Flood The Zone With Supply
That's how you deal with market power
So a little worry about houses. Even if more planning permissions are granted the big builders simply won’t bother to build them:
Even if the Housing Secretary’s planning reforms succeed in pushing councils to find more land for development and in dramatically ramping up planning consents, she will run into a new hurdle: companies do not want to build them.
Despite Britain’s huge housing need, the blunt truth is that it will not make financial sense for developers to build 1.5m new homes.
“This is the biggest constraint,” says Iain Jenkinson, of CBRE, an investment company.
Across the UK’s entire construction sector, 70pc of the projects that receive planning permission actually get delivered, says Jenkinson. When it comes to building homes, that share drops to 50pc.
These properties are never constructed because the sums do not add up. The cost of building them is too high compared to the price the developer will receive upon selling, says Jenkinson. This calculation is influenced by everything from interest rates to building material costs and the supply of homes on the market.
Although lots of people need homes, only a small proportion can afford to buy them. In turn, this means there is a ceiling on how many homes developers will build. Ultimately, there is a cap on the number of homes housebuilders can sell at the prices they want.
Well, OK. Could even be true. Imagine it is true. Well, what do we do about it?
The first bit is to diagnose the problem properly. If the big builders won’t build because they don’t want to then and therefore we want to find other builders who will and do want to. And the important part of this is that the big builders do indeed have market power. It costs a lot - a lorra lots - of money to be able to get a scheme through planning. Thus we not only have that problem of a shortage of places to build - because planning - but we’ve also handed market power to those able to build - because planning.
The answer is to shoot the planners, obviously. But then that always is the correct answer. Here, more specifically, we need to flood the zone with permissions. Really, grossly, oversupply. Like issue 15 million permits. Say. At which point the value of a permit is zero. So, anyone with a scrap of land can gain a permit and build.
This brings back the small housebuilder. Instead of being held back by the ideals of half a dozen national builders we’ve got 50,000 blokes all looking to build 2 or 3 houses a year. Or 10 or 20 even.
There’s no way that the big builders can then delay building on their plots. For they don’t have market power any more. And even if they do want to delay then it doesn’t matter a damn.
And this always is the way that you deal with those with market power. You flood that zone with supply so as to destroy their market power.
Simples.
Isn't the correct diagnosis found in the comment that "the cost of building them is too high compared to the price the developer will receive upon selling'"
Despite people widging abouit lack of homes / housing, they are not willing to pay the cost of building one. It's sort of like me complaining that there aren't enough Lamborghiniis available, then when they start turning out double or triple the number they do now, I would decline to buy, based on price. Part of that may be the extra costs imposed by planners and other authorities, as Mr Bloke suggests, but part of it may be that it's free to complain, while buying requires cash and good credit.
The problem is not only with the grant of permissions, it is with the conditions attached to them. Where once, only a decade or two ago, the only condition was that you started work within three years, now it is not uncommon to have dozens of conditions imposed including such delights as biodiversity enhancement and bat/badger/reptile surveys. And then there is the extreme ramping up of building regulations requirements. So as well as restricting the supply of permissions we have also made it much more difficult and expensive to implement the permissions that do manage to slip through the permission refusal process.