People often ask me when development viability became so difficult, and I increasingly find myself looking back to the period immediately before the pandemic. The market was far from perfect and many of the structural issues that we discuss today already existed, but there was nevertheless a degree of stability within the system. Costs were relatively predictable, borrowing was inexpensive, demand support mechanisms remained in place and many schemes could still absorb the various requirements being placed upon them.
What followed was not one single event but what I often describe as a conflation of terrible things happening at the same time. Construction cost inflation accelerated rapidly and, in many cases, outpaced the growth in sales values. Borrowing costs increased significantly as interest rates rose. Help to Buy was withdrawn, leaving the market without a meaningful first-time buyer support mechanism for the first time in several decades. Mortgage affordability deteriorated, transaction costs increased and the pool of buyers and investors became noticeably smaller.
At the same time, additional regulatory requirements emerged following Grenfell. The decision to reduce the threshold for second staircases from thirty metres to eighteen metres had profound implications for a significant number of residential schemes. Projects that had already secured planning permission suddenly faced substantial additional costs. Developers had to redesign buildings, accommodate additional circulation space, borrow more money and absorb higher construction costs, often without any corresponding increase in value.
The difficulty was not that any individual change was necessarily impossible to accommodate. The difficulty was that everything arrived together. Costs were increasing, finance was becoming more expensive, demand support was being removed, regulations were becoming more onerous and values were, in many locations, either stagnating or falling. Each individual pressure might have been manageable in isolation, but layered together they became extremely difficult.
One of the things that struck me during this period was how often policy appeared to be made in isolation. Decisions were being taken for understandable reasons, but there seemed to be very little appreciation of how they interacted with one another. Additional regulation was introduced at the same time as borrowing costs were increasing. Demand support was removed while affordability was worsening. New requirements were placed upon development at precisely the moment when schemes were becoming harder to deliver.
There was also a practical difficulty during and after the pandemic itself. The normal channels of engagement between government, industry and practitioners became weaker at exactly the point when good information was most needed. Policy was often being developed during a period when the sector itself was experiencing enormous disruption, and I do not think the full implications of many decisions were always understood.
The development industry is often criticised for being speculative, and of course development always contains an element of risk because it involves investing capital today in order to create something that may not be delivered for several years. Yet many of the decisions taken during this period actually increased the level of speculation within the system. If borrowing becomes more expensive, regulation becomes less predictable, demand becomes weaker and costs become more volatile, the risks associated with bringing forward new housing inevitably increase.
There is also a wider question of confidence. Capital values certainty, even when underlying conditions are difficult. One reason investors have become more cautious about the United Kingdom in recent years is the growing perception that rules can change quickly, liabilities can become retrospective and policy can move in unexpected directions. Development already involves long-term risk, and when the rules themselves begin to feel uncertain it becomes harder to persuade people to commit capital to projects that may take years to complete.
Government reforms aimed at improving planning and accelerating plan-making are welcome, but they do not necessarily address the central issue. Planning reform can make it easier to secure permissions, but if you cannot make money, you are not going to do it. However sophisticated the planning system becomes, development ultimately requires somebody to commit their time, expertise and capital to the process, and that only happens when the underlying economics make sense.
Read the series
Part 1: We Talk About Housing, But Rarely About Viability
Part 2: We Have Rationed The System To Death
Part 3: The Conflation Of Terrible Things
Part 4: Why Smaller Builders Matter
Part 5: Building A Better System
