#41 Barratt Redrow CEO: Bricklaying Robots & Echoes of 2008

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0:44David Thomas:Hello and welcome to the Big Boss interview. I'm Sean Farrington and this time round I've been chatting to the boss of one of our biggest house builders in the UK. This is Barrett Redrow, the company and he the chief executive is david thomas and we had a lot to get through unsurprisingly anybody who has ever thought about the housing market wanting to get on the housing ladder owning a home looking to move looking to upgrade the consequences on the economy if you're working in it on a building site we spoke about all of that he had some really interesting stuff to say about the future of the building site in a world of artificial intelligence and a world of difficulty for many industries to get the skills they need we've heard about the consequences that that could have on how homes are built and the amount of people working on those building sites never mind in heat as some of you listening to this may have been experiencing in recent days extreme temperatures our new build homes fit for purpose what might the future look like for them if we're going to get more temperatures like we've had in recent times just before we recorded this particular episode and as well we spoke about the consequences of higher interest rates what the world looks like for first-time buyers how that compares to just after the financial crisis when he actually first joined Barrett 17 years on is the world any different for first-time buyers out there what's got better what's got worse we spoke about all of that plenty more so here is my conversation with David Thomas the chief executive of Barrett Red

2:26David Thomas:Welcome to Big Boss Interview. Thank you, Sean. I'm really delighted to be with you this morning. It's always an interesting time to talk about housing. You could pluck any point and there'd be a topical moment of the week. In the week that we're talking right now, people will have been having a few sweaty nights and hot days and wondering what to do with their homes. We've had air conditioning installers tell us that they've seen record levels of interest. How much of that becomes a hot topic for you when you're thinking about the homes you need to be building? Are the homes we're building fit for the climate changes that we might have in the months, the decades ahead?

3:12Well, I think, first of all, to put it in context, as everyone knows, we've clearly seen dramatic changes in climate. if you look over the last 10 years, 20 years, 30 years. So we've got to continue to adapt the homes that we build. In the UK as a country, we're not building anything like enough homes. But the government have set out a very clear roadmap in terms of the way that we're going to address future homes standard. The future homes standard has been set, which will mean that we'll move away from gas central heating to heat pumps. Air source heat pumps will generally be the preferred methodology.

3:53And we're always looking at ways in which homes can be better insulated so that homes are both warm enough but don't overheat during these warm spells.

4:06David Thomas:Are you finding that the homes that have been built over the last decade or so aren't actually quite suitable for the extreme high temperatures that we're seeing sort of a little bit more frequently over the course of our summers and sometimes springs? Well, this is an area that we've done a lot of work on. So in conjunction with the University of Salford, we built a home, the Energy House 2, in a climate chamber at the University of Salford. So that climate chamber allows the temperature to be taken down to minus 20, and up to plus 40. So looking at the way that the house responds to those conditions is very, very important.

4:50And unquestionably, homes that were built 20 years ago, 30 years ago, or even 10 years ago, they do find it tough to perform if temperatures are going up to 30, 40 degrees. And we've clearly seen those temperatures recently, and we've seen 40 degree temperatures be breached in London over the last few years. So we've got to continue to develop and continue to innovate which is very much in line with the government roadmap.

5:19David Thomas:Are you a bit worried though that houses that are being built right now you almost know are not fit for 430 plus temperatures on a regular basis? No, I wouldn't say that that's a concern. I think we've got to recognise that we need to continue to develop and continue to innovate. So if you look at the way that homes have been developed over the last 10 or 20 years, there's been a huge amount of improvement in terms of the thermal efficiency of those homes. And that improvement is going to continue over the next three years, five years, 10 years. So it's a gradual process. But if I look at the homes that we're building now compared to the homes that we built two decades ago, or three decades ago, there's a massive difference in the performance of those homes, both in cold temperatures and also in warm temperatures.

6:18David Thomas:Are you seeing more inquiries or more complaints from people who bought homes when the high temperatures come in? I just wonder if this is becoming an increasing issue for people who are actually buying these homes. I wouldn't say that we're seeing more issues being raised by customers who have bought homes over the last three years, five years. I don't think that is really a feature. I think to a large extent almost the reverse in that as we've seen energy costs and the costs of running homes rising so dramatically over the last four or five years in particular, what we're seeing is a lot more interest from the customer in the opportunity for lower running costs.

7:09So whether that be the costs of heating the home or the water consumption of the home, I think all consumers are interested in savings that can be achieved through new built homes. So that's a very, very important part of our differentiation and the differentiation for the new build industry relative to the existing homes in the marketplace.

7:36David Thomas:What might be different in the future, you know, as you go through your projects with the University of Salford that you talk about, that may be something that is going to be increasingly in new build homes in the future to be able to handle both extremes of temperatures? Yeah, so I think it's a revolution that we're seeing in terms of the future homes standard. So we've done work, as I said, with the University of Salford. The industry cooperates with government through the future homes hub. So the future homes hub is a collaboration between the industry and government. I've chaired the future homes hub for three years up until April this year.

8:16when you look at the innovation that is going to come through into production it is quite dramatic so i touched on the fact that we're going to move away from gas central heating and moving away from gas central heating the most likely innovation there will be air source heat pumps air source heat pumps are then bringing in the opportunity for underfloor heating particularly in the ground floor to become a standard. We then see that in terms of further improving thermal efficiency that something like triple glazing is going to become much more the norm. So addressing both the cooling properties of the home and also the heating qualities of the home.

9:04David Thomas:Those things you mention, is it fair to say they're more about the heating qualities of the home rather than the cooling properties? I think that both. I mean, I think that triple glazing can help in that regard. I think with heat pumps, there is the opportunity to introduce with heat pumps air conditioning. Now, that's unlikely to be brought in as a standard, but that can be brought in as a modification. I saw the Conservatives announce something yesterday or today about air conditioning being a standard in the future. Do you think it should be a standard in the future? Not at this point, no, because I think that we're not designing, as a rule, I think you're not designing for extremes.

9:49And therefore, the utilisation of that relative to the cost may not be a good proposition for a lot of customers. Whereas I think when you look at the heat pump relative to gas, for various reasons, for sustainability reasons, for efficiency reasons, I think that is a very good response for the customer.

10:08David Thomas:Does that put up the cost of a house if you have a heat pump, if that becomes a standard? Does that mean that a new build is going to be higher than it would have been without one? When you look at the heat pump relative to a gas boiler, at this point, a heat pump would be more expensive than the installation of a gas boiler. Now, it depends on the size of the home and the heat pump required, but you could be easily talking a£4 ,000 or£5 ,000 differential. But the reality is that the cost of heat pumps will fall as we move into more of a mass production environment, then those costs will fall.

10:45And I think the best example we've seen of that in recent years has been solar panels. You know, when I first came into the business 17 years ago, we were looking at the viability around solar panels. and the unit cost of solar panels has fallen dramatically as more and more solar panels are installed in the market.

11:05David Thomas:Do you think people are getting a bit weary of having to pay a bit more for some technology now for it one day to be cheaper for others? And this is maybe a cynical way of putting it. By the time you get to those heat pumps being cheaper, there'll be another bit of technology that we're being told, actually, you need to pay more for this now and it'll be cheaper one day. And it's just been a bit of a relentless ride. You've been in charge at Barrett for quite a time now and you will have seen this. Has it been a relentless ride of ever increasing costs? Well, I think maybe to separate two points there, I mean, first of all, in terms of the customer approach, we would say that the customer, if they can see a saving, they'll tend to look at an investment for that saving over a four or five year period.

11:54So if you're going to save£1 ,000, then you're prepared to invest a capital amount of four or five thousand pounds. What's happened in terms of the cost of living and the, let's say, energy crisis over the last few years is that the costs of running and heating homes has risen dramatically and therefore I think customers are more willing to pay in terms of the costs of, for example, a heat pump. So ultimately I think it ends up being a shared cost that some of the cost comes to the house builder, some of the cost comes to the customer, but we're very, very confident that we're delivering a better experience overall.

12:37David Thomas:Given the technologies that are out there, the skills that are out there now for energy efficiencies, how are we still at a point, even with older houses, where so many don't have the insulation needed to drastically reduce people's energy costs when we're worried about oil prices all around the world? well i mean i think in terms of new build there are dramatic differentials in relation to the let's say the average secondhand home so that has been you know an advantage as such for new build over the last few years because those differentials have increased so just as an illustration if you went back five or six years ago we would have been talking about the differential cost being maybe five or six hundred pounds per annum whereas there's been points over the last few years a host of the war in ukraine where the differential has been two two and a half thousand pounds per annum on energy bills in a home compared to a second second compared to a second hand equivalent so so these are these are very dramatic increases i mean just to go back on the other point you made in terms of, let's say, increasing costs.

13:51And I know that when you get onto this, it makes me sound old. But the reality is that the cost of everything is ever increasing. But if you look over the last four or five years, we have seen dramatic increases in terms of the cost of building homes coming from two main areas one from sheer inflationary costs and again coming from the budgetary events in 2022 coming from the war in ukraine we've seen dramatic inflation on build costs so gas prices steel prices and so on have fueled those increases and then we've seen very significant increases from a regulatory point of view. So environmental regulation, which we see as being very important and our customer sees as being very important, but the reality is it comes at a cost.

14:51And our trade body, the Home Builders Federation, published some data recently saying that costs had risen by around£75 ,000 for a typical home over the last five years. So those Those are dramatic increases in build cost, and it makes it a tough environment to operate in.

15:12David Thomas:But yet, isn't the policy of this government being build baby build? Was that the quote at one point we were told over and over? Yeah, I mean, look, we've welcomed them. You can understand that all we do, all I do, is new build housing, all of our teams. So to have a government that is focused on increasing the delivery of housing numbers and, let's say, improving the environmental efficiency of the homes has got to be a good thing. Are we increasing the delivery of homes? Well, I think that the government has set out very clear plans in terms of improving the supply side. so focusing on particularly around planning I don't think this is an issue just for new built homes I think for all aspects of our economy you know whether you're trying to build a new hotel a new store you're trying to build a reservoir the reality is that planning has acted as a very significant constraint so freeing up the supply side in terms of planning is very very important.

16:21David Thomas:Is that working? Are you seeing that? Well, I mean, we need to bear in mind that the legislation only came into effect in December 25. So the reality is it is relatively early days, but I would be very confident that we will see planning numbers rise. So the reality is, as we look through 26 and 27, we will see planning numbers take up over that period of time. So I think it's right for the government to address the supply side. I think it is right for the government to have ambitious targets. I mean, when you look at our housing delivery over the last 50 years, I mean, really going back to the early 80s, we have undersupplied the market dramatically over that period of time.

17:10And hence, if you look at headline stats on housing, house prices have gone up about three times faster than anything else. So we've seen dramatic increases in house prices in real terms, even when you're adjusting for underlying inflation in the market. And that is largely due to a lack of supply. So a long-term focus on the supply side of the equation, I think, is very, very important.

17:41David Thomas:What about the other side of that, the demand side of it? What's going on with people wanting to buy houses at the minute? Where are you seeing stronger demand and weaker demand? I think that we kind of update the market on a fairly regular basis. And I think it's become a very repetitive commentary that London in particular, London in the southeast, sees huge challenges in terms of affordability. So I'm not saying that elsewhere in the country there aren't challenges, but the challenges are most extreme in London in the southeast. So for first time buyers trying to get onto the property ladder, that is a very, very tough equation to solve.

18:25we will try to do what we can in terms of offers and incentives for the customer but the reality is when you look at average house prices compared to average salaries then there are very very significant challenges and that is simply a by-product of a lack of supply over a long period of time making houses in Europe relative to salaries at some of the very highest levels in Europe.

18:54David Thomas:But yet when we look at how prices have moved around the country, many might feel that actually those in London haven't seen the house price growth and in some areas seen a fall in prices in recent times. That is very true over recent times but I think if you're looking at house price movements say since 2006 or 2007, London will have seen very dramatic movements in house prices since 2006, 2007. And other parts of the country have only just got back or in some cases haven't got back to 2007 levels. So I think there has been a very, very mixed geographic position if you look over the last five years, 10 years, 20 years.

19:44But as a general rule, the affordability challenges are much greater in London than they are elsewhere in the country.

19:51David Thomas:If you're a younger person in the UK and you're looking to get on the housing market in your life, have the prospects in the last decade improved for you or not getting on the housing ladder? I think it has definitely become more challenging recently. So if you look over the last three or four years, then affordability has become a much bigger challenge. Clearly, there's been movements in interest rates, but far higher interest rates than we'd seen previously. There's been a lot of underlying inflation and salaries haven't necessarily kept a pace. So all of those things are feeding into more challenges around affordability.

20:35So therefore, you can see that for first-time buyers getting onto the housing ladder, the stats are falling. And the reality is less people are getting onto the housing ladder.

20:47David Thomas:When you say salaries haven't necessarily been keeping a pace, I mean, when we have looked in the last few years at how much wages have gone up by, They've gone up by considerable amounts on average. Now we're starting to see that wage growth actually gets more up on average. I mean, you were feeling like they weren't necessarily keeping up in the first place. What are the consequences of this, of what's happening in the labour market right now for the housing market? I think the consequences are very challenging for the housing market. I mean, we would look at the affordability equation on a very, very regular basis.

21:25and you can see that affordability has deteriorated. I mean, there's been slight improvements as interest rates have fallen, but then we've obviously seen recent rises in interest rates. So affordability has deteriorated. I think the other area that for younger people, which proves challenging, is where people are carrying student debt. So that is another factor to feed into the affordability equation in terms of deductions that are already coming from salaries. How is that student debt impacting when people buy, how they buy, if they buy? Well, I think as a generalisation, it's just making it more challenging.

22:09You know, once people are earning a certain level of salary, they have a requirement to repay student debt, and therefore their available earnings, as assessed by the bank for mortgage purposes, will be lower. So inevitably the pool of people that can afford is reduced by that underlying debt position. So all this means that affordability is more challenged. And we've said that we do believe that the government should put in place some demand package, particularly focused for first-time buyers. Now, the house builders have said consistently that they would be happy to contribute towards that. So we're not looking for something for nothing.

22:55But the reality is that there are very, very big implications for the country if people are not getting onto the housing ladder and are going to rent on a permanent basis. So home ownership, in terms of the building of the homes, in terms of people owning their own homes, has big benefits for the country.

23:14David Thomas:One of the concerns about having policies that may be like that, people might think, oh, that sounds a little bit like help to buy, that was around for a while, is that actually when all is said and done and the maths are done all the years later, the Institute of Fiscal Studies did some analysis recently. It was wealthier households, wealthier individuals who are actually the ones taking advantage of these schemes and not those who are finding it hardest to get on the ladder. Yeah, so I think we've said that we do see the schemes as being important. The reality is that absent these schemes, as a country, we're creating big generational inequalities.

23:58If I look at it myself, I bought for the first time in the 1980s, and we had the Myra scheme that operated for a period of time in the 1980s and provided very significant support to buyers. if you look through the 90s and the 2000s and so on we've had government schemes running on a very very regular basis so this is not help to buy wasn't something new we had first buy prior to

24:27David Thomas:that not new but people might be thinking well you've had all these schemes and yet here we still are all these decades on with the housing market that isn't working for the country that doesn't need to be something a bit more radical than just a continuation of these schemes that are helping helping those with some wealth or assets in the first place to get on the ladder or higher up the ladder. And I think that comes back to pulling both levers. The government are presently very aggressively pursuing the supply side. And we've said right from the middle of 24 when the government came into power that we think addressing the planning side is fundamentally important.

25:09If you only pull the lever on the demand side, then clearly you're not solving the problem. But I think you've got to pull two levers for a period of time, because if you don't, then you leave a whole generation behind. And that, I think, is an absolutely key point.

25:27David Thomas:Is there a risk of a whole generation being left behind? Of course. Of course there is. If you look at the way that housing purchases, housing starts, home ownership for first-time buyers, the way that the age of the average first-time buyer is increasing and increasing, these are all factors that lead towards generational inequalities. Put it in a bit of context, given you've been at Barrett's and now Barrett Red Row for 17 years, a large chunk of that is chief executive. Is this the worst time ever to be a first-time buyer? It's certainly one of the most challenging times. I'm not sure I would try to decide on the worst time ever, but certainly it's going to be close to where we were in terms of the post the great financial crisis.

26:16Now, that was probably more to do with lending coming out of 2008, 2009. But I think it's very, very comparable for first-time buyers, particularly when you look at areas like London and the southeast. There was immediately government support put in place in 2009 and thereafter. So we're now facing challenges around affordability with no government support scheme in place. So, yeah, challenging, very, very difficult for first-time buyers.