By Prof. Ken Gibb, Policy Scotland, University of Glasgow
A recurring theme in housing supply debates around the UK in recent times has been the need to shift the preponderance of new housing supply from the large volume house builders towards small and medium-sized builders. This was one of the features of the Lyons Review  and has been taken up enthusiastically by Labour.
What is the diagnosis of the problem? Lyons identifies the long term collapse of the SME builder in England: in the 1980s there were 10,000 smaller builders developing 57% of output; today there are just 2,800 producing only 27% of output (the definition of SME here is an annual output below 500 units). The Lyons Review argues that not enough land is coming forward for housing in part because of the incentives to trade land and since the business model of larger builders is premised on limiting the rate at which sites are built out. Moreover, the process of merger among the larger builders has not led to more output but rather an increased phasing effect in existing sites. At the same time as the economy recovers there is less small firm capacity to take on smaller sites.
Lyons argues (chapter 7 of the review report) that the SME sector is crucial to capacity but most adversely affected by financial constraints, lumpy cash flows and lack of access to decent sites. But they are more flexible (agile – according to Lyons), and can draw on local knowledge and innovation (a similar argument is made for local social housing providers). The Lyons Review argues that intervention to support smaller builders will continue to be required because the evidence suggests a secular trend over 25 years increasing constraints and inhibiting the small house builder. They point to three sets of costs falling heavily on the SME builder: the disproportionate burden on smaller companies of professional fees within the planning system, access to and the cost of finance; and, the impact on costs of rising building standards.
While Lyons seeks to encourage volume builders to do much more through planning reforms, new institutional support and partnerships (not the subject of this post), they also seek to implement a package of reforms specifically to support SME builders and overcome the long term challenges alluded to above. They want to reduce the risk and the cost of acquiring small sites and also propose government guarantees to enable smaller firms to access finance. The smaller builder would also be supported by other policy trends supported by Lyons such as self—build and community-led building projects. Proposals to fund infrastructure and redistribute planning gain may also, counter-intuitively, help provide buildable sites.
So why now bring up this debate about the decline of the SME builder and the proposals some are making to seek to counteract it in order to build capacity and fill in gaps where volume builders would not address? The main reason is an announcement today (12 January 2015) from the Scottish Government that they intend to target the 2015-16 tranche of Help to Buy funding to support new build homes constructed by smaller scale developers. They argue that a further £30million will help 750 home-owners on new homes priced up to £250,000. Apparently, there are 170 smaller builders already registered to the scheme but as yet had not been achieving the proportion of sales expected. The First Minister, in making the announcement, linked the SME targeting to supporting housing in remote locations and jobs and economic development in rural Scotland. The Help to Buy model involves an equity stake of 10-20% of the property but unlike England (as the press release makes clear) there are no interest charges on the equity as is the case in England, after 6 years, and the sales price is capped at £250,000.
While it is not a huge amount of funding, at a remote or rural scale it may prove to be quite valuable – if linked to local market failure, shortages, community sustainability or unaffordability. But it is not clear that the policy will be so targeted. It is also of course not necessarily the case that many of these small builders might not operate in cities, larger towns and the urban central belt more generally. Logically, there will be more smaller sites where there is more density.
So such a policy may make a modest aggregate contribution but be quite important locally if it does manage to filter through to the kinds of rural areas crying out for new supply. One might say that this is the more acceptable face of help to buy: moderately targeted  and an equity share model based on new build housing (and by smaller builders) rather than an indiscriminant high ceiling guarantee scheme for all housing, old and new.
1. The Lyons Housing Review (2014) Mobilising across the nation to build the homes our children need.
2. Note that the Scottish scheme is targeted only at those who could not access a larger mortgage. The web guidance says: ‘the scheme is only available to those who are unable to afford to purchase the property without the Government purchasing an equity share in the property, i.e. if you are able to afford over 90% of the purchase price through a combination of available mortgage and deposit, your application is likely to fall’.
For further information please click HERE
First published on Professor Gibb’s personal Blog – “Brick by Brick“ on 12/01/15