starts and focused on finishing and selling homes in the run up to the crash. They then nursed their war-chest and, when the market started to recover, were able to buy new land at much cheaper prices and hence started building again.
- Private volumes continued to decline during the mid/late 1970’s, but the 1980’s brought easier planning outside Green Belts, softer lending conditions and increasing customer confidence. Output soared and house prices rose.
- The good times of the 1960’s were back:
- Contractors ploughed back in, inter alia, Costain, Laing, Lovell, Balfour Beatty, Alfred McAlpine, Mowlem and Amec;
- Conglomerates entered and/or increased their speculative housebuilding presence including, P&O, Salveson, Trafalgar House and Beazer.
- The speculative housebuilders grew again and diversified with even greater vigour – by opening offices in Spain, France and USA, by doing more contracting, and by developing commercial properties.
- And then Groundhog Day – the 1989 recession followed by Black Monday in 1991.
- All the contractors reversed out again, huge numbers of smaller housebuilders died, and those which were big and strong enough to survive, retrenched to core business.
1992 – 2007
- As with 1973, the Black Monday recession did huge damage but those able to survive came out the other side stronger by being able to buy land at recessionary prices as the recovery started. Tony Pidgeley set Berkeley up in 1976. By 1989 he was calling the downturn and started his dash for cash. The rest is both Berkeley and housebuilding folklore.
- So 1991 created the mindset that the only the big survive. This emphasis on size, strength and recession-resilience helped trigger a period of merger-mania. Inter alia:
- Wimpey took over Taylor Woodrow, Alfred McAlpine and Bryant;
- Beazer took over Leech,
- Persimmon bought Ideal, Beazer and Westbury;
- Barratt took over David Wilson;
- Taylor Woodrow took over Wilcon;
- Morgan Sindall took over Lovell.
- But the mergers and acquisitions raised issues. They are expensive and therefore usually reliant on credit. This creates a huge susceptibility if credit gets crunched, even more so if the customers for the new homes are also reliant on credit. And even more so again if the business has weighty land creditors due to land acquisitions made at high prices due to positive market conditions and highly restricted supply.
- And so it was as the sector grew significantly from the mid 1990’s up to 2007.
2008 – Today
- The GFC was the longest downturn of all. Whilst merger-mania had created some strong large businesses the key issue (other than no mortgages for customers) was balance sheet. Many of the mergers and land acquisitions had left large debt overhangs with limited cash coming in to repay. Therefore, in stark contrast to earlier recessions, some smaller builders, with less debt exposure were perhaps able to weather the storm slightly better. Perhaps Bellway, Redrow and Bloor as examples.
- But it was long cold winter for all. Many failed and without the Government support provided by Kickstart and Firstbuy many more would/could have failed.
- The good news is that current market conditions and behaviours appear to show, hopefully, much greater resilience looking out to the medium/long term:
- Balance sheets are generally good and excessive lending appears curbed;
- Planning reforms are creating more land supply and hence moderating land prices. Hopefully this will continue via NPPF2 and ensure that land debts will not be a major problem if/when a downturn comes;
- Mortgage market regulation has curbed reckless lending and low, or slightly rising, interest rates look the most realistic in the medium/long term;
- UK banks are are in a resilient position and the global economic outlook is positive;
- Optimism-biased approaches to land acquisition and future sales prices, previously often driven by high profile individuals, and often debt-backed, have moderated;
- Homes England are well funded and playing a significant role in supporting sustainable housing delivery. This will help shape outturns across the cycle;
Conclusions and lessons
- So what would be they key lessons looking back at the who, and the how, of speculative housebuilding over the last 100 or so years:
- Strong speculative housebuilders are the bedrock of housing delivery in this country and for those currently working in such businesses there appears grounds for optimism;
- Its a tough, high-risk sector. History says that those entering from another sector often do not survive the next downturn, especially if raising debt. The profit potential is eye-catching in an upturn but the downturns tend to be deeper and harsher than other sectors;
- For speculative housebuilders – diversification and excessive debt never appears to end well.
- Strong recession resilience means knowing when to call the top. Thankfully this appears appear some way off hence why Barratt (and others) retain full commitment to our volume growth plans.
- The sector needs to be diversified to drive up delivery. Letwin confirmed that and history, particularly the 1930’s, demonstrates that. But let nobody be under any illusion that housebuilding isn’t a difficult and, at times, brutal, sector. The key lesson is perhaps that those who do it well need supporting. For those with less experience of this intoxicating cocktail of land skills, building skills and selling skills, proceed with eyes wide open. Although much regulated, it is nakedly commercial and unforgiving, whilst playing a crucial role in delivering a basic human need which is in short supply. One thing is sure – got be the most exciting sector of the economy to be working in right now.