On one residential development I worked on, the winning construction tender was approximately £4.8 million. The project subsequently missed the commencement deadline associated with the transitional arrangements for changes to the Building Regulations, meaning that the design had to be revisited to comply with the newer requirements of Parts F, L, O and S.
By the time those changes had been designed and incorporated, the construction cost had increased to approximately £5.3 million. That is an increase of around £500,000, or more than 10% of the original tender price. It also excludes the tens of thousands of pounds subsequently spent on consultants redesigning and coordinating a scheme that had already been designed and competitively tendered.
The development did not get any bigger. It did not produce more homes. The homes did not suddenly become 10% more valuable. The project simply became more than half a million pounds more expensive to deliver.
That experience neatly encapsulates what I believe is one of the fundamental contradictions in British housing policy.
The Labour Government has committed itself to delivering 1.5 million new homes in England during this Parliament. Like similar promises made by previous governments, the objective is difficult to criticise. Britain has a serious housing shortage, affordability is a major problem and a sustained increase in construction activity would provide a significant boost to the wider economy.
Construction supports an enormous ecosystem of contractors, subcontractors, manufacturers, consultants and suppliers. A genuine housebuilding boom would create employment, generate tax revenue and produce an asset that the country desperately needs.
The difficulty is that announcing a housing target is considerably easier than creating the commercial conditions necessary to deliver it.
Developers do not build homes because a government has established a target. They build because, after acquiring land, obtaining planning permission, financing the project, complying with regulation, constructing the development and eventually selling or letting the completed properties, there is sufficient financial return to justify the considerable risk involved.
Increasingly, the economics simply do not work.
Planning: Where Good Development Can Spend Years Going Nowhere
Anyone involved in development will recognise how difficult the planning system can be. Depending upon the site, an application can require architects, planning consultants, ecologists, arboriculturalists, transport consultants, drainage engineers, energy consultants, daylight and sunlight assessments, biodiversity assessments, flood-risk reports, contamination studies and heritage advice before construction has even been considered.
Many of those requirements have perfectly legitimate purposes. The problem is their cumulative cost, the time involved and, above all, the uncertainty.
I experienced a particularly frustrating example on a development on Newmarket Road in Cambridge. The building was a derelict former commercial property that had previously been used for educational purposes. A developer acquired it with the intention of converting it into student accommodation, in a city where there is considerable demand for additional student housing.
The proposal would have brought a redundant building back into productive use while creating accommodation in an area where it was needed. The planning application was nevertheless rejected because the local authority wanted evidence that the building could no longer viably be used for educational purposes.
The developer was consequently required to market the property for approximately 18 months to establish whether an educational company, organisation or charity might want to occupy it. During that period there was not a single meaningful enquiry.
That outcome was hardly surprising. The property was derelict and required substantial remedial works. There was insufficient local demand from educational occupiers willing to take on the building, while many of the organisations that might theoretically have occupied it would have struggled to fund the necessary refurbishment.
Eventually the point had been proven and the subsequent application was granted. But what had actually been achieved by those 18 months?
The building remained derelict. No educational organisation occupied it. No student accommodation was created. No construction work took place. Meanwhile, the developer continued to incur holding costs, finance costs and professional fees while capital remained tied up in an asset producing no return.
The planning system had required the developer to spend a year and a half proving what the market could arguably have demonstrated at the outset: there was no viable educational demand for the building.
This is an important point because planning delay is not merely an administrative inconvenience. Planning delay is a development cost. Those costs ultimately have to be absorbed somewhere within the development appraisal.
When Planning Policy Starts Competing With Housing Policy
An even more striking example came from my involvement in a regeneration scheme for Camden Council.
This was not a luxury residential development being pursued by a speculative developer. It was a council-led regeneration scheme intended to deliver 44 new homes, including social-rent housing for people at the sharpest end of London’s housing crisis.
The scheme was already operating close to the limits of financial viability. During the planning process, however, increasingly onerous landscaping, greening and biodiversity expectations began adding further cost.
Requirements included green roofs to relatively small new entrance structures and significant pressure to retain an existing tree. Retaining or relocating that tree was estimated to cost approximately £30,000, despite there being no guarantee that the tree would survive the process. There were also biodiversity and greening expectations that went beyond the standard minimum requirements applying to the development.
There is nothing wrong with wanting greener developments. Biodiversity, mature trees, good landscaping and attractive external spaces undoubtedly improve our towns and cities. But planning is supposed to involve balancing competing public interests, and viability has to form part of that balance.
Every individual request can sound entirely reasonable when viewed in isolation: a green roof here, additional planting there, a retained tree, another assessment, another consultant and another design revision. Unfortunately, developments do not have separate budgets for each individual planning aspiration. There is only one budget.
In this instance the cumulative requirements were adding cost to a project already sitting close to its viability limit, to the extent that the delivery of the wider 44-home regeneration scheme was potentially threatened.
That creates an uncomfortable public-policy question. If environmental enhancements become sufficiently expensive that they threaten the delivery of social-rent housing, have we genuinely achieved the best environmental and social outcome?
This is not an argument for abandoning biodiversity requirements or cutting down every inconvenient tree. It is an argument for proportionality. An environmentally perfect development that is financially incapable of being constructed has achieved very little.
It has produced a drawing, not homes.
The Regulatory Cost of Building a Modern Home
Planning permission is, of course, only one part of the process. At the same time as governments have demanded dramatically more housing, the regulatory specification of those homes has continued to increase.
The residential project I referred to at the beginning of this article demonstrates how significant that cost can be.
The project had already been designed and competitively tendered at approximately £4.8 million. Missing the relevant transitional commencement deadline meant significant elements of the design had to be reconsidered to comply with the newer requirements under Parts F, L, O and S of the Building Regulations.
These changes covered ventilation, energy efficiency, overheating and electric-vehicle charging infrastructure, and formed part of the wider progression towards significantly more energy-efficient new homes.
By the time the necessary changes had been incorporated, the construction cost was approximately £5.3 million: more than a 10% increase.
That did not include the substantial additional professional fees involved. Architects, M&E engineers, energy consultants and other members of the design team had to revisit completed work, undertake further analysis and coordinate revised designs through a scheme that had already been tendered.
Again, the objectives behind these regulations are perfectly understandable. Homes should be energy efficient. They need appropriate ventilation. Overheating is a genuine concern. Moving away from fossil-fuel heating and preparing our infrastructure for electric vehicles are reasonable long-term policy objectives.
The Future Homes Standard continues that direction of travel, with new homes expected to achieve substantially lower carbon emissions and technologies such as heat pumps and solar panels becoming increasingly common. Likewise, meeting Part O can require careful consideration of glazing, solar gain and ventilation strategies, with some developments requiring increasingly sophisticated solutions.
But air-source heat pumps cost money. Solar panels cost money. Additional insulation costs money. More complicated ventilation systems cost money. Testing, commissioning, specialist design and certification all cost money.
The question government rarely seems willing to confront is not whether each individual regulation is desirable. It is what happens when all of those requirements are imposed cumulatively on the same development.
My experience gives at least one answer: a competitively tendered £4.8 million project became a £5.3 million project before the additional redesign fees were even counted.
You Cannot Keep Increasing Cost While Demanding Greater Affordability
This would perhaps be less problematic if residential values were increasing sufficiently quickly to absorb those additional costs. In many areas they are not.
House prices have been broadly stagnant in real terms while construction costs, professional fees and finance costs have remained stubbornly high. Developers are therefore being squeezed from both directions: the market determines what purchasers can afford to pay for the completed home, while government policy and construction economics determine what it costs to produce it.
The difference between those two numbers is where development viability exists.
Developer profit is sometimes discussed as though it is an unnecessary surcharge that could simply be removed to make housing cheaper. In reality, profit is the return for assuming considerable development risk. A developer can spend millions acquiring land, progressing design and planning applications and financing a project before receiving any return whatsoever.
If the anticipated margin does not adequately compensate for that risk, the rational response is not to build at a loss. It is not to build.
This is particularly important in a relatively flat housing market. Government can increase the regulatory cost of constructing a home, but it cannot simply decree that the market value of that home should increase by the same amount.
Eventually the development appraisal stops working.
The Pressure Eventually Reaches the Contractor
When that happens, the pressure does not disappear. It travels down the construction supply chain.
The lender still requires its return. The landowner still expects an acceptable land value. Planning obligations still need to be met. Building Regulations still have to be complied with. Consultants still need paying and the developer still requires a sufficient return to justify proceeding.
One of the few remaining variables is therefore the construction price.
Contractors are consequently under enormous pressure to tender competitively to secure work. Margins become thinner, risk allowances are reduced and subcontractors are squeezed. A contractor may win a project at a price where relatively minor problems can eliminate the anticipated profit.
A programme delay, unexpected design development, inflation, a disputed variation or the failure of a key subcontractor can rapidly turn a small anticipated margin into a substantial loss.
It should therefore surprise nobody that construction consistently features at or near the top of UK corporate insolvency statistics.
There is a relationship between these issues that is too rarely acknowledged. Planning delay increases development cost. Regulation increases construction cost. High interest rates increase finance costs. A subdued housing market restricts development value. Developer margins are squeezed and, in turn, contractor prices are squeezed.
Eventually contractor margins disappear altogether.
When we subsequently ask why another established contractor has entered administration, perhaps we should look further up the chain.
Higher-Risk Buildings: When Time Becomes Another Regulatory Cost
For developments involving higher-risk buildings, particularly in London and other major cities, there is now another significant consideration: the Building Safety Regulator and the Gateway approval process.
The reasons for strengthening building safety regulation following the Grenfell Tower tragedy are overwhelming. Nobody working responsibly within construction should advocate returning to a system in which building safety receives inadequate scrutiny.
However, rigorous regulation and efficient regulation are not mutually exclusive.
Gateway 2 requires building control approval before relevant building work on a higher-risk building can commence. In principle this provides an important check that the design is sufficiently developed and compliant before construction begins.
In practice, however, delays within the new regime have created considerable programme uncertainty.
For a developer, an additional period waiting for regulatory approval is not simply dead time. Land may already have been acquired, development finance may already be accruing interest, consultants remain engaged and contractors may be attempting to reserve labour and resources.
A project can therefore be spending considerable sums every month without generating a penny of revenue.
Again, this becomes part of the development appraisal.
Building safety must be non-negotiable. But government also has a responsibility to ensure that the regulatory machinery established to provide that safety operates predictably and within reasonable timescales.
If Britain wants developers to invest billions of pounds building new homes in its cities, they need reasonable certainty about when those developments will actually be permitted to start.
The Missing Word in Housing Policy Is Viability
None of these arguments should be interpreted as opposition to good planning, environmental protection, energy efficiency or building safety. I work within these systems and understand why many of the requirements exist.
The problem is that government tends to consider each policy objective independently while the developer has to pay for all of them collectively.
Protect educational uses. Increase biodiversity. Retain trees. Improve landscaping. Reduce carbon emissions. Improve airtightness. Provide better ventilation. Prevent overheating. Install EV infrastructure. Improve building safety. Increase affordable housing provision.
Considered individually, there is a rational argument for almost every one of them.
But eventually somebody has to add up the bill.
That is what appears to be missing from the political conversation surrounding Britain’s housing crisis.
We continually hear about the number of homes government wants constructed. We hear considerably less about what government intends to do to make those homes financially viable to construct.
If Britain genuinely wants a housebuilding boom, housing policy needs to concentrate not merely on targets but on the conditions necessary to achieve them. Planning needs to become faster, more predictable and proportionate. Environmental requirements need to recognise viability alongside environmental benefit. Building regulation needs to improve standards without losing sight of affordability, and the Building Safety Regulator needs to combine rigorous scrutiny with commercially realistic timescales.
Most importantly, we need to stop treating developer and contractor profit as though it represents a failure of the system.
Profit is what makes the system function.
Without sufficient developer margin, developments remain unbuilt. Without sufficient contractor margin, construction businesses become insolvent. And without financially sustainable developers and contractors, government housing targets are ultimately little more than political aspirations.
Successive governments have promised Britain a housebuilding revolution. Labour’s target of 1.5 million homes is simply the latest and perhaps most ambitious version.
I sincerely hope it succeeds. Britain needs the homes and the construction industry would benefit enormously from the investment.
But you cannot solve an affordable housing crisis while continually making homes more expensive to build. You cannot demand faster delivery while allowing developments to spend years navigating planning. You cannot expect developers to invest when their margins no longer justify the risk, and you cannot continually squeeze construction prices without eventually losing contractors.
If government genuinely wants Britain to build more homes, it needs to spend less time announcing how many homes it wants and considerably more time understanding what it actually takes to get them built.