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What follows may sound completely ludicrous, and so it should. Persimmon, the country’s largest housebuilder, has a strong claim to be Britain’s Google. No, Persimmon has not developed a world-changing algorithm. It is not experimenting with new technologies. Its business ethic is not to solve problems first and work out how to monetise them later. Persimmon lays bricks and runs copper pipes under floors, just as housebuilders have done for ever.
So what does it have in common with the world’s digital pioneer? The answer is in the accounts. Last year Persimmon reported an operating profit margin of 28.2 per cent and had £1.3 billion of cash. Alphabet, Google’s parent company, managed a margin of 24 per cent and had $100 billion of cash. The similarities go on. Jeff Fairburn, chief executive of Persimmon, pocketed £75 million while Sundar Pichai, Google’s boss, made roughly £270 million.
It doesn’t take a software engineer to see something is wrong with that picture. Housebuilding is not complicated. Builders buy land, secure planning permissions, put up a few boxes and flog them. It’s been done for hundreds of years. There should be zero barriers to entry. Instead, the accounts resemble those of the oligopolistic tech giants — complete with offensive bonuses.
With a cost of capital starting around 5 per cent and margins around 20 per cent, builders today are money-printing machines. Choosing to invest in Google or Persimmon, on these metrics, would be tough. Or perhaps not. Competition regulators are going after big tech but no one gives two hoots about the builders.
Last week they were let off the hook again. Sir Oliver Letwin’s “review of build out” rejected claims that they were causing “intentional delay” to prop up prices, despite its finding that build rates are just 6.5 per cent of a site a year. Development is slow, the former Tory minister concluded, due to the “homogeneity of the tenures on offer”. In other words, builders choose to build expensive homes and develop them no faster than the demand for that limited product can absorb. It may not technically be land-banking, but it is rationing by price selection.
Sir Oliver’s remedy is to require a mix of build-to-rent, shared ownership and affordable housing. Broader appeal would generate more demand and thereby speed up supply, he argued. To ensure diversity, and prevent builders erecting premium houses where smaller homes are needed, local authorities should cap the development value of big sites at ten times “existing use value”.
It’s a clever proposal but the bureaucracy may play into big builders’ hands. Small firms don’t have the pockets to absorb the costs of our arcane planning system. So much so, they have been dying off. In the 1980s, 10,000 small builders produced 57 per cent of new homes. Today, 2,800 produce 27 per cent.
A more frank assessment than Sir Oliver’s would be that the housebuilding market has been stitched up since the consolidation of the early 2000s. Mergers concentrated power with the big nine, who used land acquisition efficiencies to lift profits while cutting supply. As planning grew more complicated, and big builders trapped sites under option in their “strategic” land banks, smaller developers found it harder to compete.
Today the big builders are the only game in town and, as Sir Oliver acknowledged, the only way to increase supply is to play their game and raise demand. Hence Help-to-Buy, a subsidised mortgage scheme to attract buyers. Yet, as the Google-type returns attest, the ultimate beneficiaries have been the builders. There is nothing sophisticated going on here. Housebuilding is a plain old oligopoly protected by a backwards planning system that raises barriers to entry, and needs to be shaken up.
Philip Aldrick is Economics Editor of The Times