Top housebuilders’ profits now back to pre-crash levels

Affordable housing numbers now at eight year low (Image: Shutterstock)

Britain’s ten biggest housebuilders will this year make profits of more than £2bn for the first time since the high water-mark of the last credit-fuelled property boom.

The surge in profits comes despite the number of affordable homes built in England falling to an eight-year low.

Analysis by the Bureau of Investigative Journalism shows that the country’s biggest builders, who between them control enough land to create 480,000 homes, will make pre-tax profits of over £2.1bn in 2014 – a 34% jump on last year.

The total is based on reported and projected profits for firms including Persimmon, Taylor Wimpey, and Barratt, many of which have seen sales boosted by the government’s popular Help to Buy financial support schemes.

The return to pre-crash profits of the UK’s housebuilding sectors comes as government figures project 42,710 affordable homes will be built in England in the year to April – the lowest number since 2006 and a 26% fall since 2010.

“At a time when the country faces a housing crisis and with homelessness having risen significantly in recent years, we desperately need developers to provide more affordable homes,” said Jon Sparkes, chief executive of homeless campaign group, Crisis.

But Steve Turner of the Home Builders Federation whose members account for 80% of houses built in England and Wales, said: “The industry was devastated in the financial crash, profits initially fell very steeply, or disappeared into losses, and many companies disappeared. Only now are profits returning to pre-crash levels allowing companies to rebuild, restructure and replace lost capacity.”

Financial viability

But the contrast between developers’ profits and affordable housing figures has begun to focus attention on an opaque part of the planning system, known as financial viability. The process is widely used by house builders to, perfectly legally, reduce the number of affordable homes they deliver to below local authority targets.

Over half England’s affordable homes are generated by private development through what is known as the Section 106 system, in which tests of financial viability are key.

Financial viability assessments form the basis of negotiations with local authorities when developers want to reduce the number of low cost homes below local authority affordable housing targets. Targets typically range between 25% and 40% of the total number of homes in a scheme and are set according to local housing need.

The assessment works by combining all the costs linked to a housing development including a 20% margin for the developer but excluding the land price. These costs are then subtracted from a scheme’s projected sales revenue based on current values.

If the resulting total is not much higher than its current use value, the scheme is likely to be considered unviable by developers who will then argue affordable homes must be cut. This means assumptions on sales and costs are crucial.

Bureau research has found that:

  • the process is shrouded in secrecy with many developers regularly refusing to disclose to the public the assessments on which their figures are based.
  • councils rarely employ external experts to scrutinise housebuilders’ figures contained in developers’ financial viability submissions which risks local authorities unnecessarily reducing the amount of affordable homes in housing projects;
  • sales projection figures used in viability assessments are based at the time a scheme receives planning consent which often means councils fail to benefit from the significant profits made by developers as house prices rise.

Housing campaign groups warn that with 1.4 million households on council waiting lists – a 34% rise since 1997 and 85,000 children living in temporary accommodation – equivalent to more than the entire population of the Hertfordshire town of Stevenage, the government now has to put pressure on builders to meet affordable housing targets.

Fewer affordable homes

Joanna Kennedy, chief executive of housing and welfare campaign group, Z2K, said: “We are seeing fewer affordable homes built than at any point in the past decade at the same time as big developers see their profits rocket.  If Whitehall genuinely wants to tackle the housing crisis they should be supporting boroughs in challenging developers’ questionable viability assessments, instead of undermining council’s efforts to secure planning gain through section 106.”

Shelter’s director of policy and campaigns, Roger Harding said: “Planning laws were watered down a couple of years ago because it was argued that existing regulations were hampering developers by making house-building unprofitable. This led to the power of councils to negotiate with developers being weakened, with the result that up and down the country developments are being approved that don’t meet the local need for affordable homes.

With house-building now back in the black, it’s time to strengthen the hands of councils once more so that developers live up to their duty to build affordable homes alongside ones for private sale.”

“It is for local authorities to agree an appropriate level of contribution to affordable housing with developers,” a Department for Communities and Local Government spokesman said. “Our guidance is clear that changes in costs and property value should be considered in longer term developments, and councils should use appropriate methods and expertise, whether in-house or external, to determine these.”

First-time buyers

Earlier this month, David Cameron confirmed plans to offer up to 100,000 new homes to first-time-buyers under the age of 40 at a discount of 20% if the Tories win the next election.

Hilary Benn, Shadow Secretary of State for Communities and Local Government, told the Bureau that Labour will make viability assessments figures available to the public if it wins power.

“We need an “open-book” approach to negotiating site specific viability so that communities can see how assessments are being made. And we need an arbitration service between communities and developers,” he said.

A version of this story appeared in the Guardian 

To read the full report of the Bureau’s year long investigation into the affordable housing delivery system, please follow this link