Good business practice and poor government policy could be behind the housing crisis
The Letwin Review was published with no fanfare, no ballyhoo, and little media attention. This may be because it concluded what those in the housebuilding industry said all along: property developers are not guilty of land banking. All that money spent, and all the time it took… all to conclude what we already knew!
Land banking – a figment of imagination
Sir Oliver Letwin has concluded that the government is being prevented from meeting its target of building 300,000 new homes every year within a few years, but, contrary to the beliefs of many, it is not land banking that is to blame.
In fact, for want of a better phrase, Letwin found the concept to be no more than a figment of the imagination. Still, I guess that politicians and ‘experts’ must have someone to blame for the housing crisis – and usually that someone turns out to be the easy target of ‘money-grabbing property developers’ or ‘pickpocketing landlords’. Letwin has found the buck doesn’t stop with property developers.
Letwin says land banking is implausible
Letwin noted in the review that:
“Major house builders need to maintain a sustainable business and seek to do this by ensuring that they, rather than their competitors, hold as much of the land on which they will later wish to build as is compatible with their capital constraints. This may well enable them to minimise market entry and thereby enable them to maintain market share while building out at a stately pace; but it does not, in itself, drive slow build out rates.
“Indeed, if anything, one would expect faster rates of build out to require builders to hold larger supplies of land – since we have been told by market analysts that the stock market valuations of house builders depend not only on the current annual profits of those builders but also on the degree to which those profits are made sustainable by the holding of supplies of land that can be developed in coming years.”
Here is the crux of the matter:
If property developers buy land and sit on it, they won’t make any profit. They’ll go bust. And to buy land in the first place, they must make a profit. So, it is imperative that developers build. Fancy that… a business model that requires you to produce a product and sell it, rather than simply sit on the raw materials.
In other words, what property developers have been saying for years.
Property developers are not entirely blameless, though
Letwin has, however, pointed the finger of blame partially at property developers. Not for land banking, but for controlling the rate at which they build. In other words, Letwin feels that property developers could build faster, but choose not to. The reason? To restrict the numbers of new properties coming to the market, so that a flood of new builds doesn’t drive market prices down.
Um, excuse me – this, again, sounds like good business sense. Can you name a single company that would flood its market with product, thus putting pressure on prices and slashing profits? How long would that company last? And when it folded because it was no longer viable to produce the product, how many people would lose their jobs, and how would the economy be affected?
The government also need to shoulder some of the blame
Letwin has also realised that there is a systemic problem restricting the number of new homes built in the UK: we don’t have enough bricklayers. The Letwin Review highlights this as the second major cause of difficulty meeting the government’s new homes targets. Too few bricklayers mean we can’t turn on the building tap and see a stream of new builds coming to the market.
Letwin has concluded that property developers and the government should work together on a ‘five-year flash programme’ of on-the-job training, to increase the number of qualified and competent bricklayers by 15,000 – an increase of around 25% on the current number.
So, good business practice and the wrong type of education is to blame for the housing crisis, according to Letwin. If we analyse this:
The first is helping to keep people employed and produce wealth for homebuyers, property investors, and homeowners (often wealth that is then used to fund retirement). Profitable businesses help to grow an economy, not crash it.
The second can be laid directly at the foot of government. Most notably the ‘education, education, education’ policy of the Blair years. Instead of encouraging young people to take up trades such as bricklaying, electrics and plumbing, it suddenly became the desire of all youngsters to go to university and get qualified in media studies, creative studies, and social studies.
Keep selling property
To grow your profits, buy more land, and employ more people, property developers need to sell property. It’s a conclusion that Letwin has taken around nine months to come to. It’s a basic business principle that we understand. Our mission is to help property developers sell their off-plan property faster.
To connect your new development with waiting investors from around the globe, ready to buy today, all you need to do is contact Castlereach. Then let us do the rest.
Call us today on 0207 923 5680.
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