Tuesday 22 March 2011

Bricks And Mortar Fun

Let's do a thought experiment, based on a few real life facts, as follows:

1. We currently have a free market in building materials - bricks, mortar, timber, slates, floorboards, pipes, cables and the like. Anybody can buy as much of this stuff at he needs for a modest price (total cost of these for an average semi is in the order of £30,000), but he is not allowed to assemble them into a house, which would cost maybe another £50,000 in labour costs (two man-years). For that he needs planning permission.

2. The current Lib-Con government is determined to keep new home-building to an absolute bare minimum of around 100,000 new units (half of what is needed to cope with population increases resulting from longer life expectancy, even if net immigration is reduced to zero). Quite why they are doing this is a mystery to me.

3. The result of this is that the value of a fully connected building plot is around £100,000 (i.e. average price of a house minus £80,000 for materials and labour). The average price paid for the planning permission alone was recently given as £55,000 per plot , to which you add the profit/risk element of building the houses as well as the cost/value of the roads, the utility connections and so on.

4. Thus, under current rules, you can make a massive windfall gain when you get planning permission - as Sobers will confirm, the value of farm land (about £5,000 per acre) goes up to £500,000 an acre with planning (assuming ten homes per acre).

Thought Experiment

Would things be better, the same or worse if the government tried a different tack: it could completely scrap all planning restrictions, so that any land owner could build as much as he liked on his own land BUT, to prevent farmers at the edge of conurbations (where most of the new homes would be built) from making massive windfall gains and building willy-nilly, the government could draw up a short list of approved suppliers of building materials (let's say Jewson, Travis Perkins and Wolseley) and allow them to only sell sufficient materials to build 100,000 new houses (of pre-approved size and build quality) each year?

Supplementary question: let's assume an average semi in the South East sells for £300,000 and farm land in the South East currently sells for a bit more than average - around £10,000 - and labour costs to build one house are £50,000 (with other bits and pieces like road, utility infrastructure costing £45,000 per house, as above). How much would the construction materials supplier be able to charge for the building materials for one house, i.e. what would the farmer be prepared to pay for the materials to build a house and still make a profit?

My guess, FWIW, is about £200,000 (click and highlight to reveal)

14 comments:

Bayard said...

"The current Lib-Con government is determined to keep new home-building to an absolute bare minimum of around 100,000 new units (half of what is needed to cope with population increases resulting from longer life expectancy, even if net immigration is reduced to zero). "

What about bringing existing empty houses and flats back into use? That would make quite a difference, too and the increase in population due to longer life expectancy is going to stop, once the baby-boom hump has worked its way through the population pyramid (or fir-tree, or whatever it currently looks like). The House-builders' Federation was quite successful in persuading the last gov't that repairing old houses was a Bad Thing and that they should be pulled down and new ones built in their place (although such activity keeps both NIMBYs and the HBF happy, so it's likely to continue).

Mark Wadsworth said...

B, you've not really answered the questions, but hey.

This whole 'bringing empty homes back into use' can be done in two ways:
a) Land Value Tax, which allows govt to reduce other taxes, so is a win-win.
b) Offering massive grants to owners of vacant and derelict homes, which has little effect apart from transferring money from productive economy to landowners.

Bayard said...

"B, you've not really answered the questions"

I am Prime Minister, what do you expect?

"This whole 'bringing empty homes back into use' can be done in two ways:"

Well, three, actually: c) charging full council tax on empty properties. Fair enough, give the owner 6 months to sell/find a tenant, then bang, full council tax, no exemptions.

neil craig said...

Much of my problem with government "planning" of housing is that also prevents modern mass production techniques. Houses need not be built of bricks an mortar put together with 2 man years of work. Modular, off site manufacturing can get you a house delivered for $50-60,000 (£38,000) but you won't get planning permission for that. http://www.costhelper.com/cost/home-garden/modular-home.html

Our housebuilding is as backward as car manufature was before Henry Ford started using production lines.

Mark Wadsworth said...

B, empty home discounts for council tax is only a few hundred quid a year, that few hundred quid won't make much difference. LVT could be a few thousand quid a year, that will make a difference.

NC, the whole system is indeed completely nuts :-)

Bayard said...

"B, empty home discounts for council tax is only a few hundred quid a year, that few hundred quid won't make much difference"

I beg to differ, those "few hundred quid"s start adding up. Say you are a commercial landlord with twenty shops, all of which have a flat above them which you can't be arsed to let out because you're getting a good return from the shops. Suddenly, it's not a few hundred quid a year, but a few thousand quid a year extra coming off your bottom line.

Mark Wadsworth said...

B, if the owner of [one shop + flat above] is happy to leave the flat vacant and forego the thousands of pound a year potential rental income, then he will not care about paying an extra £200 quid in Council Tax.

If he owns a thousand such [shops + flats above] and is happy to forego many £ millions in rental income, then he will still not care about a few hundred thousand quid in extra council tax.

According to Planet Daily Mail, council tax has doubled over the last ten years or so, has this made any impact on the number of empty properties? Nope.

chefdave said...

I expect it would lead to more housing being built in the most sought after locations because the owners would be able to outbid others and still make a "profit".

I don't know whether this would be better or worse, maybe a bit better.

Supposing the floor was £10k for a land owner (the price of farmland) £30k for the building materials and the price of a semi was £300k this gives them £240k to divide between thmselves. Presently it all goes to the landowner, but this change would transfer some of the wealth to the building supply firm, they now hold the golden ticket.

I doubt landlords would be cutting their own throats to sell though, they could just wait for another change in legislation

chefdave said...

Edit; £260k not £240k. I can do maths, honest guv!

Mark Wadsworth said...

CD, I knocked off another £50,000 per house for the cost of new the road, the water, gas, broadband and 'leccy connections, plus a risk/profit margin for the builder and the cost of a few brown envelopes = £200,000.

Why would the landlords wait? Those 100,000 homes would use up about 0.02% of available farmland each year, why would they not fill their boots; if the law changes back again, they still have 99.98% of their land left to sell at the old price of up to £2 million an acre.

chefdave said...

They wouldn't wait, those houses would be built in a jiffy but the interesting bit is how the surplus is divided up.

If there's £200k of surplus (max) but the landowners can only access it by dealing with an approved supplier Jewson's will take as much as they can.

If I was one of the approved suppliers I'd be tempted to auction off the housing materials to fetch the best price, obviously I can't give you an exact figure as it depends on the whims of the landlords of the day.

All I can say is I would expect housing to be built in the best locations as those landlords have more money to play with.

Robin Smith said...

There are a million empty homes. Mostly in valuable location. Ready to live in.

We do not need any new ones.

Simple. Observed. Facts.

Robin Smith said...

Oops forgot to say we do not have a free market for B&M, nor most things any more. The term Free Market really means Monopoly Market. What we WANT is a free market sure!

The largest suppliers have effective monopolies on that supply though buying, staying, branding power and taxes that benefit the monopoly more than the entrepreneur and worker. The effects are less competition, higher prices, poorer quality goods.

Not sure if this matters in your example. But we should not forget it.

Mark Wadsworth said...

CD, yup, landowners in the south east would end up paying up to £200,000 for the materials and still make a profit far in excess of the loss of farming income. Sobers out in Swindon wouldn't get a look in.

RS, whether it is a million or half a million is hotly disputed, but more important are all the chronically under-occupied homes (Poor Widows In Mansions), that adds up to another couple of million.

And no, that does not matter in this example. There are monopoly profits to be made, it's just that under this Thought Experiment, they go to the B&M wholesaler.