David O’Leary, executive director at the Home Builders Federation (HBF), discusses the costs that housebuilders and developers face and why action is needed
The home building viability crisis is an increasingly well-documented barrier to housing delivery. It has become obvious in recent years that the avalanche of additional burdens on development, in the form of new taxes, levies and policy costs, has made many prospective sites for new homes uneconomical. The government’s forthcoming levy on new homes promises to make matters worse. Postponing that new tax or even cancelling it altogether would provide some relief for home builders struggling to make the economics of development work at the current time.
Last autumn, a report by Zoopla found that building homes was unviable across half of the country. That research excluded London from its analysis, but the government’s ‘emergency package for London’, published just a month later, appeared to provide clear acknowledgement that residential development in the capital is severely constrained on viability grounds.
And last month, in an attempt to put some numbers to the scale of increase in the cost of building homes, HBF’s Viability Crunch report established an estimate of £76,000 for the rise in costs associated with the building of a typical house over the past five years. This is split roughly 50-50 between costs imposed by the government through levies, taxes, and new policies, and the inflationary pressures that have swamped developers as a result of Covid and the war in Ukraine. While it is too early to estimate the impact of the current conflict between the United States and Iran, it is likely to add further costs, creating additional viability pressure on development.
A new levy on new homes
This October, a new levy on new homes is due to come into effect, increasing the cost of building new homes for builders. The Ministry of Housing, Communities and Local Government’s Building Safety Levy will extract £340 million per year from new housing developments over the next decade by adding an average of £2,500 to the cost of delivering the average new home in England.
Home builders have never disputed that our sector, along with others, should help fund building-safety remediation efforts. Since 2022, larger UK home builders have been paying a precept on Corporation Tax. The Residential Property Developer Tax sees firms pay Corporation Tax at a rate 4 percentage points higher than other businesses. Meanwhile, through unprecedented self-remediation commitments, more than 50 builders have taken responsibility for buildings built since the early 1990s. Taken together, these commitments mean UK home builders will contribute more than £6bn to address failures in regulation and product approval processes over multiple decades. The £3.4bn government plans to extract from the same sector through the Building Safety Levy is unfair, unnecessary and damaging to the economy.
Unfair
Unfair because, despite several half-hearted attempts, government has been unable to bring any other sectors to the table to contribute to the national effort to remediate affected buildings. In January 2022, then Housing Secretary, Michael Gove, told product manufacturers ‘I expect a public funding commitment from your sector by early March, which would be made available to the public and to affected leaseholders… I am prepared to do whatever it takes to deliver our objective, including using our regulatory framework to limit any culpable company from operating and selling products in this country in the future’.
A year later, with no progress made in these endeavours, the then Shadow Housing Secretary, Lisa Nandy, called the government’s failure an ‘immoral’ omission. Gove responded that the pursuit was still on. He told the House of Commons, ‘There are others—and the insurers as well as construction product manufacturers are squarely in our gun sights—who do need to do more.’ Almost four years on from that, this government is planning to implement the levy designed by Michael Gove, which will significantly hit home-building delivery.
Unnecessary
Five years on from its creation, the £5.1bn Building Safety Fund has allocated only around half of the funds available, with £2.5bn as yet unassigned. Furthermore, as part of the commitments made by responsible UK home builders, reimbursements will be made to the Fund for payments made in relation to buildings developed by signatory firms. The Government estimates it will claw back around £700m in this way, leaving more than £3bn unspent and unallocated in existing building safety remediation pots. Government has been unable to articulate why another tax on the same companies – the third charge on UK home builders is necessary, and why it is required now.
Restricting housing supply
The government’s impact assessment for the new levy is just a few pages long. It is argued in the impact assessment that viability is more likely to be compromised where house prices are lower, somewhat belying the government’s own assessment of the housing supply collapse in London, where, it is fair to say, house prices are high. Nonetheless, it is this logic that has informed the levy’s design, with rates set according to local authority-level house price averages. So much of the good work being delivered through MHCLG’s package to improve viability in the capital will be undone after October. And those marginal areas around the rest of the country identified in the Zoopla analysis will slide further into unviable territory.
The impact assessment makes the case that this additional charge will have ‘only a very small negative impact on supply’ because it represents only between 0.5% and 1.1% of house prices, but this is demonstrative of a wildly simplistic assessment of land viability and ignores the vast range of additional costs imposed on the delivery of new housing which governments have added over the past six years as a result of new taxes, a huge number of building regulations changes, the adoption of Biodiversity Net Gain, the emergence of the Future Homes Standard, nutrient and water neutrality, the implementation of the Building Safety Regulator and its associated costs and delays. The list could go on.
We need to have a serious debate about the viability of new housing. With such a shortage of homes and affordability stretched, the economic rationale for building homes should be straightforward, but a decade of idle assumptions by policymakers that ‘land values will adjust’ to meet every objective of Whitehall has left us with a questionable case for the large-scale investment in new housing in the way that is desperately needed.
Policymakers now need to be brave enough to take away some of the burdens on development. Cancelling the introduction of this levy would be a good start.
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