Continuing with the theme of cross-subsidy funding for affordable housing, here is another article from the United Kingdom. This one is about greenfield development, which refers to building new homes on sites that had a different use, most often agriculture. There can be space to add a lot of homes. In greenfield developments, the cross-subsidy comes when some of the proceeds from the sales of market rate homes covers some of the cost of building homes that are offered at ‘affordable’ prices.
Part of the attraction of greenfield sites is the extraordinary increase in land value when the permitted use of the land shifts from agricultural to residential. The businesses that can tap into the rise in land value need to be large enough to satisfy lenders that purchasing land for development is worth the risk.
The article linked below tracks the production records of housebuilding businesses since the 1970s. Governments have issued construction targets, but the number of houses built has consistently fallen short.
Although the public targets aren’t met, the largest housebuilders are very successful, posting year over year increases in profit year after year. To understand how this happens, the article’s authors, Chris Foye and Edward Shepherd, looked at the business records of the three largest housebuilders, who these days are building 25% of all homes on greenfield sites in England.
Foye and Shepherd found that house prices have gone up but the value of land has stayed relatively flat. The price of land has contributed less to the rise in house prices than would be expected.
The large housebuilders must decide how many houses to build. Public policy is calling for more houses, but public policy is not the only consideration in play when deciding when to build. Profit is another and the one that in good business practice must rise to the top. Annual reports to shareholders confirm that decisions to build are based on profit over volume.
This creates a very difficult situation for local authorities, which rely on the housebuilders to add to the supply of all housing, including affordable ones. With reduced volumes, fewer affordable houses are being proposed and even fewer are being built. Yet because there are few developers in a local community, planning officials have limited ability to push to build more affordable homes.
This article is about the three largest housebuilders. It raises a question: do the seven next largest firms follow the same business practice? Along with the big three they are responsible for 50% of all greenfield development.
The article is about housebuilding in the United Kingdom, but is this business strategy limited to that country? The big three are international businesses and there are other jurisdictions where housing starts are falling well short of housing need.
Read more in The Conversation: How big UK housebuilders have remained profitable without meeting housing supply targets
For a deeper dive, read the full report at CACHE: Why Have The Volume Housebuilders Been So Profitable?
