Will the government meet its housebuilding targets?

0:12Hello and welcome to this edition of the FT Advisor Podcast. I am your host senior reporter Tom Dunson and I am delighted to be joined by Aldmore Managing Director of Property Ross Dalzell and Landmark Information Group Divisional Director of Growth Michael Holden. A very warm welcome to you both. Thank you very much for joining me. One of the most eye-catching policy proposals made by the Labour Party in the run-up to the election was their pledge to build 1.5 million houses by the end of the current Parliament to address the housing shortage in the country. This plan was part of their scheme to get Britain building and included a blitz of planning reforms aiming to quickly boost house building to buy and rent and deliver the biggest boost to affordable housing in a generation.

0:56Now that Labour government has been in power for over a year how are they doing? What could buyers expect or hope from this proposal and what are the barriers that are constraining the house building at the moment? Hopefully my guests will help us answer these questions but to start off with what does the current mortgage landscape look like why are there some why are more homes needed um maybe i can come to you first on that michael um yeah thank you very much um so just to give a bit of background the the um one of the businesses that we have in landmark is landmark valuation services and we supply and um lenders with a platform to support their mortgage valuations um very happy and proud to say that oldemore and ross are a client of ours um and so what that means is we get a pretty good view of what's happening in mortgage activity through the valuations that are instructed through the network.

1:48And to give a high level overview, what we've seen is pretty flat valuation activity over the course of this year, improved on last year, but still fairly uninspiring, I think for want of a better word. And if we look back over two or three years, really since the mini budget. The interesting change that we've seen this year is over the two prior years, we saw a pretty distinct correlation between mortgage rates and activity. So there was quite a clear trend as we'd see swap rates either increase or decrease. You'd see mortgage rates follow. And where rates were going up, we'd see a decline in valuation activity.

2:35Where rates were coming down, we'd see a pretty apparent increase in valuation activity to the point that we were getting towards kind of single digits percentage difference on 2019 levels. But what's happened this year is we've got, we've had pretty stable interest rates, mortgage rates, and apart from a couple crept up over the last few weeks, but we've seen pretty stability over the course of the year but we've not seen that correlate necessarily in the mortgage valuation traffic and certainly over September and into October we've actually seen a kind of a slowdown in that activity and really for us that's all pointing to what's going to happen in the budget in autumn I think there's a bit of concern a bit of wariness as to yeah what might be on the cards there which which looks to be impacting consumer activity and buyer behavior and then the other factor to throw in there as well is that remortgage activity is really bolstering those numbers.

3:38So remortgage volumes, the Bank of England mortgage approvals for July and August, 43 % increase year on year on remortgage approvals. So all those numbers, we have to factor in that remortgage is bolstering a lot of the lending market as well. And maybe I could ask you as well, Ross, in terms of why these new houses are needed? What need are they filling? Yeah, sure. I'll just maybe say a word on the mortgage market as well from our perspective as a kind of specialist lender. So I agree really with a lot of what Mike said. I think we are seeing a gradual easing of the big affordability crunch we saw at the back end of 2022 and into 2023.

4:20Wages have been outstripping house price growth for probably a couple of years now. Mortgage rates, as Mike said, have been kind of broadly drifting downwards for the last two years, probably slackened off more recently, but broadly drifting downwards. So we have seen a sort of slow but steady recovery of the mortgage market. That said, we still live in a country where fundamentally we've not built enough homes for two generations. And what that meant is we've got some of the lowest vacant property rates in Europe. We're building fewer houses per capita than anywhere else in Europe. And that, in turn, has put a prop under house prices.

4:59There's a reason why we've not seen any fall in house prices materially with the rise to interest rates is because there's just not enough housing in the UK. And that's been a slow-burning kind of frogs-in-the-pan problem for probably 20 or 30 years. And the net result of that means that even as that recovery, slow recovery in the mortgage market plays through, we're still in a market where most people, many people can't build the size of deposit they need to buy a house and can't afford to borrow the multiples of income they'd need to borrow. And that's particularly acute in the southeast, particularly in and around London.

5:34But also I'm in Wilmslow today. The area like the Manchester metropolitan area has the same problems. So that's kind of where your challenge comes from. In terms of why does that matter, you could look at it from a bunch of lenses. Obviously, at the individual level, owning your own home is a big part of kind of feeling satisfied with your life and your outcomes. We also know there's lots and lots of research and data that's shown that kids grow up in homes that are owned by their parents, have better life outcomes in every which way you can measure it, health, education, kind of you name it, really.

6:09so there's lots of sort of social good from from more people being able to own their own home but also it can be a huge engine of economic growth you know there's loads and loads and loads of conversation at the national level about how do we kickstart growth in the UK well house building's one way to do that it's a very direct and beneficial way to get the economy moving um so so that that pickup's really necessary but it's a long-term problem that's been built up over 30 years and i don't think we should expect a solution in five minutes unfortunately it's not going to be solved that way so obviously the the government's target won't be a complete solve for what you mentioned there but i'm very interested in to what degree you think it will address it 1.5 million houses in five years or so uh is that uh we will get on to whether or not they can actually achieve it in a minute but in terms of if they do achieve it what kind of impact would that have on the housing market?

7:03Yeah I'll maybe go first I'll show Michael out so look I think it is it is a good target as you say we can talk more to whether it'll be achieved or not later but building circa 300 ,000 homes a year is probably about the sort of the level of house building you would need in the UK to deflate that balloon to get to the point where you were building you were eating into the problem of this shortage of housing rather than adding to it so it's probably about the right objective um obviously a lot to talk about and we'll come on to it about how you get there and the barriers that get in the way but is it the right target whether one and a half million over this parliament is or not i don't know but 300 000 homes a year is probably about the right number to as i say deflate the balloon rather than allow it to continue to to to build up um yeah from my point of view i agree with ross on that point i think at risk of throwing in more questions than answers.

8:01I think there's a point of there's not just quantity, there's type of housing stock as well to ensure that the right stock is there to meet demands. We've got an ageing population. There's an ageing population who are primarily residing in their large family homes and looking at downsize opportunities which aren't necessarily there. so I think we need to look at stock that meets the evolving demand of the UK population and then the other side that comes into it is really that sorting the demand side as well

8:42affordability, who's going to buy all these houses for want of a better term and if you look back over history the last time we built this level of housing 40 plus percent were local authority stock so there's a conversation i guess to be had as to yeah it's it's a good number good target to be aiming for but what's it look like in terms of you know where those houses go what it does for general uk housing so it's been about as i said it's been about a year since uh labor were elected how are they getting on they should have built what 300 000 houses by now i i is that the case or are they still flagging behind at this point again i'll come in and might please add um so uh the final figures for the latest quarter aren't out but we've probably built about 240 000 houses since the last election um building about 35 000 homes a quarter um we need to be building 70 ,000, 75 ,000 homes a quarter to get up to that sort of 300 ,000 level.

9:47So we've probably been building less than half of what we need to build. Realistically, by the end of next year, you might get to 400 ,000, something like that, houses built in this parliament, maybe a little north of there if we see a pickup in the second half of next year. But that's going to leave you north of a million homes to build in the second house of the half of this parliament. That's 100 ,000 plus homes a quarter. That's three times what we're building today. So the short answer is no, we're nowhere near the rum rate we need to be to be at that one and a half million target, or indeed at that 300 ,000 a year.

10:31That said, I don't think we should all kind of jump on a bandwagon of whacking the government and celebrating that fact i think this is genuinely one of those things that everyone in society should want us to solve this problem um and so rather than having just a conversation about whether the target's going to be hit or not i think we need to have a conversation about how how's everyone going to contribute uh to solving for it but the short answer is uh the run rate's nowhere near where it needs to be so we're going to have to make some big changes to to to change the trajectory um yeah again completely agree agree with that um and just to add a bit more detail which which probably might not be any more positive unfortunately is um comes from one of our businesses is involved at the very early stages environmental reports and consultancy on pre-land acquisition um and over the course of this year you know the summary from that business is we've not seen any level of increased activity in that area that would suggest a real uptick in um in number of sites um number of new build sites now they they work across the sector across all land acquisition so there's commercial in there as well but there's you know that's been pretty flat this year um so like i said there is there's nothing pointing towards an expected real uplift next year so i suspect we're there's nothing to suggest we're not going to stay at the current levels which creates that um you know we're pushing a higher number later on in the parliamentary term so with this 1.5 million number looking a bit unlikely we'll we'll call it for uh right now uh i suppose the big question is why i suppose uh ross if i can come to you on that because i know you have been involved in talking with number 10 about this yeah so so we've produced a report about six seven months ago now on what the barriers to building one and a half million homes would be and some policy suggestions as to how we might solve for that.

12:29After that, actually, and probably in some ways, I think even more interestingly, we ran a big roundtable in 10 Downing Street with a number of our SME property developers. Aldermore as a bank, we both help people buy homes. We also fund SME property developers to help them build homes. So we got some of the brightest and best and most innovative SME property developers in the UK and we got them in a room with the government. The government were very willing to be part of that conversation and absolutely were really engaged in it to hear from the developers and I think in some ways it's a lot more interesting to hear what SME developers have got to say than probably perhaps what a bank has got to say.

13:09So if I try and summarise the key things they called out to us and to government in that meeting, planning is a huge part of it yes there's reform coming but every property developer around that table was um almost emotional at times actually about how long it can take to get responses back and and to move things forward and how uncertain it can be there was one i remember particularly a firm called sb homes they're a house builder in yorkshire um two daughters who've just taken over the business from their father who started i think 30 40 years ago quite a small house builder built very good quality homes and they just taking this business over they desperately want to double the flow of houses they want to build but they just can't get the responses they need and to the point where they're kind of going do they want their kids to go through the emotional stress that they're going through at the moment in that level of uncertainty that was quite tough to hear um so i think i think planning is a big big part of it um building regs is also a big part of it mike probably maybe add a bit to that as well but um uh i think some of the very understandable changes that were made post-grimful for obvious reasons, but I think that is particularly hurting property development in urban areas.

14:20If you look at some of the stats for London are frightening. I mean, London is building a fraction of the houses it used to build. And that's true of other metropolitan areas as well. And that is in part a function of very long delays due to the new building regs. So we've got to make a big investment in planners. We've got to make a big investment in changing the relationship between planning departments and local developers. we've got to get the incentives aligned between local politicians and local developers to get more houses built and I think we're probably going to have to have a look at how the building regs changes are coming through and whether not whether we're overreacting it's impossible to overreact something like ground football whether there's a better answer to get both safe housing and more housing because at the moment I think we're definitely getting less so I think there are things I'd start with there's some longer term strategic stuff we might come on to but in the short term they're the barriers that i think those developers particularly were citing um yeah i mean building regs is a really interesting and complicated one and it's one that we see not just a new build as well but in the resale market as well so if we look at the um conveyancing and valuation process there's um there's a lot of additional hurdles and additional steps now that are there for the conveyancers and valuers um to ensure that um that all this stuff is being looked at and i guess it's another thing to think of as well when we're looking at this level of building volume that the um the impact that that has on the conveyancing community and the valuation community um in terms of different processes it's a different valuation process for a new build there are different things to look at there are things like um lender exposure levels in that any particular lender wouldn't want to be over overexposed to a certain site you know if ross will know better than me if you have too many units on one site that's that's an area of risk for you um so those are different processes that need to be taken into account um and certainly cladding and building regulations again extra checks extra requirement extra extra things to look at and extra risk to manage so all of that goes into the mix um and if there are another million houses coming in the back half of the parliamentary term.

16:34That would have, I'm not wanting to put words in your mouth, Ross, but I guess that would have an impact on your risk exposure across the whole bank. So in terms of that meeting you had, Ross, with the government, has there been any announcements of, has any of the issues you brought up in that meeting been addressed since then, I suppose the question is, because if they are going to hit the target, they're going to need to get a move on with that kind of innovation? Yeah, so look, I think on planning, there's a lot of things already being done and more to be done. I think there's some announcements this morning, actually, in terms of governments being able to intervene where local authorities are blocking planning and delaying planning.

17:13So, I think there is clearly a buildup of steam there. I think ACE needs to be picked up. I think the government have already announced the training of 300 additional planning officers as well. So, I think, again, that's very much welcomed by the planning community, the building community. So, I think there's a lot of good things in train. I think, though, it's a little slow, perhaps, and it's a little incremental. I think our conversation with developers, and certainly I can sense the hunger is there from government for what it's worth, the conversations I've had. There's no lack of desire. I think this is genuinely really, really important to this government, which is good to see the willingness to get around the table with SME developers and really sit and listen and understand their needs.

17:55This meeting was only about a month ago as well. So it takes a little bit of time for the gears of government to get outcome. But we are going to have to move faster and we are going to have to do bigger things. And we're going to have to do bigger things in the short term on planning, on building regs, on maybe some intervention in the mortgage market in the way that Mike set out. I think we're going to have to look at help to buy our stamp duty or something to clear some of that standing stock. So I think those things are all being talked about. We also, though, I think need some longer term solutions to longer term problems.

18:27So there's a lot of there's a big skills shortfall coming in the construction sector. Hundreds of thousands of people estimated to be short in that sector through time. You're not going to solve that in six or 12 or 18 months. That's a five or 10 year game of how do we build a vibrant skills sector for construction in the UK? there's all those things like modern methods of construction again um uh we do some of that today but how do we make the uk be a genuine place of a house building innovation somewhere where new ways to build houses um uh get tested and developed and grown first we're not that today but again that's a that's an industrial strategy problem over a five or a 10 or a 15 year time horizon and that they're the conversations we've got to be having with this government but also cross-party to get to something that can't just build 300 ,000 homes in one year, but can do so on a sustained basis for five or 10 years to eat into that shortfall that we've built up over two generations.

19:32So it was a really good quality conversation, but speed and pace of movement and sustained movements are going to be the thing to watch for, I think. And we'll keep an eye on that with the autumn budget coming up and certainly. Michael, I'd come to you for the same question. Yeah, I think the really interesting thing that Ross mentioned early on in that answer was around the demand side. And I think that that's the bit that I think personally I have a bit close to and a bit more interest in, in that there's a question of if we deliver all these properties, if the demand's not there, what happens?

20:07What's the risk then to the market? So I think you touched on two points, Ross, which are really interesting. One of them is mortgage schemes. I think it's interesting that yesterday there was an announcement of a kind of private help to buy scheme with Barrett Red Row and Persimmon launching that along with a couple of mainstream lenders. That's interesting innovation in the market to drive more demand for new build. I think that's welcomed. It would be interesting to see if the government does anything along those lines to within the budget. And the secondary point is stamp duty. What's clear over the past five years going into the stamp duty windows post-COVID and the last stamp duty window shutting at the end of March is that it drives activity in the market.

21:03Now, there's some argument to say is March might have just been realigning activity that was going to happen anyway, but people pulled it forward to save a bit of money. But where stamp duty is lower, more people move house, more people buy houses. And again, a point Russ made early on in our conversation was around the wider economic impact of that. I think the£6 billion of retail spend come off the back of property transactions every year. So if we can increase the number of property transactions, make property more liquid, easier to move, one we would reduce the number of people who are you know staying around in the family home and wary to move because um it's it's a pain to do so um and therefore we would free up housing stock but two we'd also drive a lot of um a lot of money in vats in um home improvements and furniture sales all those kind of things into the economy and um and certainly support driving growth which I think is what we'd all like to see in the economy at the moment.

22:10I agree with that completely much. To build on it and also give a slight view in one aspect but I think it still broadly supports your point. Look I think there is definitely an ongoing issue where since the rise in interest rates it's curtailed demand and where stamp duty can help is often the biggest barrier to getting on the housing ladder is often a deposit, not affordability. People are generally paying rents that will be as high or higher than their mortgage repayments. So it's often not affordability. It's often a lack of a deposit. If you add a multi-thousand pound stamp duty bill to that upfront, clearly that has consequences for people's ability to do so.

22:51So I think Mike's point there is exactly right. And we would certainly advocate for changes that help first time buyers get on the ladder, whether they're from the private sector, some of the schemes that have come out already or whether they're from the government. The only, my other slight counter is not really in the short term. I think in the short term, it's definitely needed. And we could see that with standing stock. And you can see there's some evidence actually Wales still has a help to buy scheme. And there you've got slightly less of a problem than you have in England. So that might suggest that that would be a good thing to do.

23:22My only slight counter is we had very, very low interest rates and lots of demand size interventions for 20 years and we didn't see house building get north of about 200 ,000 homes a year so that kind of says to me that demand side intervention alone and I know Mike this isn't what Mike's advocating for at all but those that demand side intervention didn't work when when the conditions were as loose as they could possibly be so it needs to be this combo and I think that's probably the point Mike and I are trying to make that yes a good thing to do but probably a good things to do but the coin rates are a bit higher but uh you probably need some other stuff too yeah completely agree if you have a period of supply and demand imbalance either way you either get falling prices or rising prices we don't really want the extremes on either of those to be honest so it's about it is about that balance if i can focus in on advisors now i was hoping to ask uh what should advisors take away from this from the uh the target itself from how much they've built so far from the barriers, how can they prepare and what should they expect really?

24:30So every mortgage that Aldermore sells is through a mortgage advisor. So we're completely dependent on the advisor market, around about 90%, it's climbing towards 90 % of mortgages sold in the UK now sold through mortgage advisors. And whether it's the mortgage advisory community or whether it's the financial planning, financial advice community, those two groups have been sort of central to helping customers navigate this very difficult housing market, whether it's helping them get the right mortgage and work out what mortgage they can afford, or whether it's helping them make their money work as hard for them as they possibly can to help build that deposit.

25:03So I think that the advisory community has been kind of key to blunting the worst consequences of the shortfall in housing we've spent the whole conversation talking about. And I don't know at a seismic level what more they can do than that. I don't think there's something that the advisory community can suddenly come together to do to solve the problems we've all talked about. There is one smaller thing, though, which of course I would advocate for given the bank I work for, but helping a customer remortgage on a 50 % loan to value with a high street bank. That's good for the customer. And of course, we want that to happen.

25:39but that's not the incremental person getting on the housing ladder that is actually going to make a difference. Those customers will often be helped by a specialist lender, someone like Oldermore. So those customers who are maybe self-employed and didn't think they would ever be able to get a mortgage because their income is too complicated, or maybe someone who's only got a 5 % deposit or less, or maybe someone who had some blip on their credit history four or five years ago, and that's meant they can't get a loan from a major high street bank. It's the advice to those sorts of people and the support you can give those customers, whether it's to rebuild their credit history and build up their deposit or whether it's to help them get a mortgage.

26:17That's the incremental stuff. Every one of those gets another person on the housing ladder and kind of creates that dynamism in the market that Mike talked about so well before. So I think advisors thinking about how they're going to build out that capability, get better and better at that stuff, that can both help people today and if this wave we all hope for comes and there is a big increase in house building and house buying as a result it'll mean their business is ready to respond to that opportunity when it turns up so that's what i'd be focusing on perhaps if i was an advisor yeah i mean i would add um i think that what we're going to see and we saw it yesterday with new products um announced is you know as there's more new build property on the market there's um different incentives um being made available there will be more mortgage products out there which increases the importance of the advisor's role.

27:14Whether it's already a fairly daunting and confusing prospect for most people, especially first-time buyers, where there are more mortgage products, more variables involved, more incentives, et cetera, these people will need their hand-holding more and more and the importance of good quality advice will grow. So I think that it's a good thing for advisors and the role of the advisor will continue to become more important as a result of everything we're talking about. And finally, I want to kind of go back to my opening questions in terms of how is it going? What can buyers expect from the proposal?

27:54What are the barriers and all that and everything we've talked about today? and I wanted to ask you what you think based on their current track record and the pledge itself this government's legacy will be for I think both homebuyers and mortgage advisors I suppose In terms of legacy unfortunately I don't think the legacy is going to be 1.5 million more homes for reasons we set out I think though what it can be and I really believe this is the moment where we turn the corner I think if this can be the government where we turn that corner, where we stop building too few homes and start eating into the problem, I think that would be a pretty momentous shift of a problem that's been building for 30 years.

28:38And we could now start to ease it out over a period of time. And I think so that to me is what I would like it to be. And what would that mean in terms of legacy of homebuyers? Well, it would mean, I might put it much better than I did, more homes of the right type in the right locations for the right sort of buyer. so people can build the lives they want to build and build the careers they want to build and have families and all those good things. So I think it really matters. But to me, it's that, can this government be the inflection point and be the point at which we start to dig ourselves out of the problem rather than dig ourselves deeper into it?

29:10So even if they don't hit that 1.5 million number, there is still a lot positively to take away from this. Yeah. And Mike, if I can ask you the same question in terms of the legacy of this government. Yeah, I couldn't agree more. I think, unfortunately, the evidence doesn't suggest we're going to hit one and a half million homes. However, there's an awful lot happening to move us in the right direction, both on planning reform, but also the bit I'd like to pick up is the announcement of a consultation on the home buying process. It takes too long to buy a house in this country. It's painful. We see 30 percent of what most people in the process do yields no results.

29:49a third of properties fall through um it doesn't need to be that way um and there's there was two weeks ago the government announced a consultation um into the process of engaging with industry and we don't have to look that far away i.e to scotland to show that there's a there's a process that has um much more efficiency in it for fewer four throughs um and it's a less painful process So we get the house buying process right and a more liquid transaction. It doesn't take six months from the point you go sold subject to contract. It removes a lot of strain and a lot of friction in the process.

30:30The evidence suggests we will see more people buying and selling houses just because it's easier. Then we add into the fact that we're moving in the right direction on supply as well. It looks positive. I guess the counter to that is 1.5 million still looks like a really big number Thank you both very much for joining me for this session I think we've discussed a lot and a lot of interesting points there about the government's house building targets I'm afraid that's all we've got time for but please do join us next time on the FT Advisor podcast

31:12Thank you.