Preparing for Recovery

John Stewart

Director of Economic Affairs

Home Builders Federation

13 October 2009

SHORT-TERM TRENDS

THE ECONOMY

Gross Domestic Product (GDP)

Quarterly % change, seasonally adjusted

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.51971 1

1973 1

1975 1

1977 1

1979 1

1981 1

1983 1

1985 1

1987 1

1989 1

1991 1

1993 1

1995 1

1997 1

1999 1

2001 1

2003 1

2005 1

2007 1

2009 1

% c

han

ge

Bank of England GDP forecast

Annual % change; central projection (August 2009)

-7.0

-5.0

-3.0

-1.0

1.0

3.0

5.0

1989 Q

1

1990 Q

1

1991 Q

1

1992 Q

1

1993 Q

1

1994 Q

1

1995 Q

1

1996 Q

1

1997 Q

1

1998 Q

1

1999 Q

1

2000 Q

1

2001 Q

1

2002 Q

1

2003 Q

1

2004 Q

1

2005 Q

1

2006 Q

1

2007 Q

1

2008 Q

1

2009 Q

1

2010 Q

1

2011 Q

1

2012 Q

1

An

nu

al

% c

han

ge

Actual Central (mode) projection

Bank of England CPI inflation forecasts

Annual % change; central projection (August 2009)

0.00.5

1.01.5

2.02.53.0

3.54.0

4.55.0

1995 Q

1

1996 Q

1

1997 Q

1

1998 Q

1

1999 Q

1

2000 Q

1

2001 Q

1

2002 Q

1

2003 Q

1

2004 Q

1

2005 Q

1

2006 Q

1

2007 Q

1

2008 Q

1

2009 Q

1

2010 Q

1

2011 Q

1

2012 Q

1

An

nu

al

% c

han

ge

Actual Central (mode) projection Inflation target

SHORT-TERM TRENDS

THE HOUSING MARKET

Annual House Price Inflation

-30

-20

-10

0

10

20

30

40Ja

n-9

9

Ju

l-9

9

Ja

n-0

0

Ju

l-0

0

Ja

n-0

1

Ju

l-0

1

Ja

n-0

2

Ju

l-0

2

Ja

n-0

3

Ju

l-0

3

Ja

n-0

4

Ju

l-0

4

Ja

n-0

5

Ju

l-0

5

Ja

n-0

6

Ju

l-0

6

Ja

n-0

7

Ju

l-0

7

Ja

n-0

8

Ju

l-0

8

Ja

n-0

9

Ju

l-0

9

An

nu

al

% c

han

ge

Halifax Nationwide CLG

House Price Change (GB)

-20

-10

0

10

20

30

401930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Annual %

change

2009 is annual rate Jan-June

Price trends reported by estate agents (RICS)

Balance: prices over last 3 months, seasonally adjusted

-100

-80

-60

-40

-20

0

20

40

60

80

1001978:0

1

1980:0

1

1982:0

1

1984:0

1

1986:0

1

1988:0

1

1990:0

1

1992:0

1

1994:0

1

1996:0

1

1998:0

1

2000:1

2002:1

2004:1

2006:1

2008:1

Bala

nce,

sa

Prices rising

Prices falling

Residential Transactions & Mortgage Approvals (UK)

Seasonally adjusted; moving three-month totals

90

140

190

240

290

340

390

440

490

Ma

r-9

9

Se

p-9

9

Ma

r-0

0

Se

p-0

0

Ma

r-0

1

Se

p-0

1

Ma

r-0

2

Se

p-0

2

Ma

r-0

3

Se

p-0

3

Ma

r-0

4

Se

p-0

4

Ma

r-0

5

Se

p-0

5

Ma

r-0

6

Se

p-0

6

Ma

r-0

7

Se

p-0

7

Ma

r-0

8

Se

p-0

8

Ma

r-0

9

(00

0)

Residential transactions (>£40,000) Approvals for house purchase

Mortgage Approvals for House Purchase (UK)

Quarterly totals

0

50

100

150

200

250

300

350

400

450

50087 Q

1

88 Q

1

89 Q

1

90 Q

1

91 Q

1

92 Q

1

93 Q

1

94 Q

1

95 Q

1

96 Q

1

97 Q

1

98 Q

1

99 Q

1

00 Q

1

01 Q

1

02 Q

1

03 Q

1

04 Q

1

05 Q

1

06 Q

1

07 Q

1

08 Q

1

09 Q

1

(000)

Estate Agency Enquiries & New Instructions

-80

-60

-40

-20

0

20

40

60

80Jan-0

0

Jul-00

Jan-0

1

Jul-01

Jan-0

2

Jul-02

Jan-0

3

Jul-03

Jan-0

4

Jul-04

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Bala

nce (

%)

New enquiries New instructions

Enquiries/instructions rising

Enquiries/instructions falling

Net Mortgage Lending (UK)

£m

-1000

1000

3000

5000

7000

9000

11000

19

93

:01

19

94

:01

19

95

:01

19

96

:01

19

97

:01

19

98

:01

19

99

:01

20

00

:1

20

01

:1

20

02

:1

20

03

:1

20

04

:1

20

05

:1

20

06

:1

20

07

:1

20

08

:1

20

09

: 1

£m

Not seasonally adjsuted Seasonally adjusted

HBF Survey: Net Reservations Balance (year-on-year) (GB)

-100

-80

-60

-40

-20

0

20

40

60

80M

ay-9

2

May-9

3

May-9

4

May-9

5

May-9

6

May-9

7

May-9

8

May-9

9

May-0

0

May-0

1

May-0

2

May-0

3

May-0

4

May-0

5

May-0

6

May-0

7

May-0

8

May-0

9

Year-

on

-year

bala

nce (

%)

Net reservations rising yoy

Net reservations falling yoy

HBF and RICS Monthly Surveys: Price Balances

-120

-100

-80

-60

-40

-20

0

20

40

60

80

100A

pr-

92

Apr-

93

Apr-

94

Apr-

95

Apr-

96

Apr-

97

Apr-

98

Apr-

99

Apr-

00

Apr-

01

Apr-

02

Apr-

03

Apr-

04

Apr-

05

Apr-

06

Apr-

07

Apr-

08

Apr-

09

Bala

nce:

% u

p l

ess %

do

wn

HBF price balance RICS price balance

Prices rising

Prices falling

Private house building (England)

Quarterly; seasonally adjusted

10.0

20.0

30.0

40.0

50.01990 Q

1

1991 Q

1

1992 Q

1

1993 Q

1

1994 Q

1

1995 Q

1

1996 Q

1

1997 Q

1

1998 Q

1

1999 Q

1

2000 Q

1

2001 Q

1

2002 Q

1

2003 Q

1

2004 Q

1

2005 Q

1

2006 Q

1

2007 Q

1

2008 Q

1

2009 Q

1

(000)

Starts Completions

Private Housing Completions (GB)

0

50

100

150

200

250

300

350

400

4501920

1924

1928

1932

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

Com

ple

tions (

000)

Total Forecast (Experian)

But not out of the woods yet…

Treasury review of 22 independent economic

forecasts (September)

House price inflation in year to 2010 Q4:

• 12 predict fall

• 3 no change

• 7 rise (most <3%)

Average -0.2%

PREPARING FOR RECOVERY

SHORT TERM

Economic Preconditions

• Restoration of mortgage market

• End to recession (& rising unemployment?)

Government New Home InterventionHCA Initiatives

• RSL private stock purchases (£350m+): 9,000 homes

• HomeBuy Direct (£300m+): 10,000 homes (~£2bn sales)

Kickstart: mothballed sites (£400m + £660m): 9,000 + 13,000 homes

• Public Land Initiative/Delivery Partner Panel: 1,350 homes initially

TOTAL: ~42,000 new homes (~£1.7bn) 2008-09 to 2011-12

• Affordable Housing (grant rates, Intermediate Rent, tenure mix)

• Private rental initiative

• Local authority building

Local Authority Flexibility

To restore viability:• Renegotiate:

S106 agreements

Mix, density permissions

• Review other policy/regulatory demands

New Home Valuations

• CML Disclosure of Incentives Form – restore

lender confidence

• New home valuation (RICS new guidance,

lender instructions, valuer behaviour)

Affordability

Major influences:

• House prices

• Earnings

• Interest rates

• Mortgage terms (especially higher LTVs)

HMR Affordability indices (GB): Single male

First-year payments as % post-tax earnings

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00Q

2 8

6

Q3 8

7

Q4 8

8

Q1 9

0

Q2 9

1

Q3 9

2

Q4 9

3

Q1 9

5

Q2 9

6

Q3 9

7

Q4 9

8

Q1 0

0

Q2 0

1

Q3 0

2

Q4 0

3

Q1 0

5

Q2 0

6

Q3 0

7

Q4 0

8

Ind

ex

Interest-only Capital + interest

House Price/Earnings Ratio (GB): Single male

Long-run: 1968 Q2 to 2009 Q2

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00Q

2 6

8

Q2 7

0

Q2 7

2

Q2 7

4

Q2 7

6

Q2 7

8

Q2 8

0

Q2 8

2

Q2 8

4

Q2 8

6

Q2 8

8

Q2 9

0

Q2 9

2

Q2 9

4

Q2 9

6

Q2 9

8

Q2 0

0

Q2 0

2

Q2 0

4

Q2 0

6

Q2 0

8

Ind

ex

Price/earnings ratio Long-run average

PREPARING FOR RECOVERY

LONGER-TERM

Mortgage Market

Restoration of mortgage market

• Availability of funds (wholesale, securitisation)

• Terms, especially higher LTVs

• New lenders/competition

• New build lending

• MORTGAGE REGULATION

But first, do we really need more homes?

Structural long-term housing under-supply

Demographic, social and economic

necessity to raise supply

Household Growth Average, England

Annual Increase (2006-based Projections)

0

50

100

150

200

250

300

71-76 76-81 81-86 86-91 91-96 96-01 01-06 06-11 11-16 16-21 21-26 26-31

000

1981-2006: 166,000 pa

2006-31: 252,000 pa

Structural under-supply

“I do not believe that continuing at the current rate of

housebuilding is a realistic option, unless we are

prepared to accept increasing problems of

homelessness, affordability and social division,

decline in standards of public service delivery and

increasing costs of doing business in the UK –

hampering our economic success.”(Kate Barker Review of Housing Supply. Final Report. March 2004)

Structural under-supply

“If the state controls the location of residential

development, rations the supply of permissioned land,

heavily influences housing mix, density and product,

and “taxes” housing land to the limits of viability and

beyond, then it shouldn‟t be surprised the supply of

housing is inadequate!”(John Stewart, an irate email, 24 September 2009)

Achieving the Government‟s Housing Targets

(England)

Chart 2. Net Additions to Housing Stock, England

Indicative Trajectory: Before Current Downturn

80

100

120

140

160

180

200

220

240

260

280

3001991/9

2

1993/9

4

1995/9

6

1997/9

8

1999/0

0

2001/0

2

2003/0

4

2005/0

6

2007/0

8

2009/1

0

2011/1

2

2013/1

4

2015/1

6

2017/1

8

2019/2

0

000

Net additions Housing completions

Chart 3. Net Additions to Housing Stock, England

Illustrative Trajectory: to Hit Targets with Current Downturn

80

100

120

140

160

180

200

220

240

260

280

30091/9

2

93/9

4

95/9

6

97/9

8

99/0

0

01/0

2

03/0

4

05/0

6

07/0

8

09/1

0

11/1

2

13/1

4

15/1

6

17/1

8

19/2

0

000

Net additions to hit target New build to hit target

~20% pa

Chart 4. Net Additions to Housing Stock, England

Illustrative Trajectories: Current Downturn, 5% pa Growth

80

100

120

140

160

180

200

220

240

260

280

30091/9

2

93/9

4

95/9

6

97/9

8

99/0

0

01/0

2

03/0

4

05/0

6

07/0

8

09/1

0

11/1

2

13/1

4

15/1

6

17/1

8

19/2

0

000

Net additions New build

5% pa

Maximising House Building

in the Recovery

Lifting growth above 5% pa

Affordable Housing Delivery Model

Developed in boom

• S106 private land value subsidy

• Cross subsidy

• Ready access to keenly price funds

• HCA grant

No longer viable delivery/funding model

Development Models

• Is the private „current trader‟ model broken?

• New entrants, competition?

“Strong and diverse housebuilding sector”

• What alternative models/suppliers?

• Is public „intervention‟ required?

The market will solve, if enough land!

Current Trader ModelCommon public sector views

• Returns too high (vs contractor margins)

• Need “new players”, competition

• Too driven by cycles/land market

• Low output

• Too labour intensive (labour/materials balance)

• Sales driven (“sell one, build one”)

• Inefficient

• Poor innovation (MMC)

• Poor R&D

• Excessive waste

Permissioned Land Supply &

Planning

To increased supply, you can only go

out or up

Housing Completions and Land Use, England

120

130

140

150

160

170

180

190

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Co

mp

leti

on

s (

000)

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

Hecta

res

Completions Total land area

Housing Completions and Density, England

120

130

140

150

160

170

180

1901989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Co

mp

leti

on

s (

000)

20

25

30

35

40

45

50

Dw

ell

ing

s p

er

hecta

re

Completions Average density

Chart 5. Residential Land Use, by Land Type, England

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.01989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

He

cta

res (

00

0)

Brow nfield Greenfield

Conservative Planning Policy

• Abolish

National target

Regional targets, RSSs, RAs, RDAs

• Devolve responsibility to LPAs

• Incentives to encourage LPAs to

“welcome development”

Housing Products, Mix and

Density

Home builders will only build products they

can sell (i.e. to meet local demand)

Outcome

Fewer apartments

More houses

i.e. lower average densities

Development „Viability‟

Two essential conditions for development:

• Profitable, and

• Land value sufficient to persuade land

owner to sell/exceed current or

alternative use value

Land Value Viability

Cumulative

Cost Impactof

Taxation, Policy & Regulationon

Land Value

Taxed to the limits of viability and beyond

• Regeneration projects

• Strategic greenfield with high infrastructure

costs

• Northern brownfield/infill sites

Industry Delivery Capacity

• Development finance, „excess‟ debt

• Skills – management, professional, trades, new

skills (e.g. sustainability), skilled teams

• Expand company output

• Expand number of companies

• Innovation and productivity improvements

Meeting Intermediate Demand

New Role for Private Rented Sector?

• Large-scale institutional funding, suitable vehicles/fund

managers, professional management, focus on yield,

location critical, purpose-built products, long-term model

vs short-term opportunism

• Issues: taxation, S106 demands, planning attitudes,

Affordable Housing (PPS3), right products/locations

But can it be made viable for institutional yields?

Summary: Recovery Conditions

Axioms

• Serious supply/demand imbalance

• Majority aspiration home ownership

• Private sector „current trader‟ primary

delivery model

Recovery Conditions: Short Term

• Positive market indicators 2009

• Slow, possibly halting recovery

• Critical demand constraint: mortgage

availability/terms

Recovery Conditions: Long Term• Drastically reduce cumulative impact taxation, policy,

regulation on land value

• Sufficient permissioned land, right locations

• Products, mix & density – market responsive

• Industry capacity (skills, finance) – more partnerships?

• New Affordable Housing delivery/funding model

• New model for private rented sector?

Preparing for Recovery

John Stewart

Director of Economic Affairs

Home Builders Federation

13 October 2009