Friday, 3 May 2013

Housing and Planning

As things stand, the United Kingdom has a genuine need for about half a million extra homes, property companies already have planning permission for somewhere around two hundred thousand new homes (if not more: it's a bit hard to tell, especially when they've been sitting on a planning permission and not using it for several years as it falls out of the government figures, but continues to exist indefinitely), and there are about eight hundred thousand empty, existing homes. (Not counting those people who have more than two homes which count as being "occupied" by them. It's not possible to count these homes: there might be a lot of third, fourth, fifth and sixth homes, because the widening pay gap between executives and other workers means that a small percentage of the population really does have more money than it knows what to do with, not-withstanding the austerity and hardship experienced by everybody else.)

The current UK government is obsessively trying to dismantle planning controls, ostensibly as a way to speed up the building of new homes, both to house people and "boost the economy." The problem is that the property companies are not using planning permissions as "permission to build something, which they then build" but as a form of bespoke quantitative easing with which to repair their balance sheets and liquidity. This has been going on in one form or another since at least the early years of John Major's government (or the end of Edward Heath's government in the case of some firms specializing in prime commercial sites in Central London) and nearly all of the biggest property firms in the UK would have been technically bankrupt before the credit crunch if they had not been refreshing their balance sheets by using planning permissions as a substitute for money in the bank or properties actually on the market and being sold. The economic dangers of this situation as it already is, are dwarfed only by the economic dangers of allowing the same property companies to benefit from a presumption in favour of granting planning permission for anything they apply for, because that would amount to a licence, not to print money, but to print planning permissions at will and plug those into the company balance sheet in lieu of money.

The hard truth is that the United Kingdom does not have the money to support and sustain its property industry, and unless the whole nation is to go bankrupt, several of the biggest property companies must be allowed to fail, as they should have failed ten or twenty years ago without their own unique form of false accounting. The idea that granting even more planning permissions to an industry that's only building a small percentage of the developments it has permission for, will somehow lead the whole economy into recovery is not just wildly optimistic, but deranged. The one thing the property industry cannot do, is actually build houses on a large scale and sell them! Because that would allow the market to put a real, rather than an imaginary, value on the all the "assets" the companies have on their books to convince their bankers, shareholders and other creditors that they are solvent. It's a little bit like vampires and sunlight: if a UK property company exposes its books to a strong ray of actual market valuation, those books will implode into a cloud of dust and ash. (Which is precisely what happened in Tokyo in the nineties!)

The false accounting mechanism works something like this:
Property companies which, in the booms of the eighties and nineties competed with each other to pay far too much for prime urban development and redevelopment sites, suddenly found that the urban properties on their books were over-valued by about 30%. Barring an economic miracle, which they all religiously claimed was happening or imminent, the legal and proper cure was to go into administration so that an accountant could assign the actual value of the company's assets to its creditors and investors: in some cases the companies could then have restarted their business based on a true valuation, others would have been wound up with as little harm and risk to the wider economy as possible. The other, preferred, "cure" was to buy some cheap farmland, cheap because it was in the greenbelt and thus priced as if it could not be used for building on, or so remote that nothing built there had a hope of being sold -and use massive and often unscrupulous political lobbying to get planning permission to build something on that cheap land. The company could then claim that the resale or development value of that cheap land had increased twenty or a hundredfold, and in that year, the supposed book value of the company's property portfolio would show a healthy-looking increase, rather than a a steep drop. But if they actually built and sold all the houses on the cheap land they've actually just received permission for, its true value would be revealed as something rather less than they'd needed to claim to keep the books straight. So what they did, was start building on just some of the cheap land, as slowly as they could manage, and buy another tranche of cheap agricultural land and use all their political muscle to get planning permission for that as well, so that the next financial year would also see an apparent increase in the company's asset value. Which becomes ever further removed from their actual "production" (building) and "trading" (selling something which they have built at a real profit). In the third year, they need still another tranche of cheap land and another set of planning permissions to make that cheap land look as if it's worth more.

Most of the companies involved have been doing this for twenty years now, but one or two have been doing it for forty years. Never has any elastic been stretched further, and the most reckless banker of the credit crunch and global banking crash begins to look sober and responsible by comparison.

How to defuse this bomb and make some homes available for people to live in:

There must be changes to accounting and tax regulations, so that planning permissions cannot be used to simply pump up balance sheets. Whenever a company introduces new property to its portfolio, its bookable asset value must be limited to what the company paid for it, because nothing else can be verified, until there is a commencement date and a completion date for the actual development or redevelopment of that property, or it is actually sold, of course, which would (or should) give its true value. Once there is a published commencement date and a completion date, which the company is not allowed to change once it has notified the dates to investors and creditors, it can value the property as being worth more than was paid for it, in order to raise capital to develop it. However, once either date has been missed by a year, the bookable value of that property must be trimmed by a quarter (say) of the difference between the original purchase price and whatever the claimed new value was. If the date is missed by another year, then the bookable value must be trimmed by another quarter of that difference, so that if the dates are missed by four years, the property can only be booked as being worth what was actually paid for it. Companies would be perfectly safe, provided that they only ever told their creditors and investors (and planning officials) realistic values and realistic commencement and completion dates. This would be an unprecedented culture change for the industry, but ultimately beneficial because investors who are actually told the truth will gradually become more confident.

The United Kingdom does not have the money to pay for the sort of building boom which the present government is fantasising about, even if the property industry wasn't facing ruin if it actually tried to build and sell all the houses it is promising to the politicians. There is a housing need, albeit almost certainly this is a fraction of what pro-developer politicians and officials say it is. Assuming that we probably do need to provide somewhere between half a million and a million homes in the next few years, when wages are likely to rise by less than general inflation making it extremely risky for housebuyers to borrow a high multiple of their earnings, or borrow against the 80-90% of the house price that has been customary, it has got to be done relatively cheaply, or else it's simply not going to be possible. That means that not all property firms and building contractors are going to survive, just as not very many coal mines have survived and most of the hat factories in Luton that were active in the nineteen fifties have closed. Never mind that property firms are traditionally more generous to (compliant) political parties than other types of business: they cannot be exempt from economic reality. Indeed, many of their current problems stem from past attempts to escape reality, see preceding paragraphs and are entirely self-inflicted. The objective is to put roofs over the heads of people needing a home, not keep a Bentley's driving seat beneath the backside of every developer who plays golf, tennis or squash, with a politician.
We have to make sure we use what we have already got, before we fritter the nation's life blood away on promises and speculation. We have eight hundred thousand empty homes, the property industry has existing planning permissions for something like two hundred thousand homes. The accounting rules above, reasonable as they are, might be seen as an imperative for the industry to build those two hundred thousand homes, or die. It's an economic crisis and they won't be the first or last industry to face that kind of blunt ultimatum.

Bringing the eight hundred thousand empty homes back into use, requires government to reverse some perverse tax incentives, which all three of the Conservative, Labour and Liberal Democratic parties have consistently supported, often to the bafflement of non governmental organisations. At the moment, Value Added Tax is charged at 20% on building work to renovate or restore existing buildings, whereas there is no VAT at all on new-build greenfield developments. Furthermore, landlords are only allowed to offset 15% of their rental income against tax to pay for maintenance, renovation and improvement of their properties. If buildings could be maintained by percentages, that might be barely adequate, but since building work can't be done very effectively in little £1,500 bites, it leads to much privately-rented property falling behind in terms of maintenance, efficiency of appliances and general adaptation to changing needs and circumstances. Eventually, it falls out of use: hence eight hundred thousand empty homes.

The current political consensus is almost completely wrong. What needs to happen, is for the VAT concession on new-builds on greenfield sites to disappear. But, since we want the industry to start using its considerable bank of existing planning permissions on brownfield sites, the VAT concession on brownfield new builds and major redevelopments, should be retained -or introduced where it isn't already applicable.
There must be zero-rating for VAT on repairs and renovations to existing properties, and for any modest extensions ("additions" in American) needed to bring a property up to modern standards of access, amenity and safety. In a time when affordable housing is in shortage, it makes no sense for the government to be taxing landlords for trying to bring empty properties back into use.

Likewise, the proportion of rental income which landlords can offset against tax for repairs, renovation and improvement could be increased a little, and landlords should perhaps be allowed to average that spending over a few years, so it's easier to do all the outstanding work at once, between tenants, rather than having to do it a bit at a time to comply with tax rules. This should make the work more efficient and effective, increasing the quality of the usable housing stock and preventing properties from falling out of use, as well as making it easier to bring properties back into use.

It would also create more jobs for a given amount of taxpayer subsidy. Whereas the big property companies creating big new build developments work through a  pyramid of prime contractors, sub-contractors, sub-sub contractors and, usually, self-employed craftsmen putting hammer to nail, repair and renovation work is very often negotiated directly between a landlord or other property owner and a self-employed craftsman, or at most, one level of contractorship. The number of middle-men being carried by the nation's small army of self-employed skilled building craftsmen could be cut dramatically, getting more money down to the bottom of the economy where it's needed most.

Many of the candidate properties for repair, renovation and return to the available housing stock, are in towns and cities where people want to live and find work. Many of the sites where the industry wants to put its new builds, are miles away from any jobs, schools or infrastructure. Not only can the nation not afford the cost of building and mortgaging all of these: the nation cannot really afford all the extra petrol and travelling time they entail, either.

Repair, renovation and improvement is not only a better strategy economically: it is far greener than greenfield newbuilds, too.