How to save 150,000 construction jobs, earn the Treasury £16 billion and create 200,000 new homes

How to save 150,000 construction jobs, earn the Treasury £16 billion and create 200,000 new homes

Imagine that Chancellor Alistair Darling had decided to boost public spending by investing £20 billion of taxpayers’ money over the next two years in buying land and building homes earmarked for eventual open market sale.

What would be the net result?

Well we would have 200,000 more homes to help meet the much talked of housing crisis. We would save about 150,000 construction jobs plus many others in associated businesses.

And what is really tasty is that the deal would pay back all that was borrowed and could earn the Treasury an extra £16 billion, which in turn it could use to reduce public debt.

It sounds too good to be true. But if you make reasonable assumptions (see below) it seems that this is what the numbers tell you. And what is more it appears very low risk.

Here is where I started.

The outline idea is for the Government to fund, through an arms-length private market focused body, the development of 200,000 homes over two years and then to sell them again when the market price recovers, say in 2014.

To get a handle of the cost breakdowns I went to the presentations to analysts made by Bovis, Persimmon and Barratt. These together provided some detail on the typical cost elements of a new-build home. From this I estimated a rough cost model, which I checked against the sort of numbers provided in the Callcutt review.

I took the average selling price of a new home to be £180,000 up to the end of 2007. That is just below peak. I called the gross margin 20% (that is a pre-collapse margin) which put total costs at about £144,000.

The elements will vary place to place, product to product, but an average breakdown looks something like:

  • £39,000 – Land
  • £38,000 – Labour
  • £55,000 – Materials
  • £12,000 – Sales & Marketing and other costs

If the build rate is 100,000 a year that would require about 150,000 people engaged in the house building process.
So taking one year’s output of 100,000 homes. Here are the sums.

Cost to build 100,000 homes for sale at 2007 prices
£14.4 billion

Savings to the Treasury
£0.95 billion: Revenue to the Treasury from the tax taken on labour
£1.20 billion: Savings to the Treasury from reduced benefits of 150,000 fewer unemployed
£1.30 billion: From buying the land at currently reduced prices (a third discount)
£0.95 billion: Reduction in sales & marketing and other costs

Net cost to the Treasury to build 100,000 homes
£10.0 billion

Market price at which to sell
£18.0 billion

To cover the spending over two years would mean borrowing £20 billion, which would attract interest at, say, 5% of £1 billion a year.
That means to cover the period up to when the homes are sold each home would have to generate £5,000 a year in rent, net of other expenses, such as maintenance, repairs, improvements and administration. This is easily achievable.

When the local house prices hit a set target the Government can sell each of the 200,000 homes off at, say, an average of £180,000 returning £36 billion to the Treasury, making a return to the taxpayer of £16 billion. And the Government could waive stamp duty into the bargain.

Naturally life isn’t that simple, there are many clouding factors – not least political – and other influences will impact on the real outcome. You can not expect to pull 150,000 people into the production of homes without other effects, both negative and positive.
But here are a few of the missing effects on the plus side I have not taken into account in the simple calculations above.

• The stamp duty collected on the £36 billion sale of homes
• Social housing gets moving again because so much rests on the production of homes built for open market sale
• The production of 100,000 homes annually would mean materials sales of £5 billion saving tens of thousands of jobs
• There would be a boost in sales of white goods and furniture
• There are a plethora of other social benefits if you keep people employed
• There are other multiplier effects from the greater spending by those in work who would otherwise be unemployed
• I estimate you would save about £2 billion in the cost of training new construction workers to replace those otherwise lost to the industry.
• There would be maintenance work on the houses during the period of temporary market renting

Obviously you can’t simply slap 100,000 homes a year into market renting in lumps up and down the country. There has to be a slightly more subtle approach in terms of balancing the tenure mix.

And yes this action would be in effect a temporary part nationalisation of the housing development market.

But in the jargon phrase of the moment it is an economic stimulus that it “timely, targeted and temporary”.

It would mean setting up an arms-length mechanism to take the politics out of the practical day to day running.

So, will the house building industry really complain? In principle they may. The Home Builders Federation is constitutionally opposed to nationalisation. But in practice they would have homes to build, they may even partner with the Government on a refinement on a plan of this type. This I don’t know.

But most of all there would still be an industry to build upon when the good times return and the Government backs out of building private market homes.

Indeed the Government could take advantage of this model and engage in some much needed innovation in housing development, testing new ideas in private and social housing mix. It could invest in energy efficiency. It could challenge the industry to develop new ideas.

The point I am seeking to illustrate is that those who say public spending in a downturn always leaves the taxpayer with a nasty bill later are just wrong.

It is a quirky, but reassuring, aspect of human kind that when challenges are faced people respond innovatively.

Here are some of the assumptions made:

The figure for the 150,000 jobs to build 100,00 homes comes from rounding down a figure generated by my own calculations and similar figures in the Callcutt review, which would have put the number nearer 185,000.

I am assuming that the average extra benefit claimed by someone made redundant from house building would crudely amount to about £8,000. This is a bit of a stab, as individually circumstances will vary, but likely to be on the light side. To get a feel I looked at a few documents such as the Tax Benefit Model Tables published by the Department for Work and Pensions.

I am assuming for the purposes of this calculation that land on sale at the moment can be bought at a discount of about a third. In the last recession house builders ended up writing down land by nearer 75%. So again the figure probably errs on the safe side.

I am assuming that the tax paid (income tax and both employee and employers national insurance) would amount to about 25% of the total labour cost. This again may be light, but construction has its ways of reducing the labour tax burden.

I have assumed that the price of a house will in reasonable time return to the level of late 2007. Savills latest forecast would suggest a return to late 2007 prices by about 2014.

I am assuming that there could be a squeeze on the sales & marketing and other costs, not least because sales would be deferred, so I reduced that figure by 8%. This is probably light but it makes the sums easier.

I have taken no account of the potential to squeeze downward on the cost of materials, although there is a fair chance to cut between 5% and 10%, or indeed more, without reducing specification. I have assumed that specifications would be improved instead.

I have not put in the tax take from stamp duty, which would equate to a further saving of between £300 million and £500 million depending on sale price assumptions and the prevailing rates at the time.

2 thoughts on “How to save 150,000 construction jobs, earn the Treasury £16 billion and create 200,000 new homes

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