Zero Carbon is Coming – one reason behind those increasing housing registration figures?

In December 2006, the UK Government announced that all new homes would be ‘zero carbon’ from 2016. This was, as many suggested at the time, a ground breaking commitment from the Government.  Some also considered this policy commitment an opportunity for innovation and green growth in a much beleaguered housebuilding industry.

With 8 years’ worth of hindsight, a housing crisis and 15 months of anticipation remaining, will 2016 really yield a step change in the way housebuilders design and produce new homes in England?

Policy Evolution or Regulatory Capture?

Anyone looking for a comprehensive overview of the podgy history of zero carbon housing policy will be disappointed.  I won’t be providing you with one here.  Requires far too much research.  And time.  I’m fast forwarding straight to the juicy stuff.

After much dilly-dallying, the Coalition Government produced its long awaited ‘clarification’ of zero carbon housing policy via the Queens Speech but with one important caveat, more commonly known as allowable solutions – that is, a ‘cost effective and flexible mechanism’ allowing housebuilders to meet the remainder of the zero carbon target through off-site carbon abatement measures.  A sort of offsite contribution equivalent to s106 affordable housing provision.  And there seems to me to be a fair few ways of abating those pesky extra carbon emissions.

So, whilst housebuilders have to mitigate, through various measures, all the carbon emissions produced on-site as a result of the regulated energy use (including energy used to provide space heating and cooling, hot water and fixed lighting, as outlined in Part L1A of the Building Regulations), this doesn’t need to be delivered via material alteration alone.  A very important moment for an industry so heavily reliant on standardised design and production practices to achieve success in the land market and required rates of return.  And, an opportunity for those previous claims of policy watering down to resurface.

Zero Carbon Policy and New Home Registrations

Rewind back to early 2014, when NHBC published its annual overview of new home registrations.  We saw noteworthy increases in the number of new home registrations across most regions in the UK in 2013 when compared to the previous year’s figures.

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Source: http://www.nhbc.co.uk/NewsandComment/Documents/filedownload,54854,en.pdf

Whilst this could be attributed to more positive market conditions, I suspect zero carbon policy has a role to play here…

Many housebuilders in 2012 and early 2013 were registering plots on 2010 building regulations.  Then came the announcement on 30th July 2013 of the proposed changes to Part L.  And a warning of the increased energy efficiency requirements that would come into effect on 6th April 2014.  Cue registration fever for housebuilders looking to avoid increasingly stringent, costly and poorly defined regulations.  Because that wouldn’t be so good in an already unstable housing market.  Bit risky.

Most housebuilders probably won’t be building to 2014 regulations by the time 2016 comes along and zero carbon compliance starts to bite. Which is, as one housebuilder I spoke to recently stated, a crazy situation because “…there’s going to have been no learning from current regulations before they up them again, because the transitional provisions are such that we’ve all registered thousands of plots under the old building regulations before the old cut-off date”.

A quick call to NHBC will tell you how many building plots have been registered under 2010 building regulations.  If you imagine how long it’s going to take housebuilders to build those homes, its likely there’s going to be very few 2014 building regulation houses built before they’re meant to be ‘doing zero carbon’ in 2016.

So that step change is quite high and there will be little if no learning on the way there.

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Housing Supply and The Landowner Question

I have a gripe with landowners.

Landowners are key players in the housing supply debate who often go unnoticed.  We don’t talk enough about landowners.  Like housebuilders, landowners also walk away from residential development schemes with money in their back pocket.  But I don’t see them occupying the front pages of the Daily Telegraph or the comments section of MailOnline.

Landowners have the UK spatial planning system to thank for generating value in their assets and the UK speculative housebuilding industry to thank for extracting that value and turning it into landowner cash.

Given the perilous state of UK housing, this begs the following questions – why do landowners deserve to continue benefiting from decades-past government policy that placed housing delivery in the hands of the market but forgot to smartly regulate that market?  And, why do landowners deserve to continue benefitting from decades-past government policy that restricted the use of their asset, thereby indirectly increasing its value?

In response, my opening gambit is this: we need to reconfigure the residential land acquisition process so that landowners shoulder more of the costs, risks and burdens associated with increasing housing output in the current macroeconomic context of housebuilding.  Let me explain why.

Firstly, when compared to housebuilders, landowners bear little, if any, risk in the financial structure of the speculative residential development process.  Yes, land acquisition deals might collapse, on occasion, but as a former land buyer, I know very well that there will always be another chance for landowners to sell housing land to another builder. House price inflation, the 18,000 other housebuilders registered with the NHBC and an insatiable demand for new homes pretty much guarantees this. I know I’m skirting around the viability issue here. But that’s because it’s an issue dictated by landowners. Not housebuilders.

Secondly, whilst land doesn’t make up a huge proportion of the financial structure of a development scheme, it’s part of the problem and has a reasonably significant part in explaining housing supply constraints.

Figure 1: The Financial Structure of the Development Scheme – current day (A), optimistic (B), pessimistic (C).

Figure 1

Figure 1 shows the financial structure for a part residential part commercial (retain and let) development scheme in Sheffield, with a 2.5 year development period.  Structure A is current day costs and values, Structure B is an optimistic price and value inflation scenario and Structure C is a pessimistic price and value deflation scenario.  Figure 2 gives you the details.

Figure 2: Optimistic (B) and Pessimistic (C) Development Scenarios

Figure 2 Short

What’s important to notice in this example is that the land cost doesn’t change in those optimistic and pessimistic scenarios.  It remains the same because the land deal is already done; ownership exchange has occurred by this point.  It’s in the ‘post land acquisition’ part of the development process where the risk is realised.  The developer shoulders all of this risk.  It comes of the bottom line.

Remember Mr Landowner?  By this time, he’s long gone.  Already walked away with his cash. He doesn’t need to worry about this part of the development process.  There is no chance of clawing back any money from him.

Or is there? Those working in residential development ‘post recession’ might say that, actually, there is.  Land deals can be structured so that deferred payments are made to the landowner part way through the development programme to account for market changes. And they would be right.

But I’d argue that more needs to be done to ensure this happens legally, away from the auspices of the developer’s profit motive.

More needs to be done to capture the value inflation of land granted residential planning permission. Because, this value inflation doesn’t just provide developers with the risk premium necessary to speculatively deliver housing. It also goes in the back pocket of the landowner.

Within the current context of housing market volatility, the landowner continues to unfairly benefit from the speculative residential development process, whilst the housebuilder shoulders an increasing burden of risk and, in some of the UK’s struggling housing markets, with little prospect of reward.

So, what can we do? Three things:

1)      We can ‘shave’ some of the land value – a development levy/tax/charge – to fund affordable homes and infrastructure requirements. This should be administered regionally (definitions on a post card…) and should not be part of the planning process.  An entirely separate legal process should occur between the LA and the landowner, which kicks in as part of the land ownership exchange process.  Create a land tax officer if need be.

2)      We can ‘shave’ some of the land value – a development levy/tax/charge – to be held in situ in a risk-abatement account, underwritten by the Government, to give the developer a risk comfort blanket, thereby stimulating developer engagement with risky housing markets.  If it isn’t used, it goes into the above pot.  Again, this should not be part of the planning process.  A separate legal process should occur between the Government, developer and landowner, which kicks in as part of the land ownership exchange process.

3)      A vacant land levy could prevent landowners from ‘hoarding’ land with residential planning permission.  But not for vacant land without residential planning permission. You can’t force the market.

To some extent, the above solutions nullify the residential land market.  But is it really so draconian to consider taxing the ownership exchange of land for residential development, to tend to the basic human needs of the 21st century?

The easier solution would be to ask housebuilders to roll up their sleeves, build more homes and just get on with it, changing their conventional and long standing strategies to do so and taking on more risk.  But as Cameron et al already know, this isn’t working and is taking up time. We don’t have time, we have a housing crisis.

The land (owner) question needs raising.  Let’s talk about it.

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Coming Soon…

Welcome to my personal website. I look forward to writing my first blog shortly, the topic of which is still under consideration!

My pressing tasks are: 1) to complete a paper/presentation for the forthcoming Housing Studies Association Annual Conference in April (my colleagues Nick Taylor-Buck & Aidan While – and I are examining market housebuilding and the mixed economy of low carbon regulation); and 2) to complete a conference paper for the forthcoming ENHR Conference in July (I’m examining housing market recovery and institutional transitions in UK speculative housebuilding).

Please don’t hesitate to get in touch with any questions or comments you may have.

Dr. Sarah Payne

s.payne@sheffield.ac.uk

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