Lyons Housing

October 24, 2014

Last week Sir Michael Lyons published his review to great fanfare and his recommendations have been generally welcomed. However, for me, he has failed to address the issue of capacity within the construction industry. As it stands, his targets for housebuilding, although absolutely necessary, are unrealistic and undeliverable in the current industry environment.

109,400 homes were built in 2013, and the NHBC estimate the figure will be 110,000 for 2014. The target: to increase the number of homes built annually to 200,000 by 2020 will require a great deal of effort by all parts of the development community.

280,000 “building and construction” companies in the UK employ 2,930,000 people: less than 10 employees per business. It is effectively a cottage industry. There are complex and elongated supply chains and trying to obtain a clear consensus or direction from such a diverse and fragmented industry is difficult. The construction industry will need to expand sufficiently to accommodate the increase in development activity. Sir Michael acknowledges: ‘it is clear that we cannot rely on the volume house builders, as important as they are’.

The report has outlined many measures to help developers build more (from 65,600 last year up to 101,100 by 2020), it also anticipates an increase from SME Developers, who are largely contractors deciding to take on some development risk. A significant increase is also anticipated in the numbers of self-build homes produced, which we feel is very optimistic and there is an anticipated contribution of 8,700 from institutional PRS, we will have to wait and see if that transpires, but what interests me the most is that Lyons sees Councils and Housing Associations as being key to reaching the 200,000 figure. The anticipated figures require housing associations and councils to DOUBLE the number of homes they are building at present from 22,400 in 2013 to 50,200 in 2020.

The current capacity of the industry is such that producing 110,000 homes per year is stretching current resources so the idea that we can double the industry’s output in 5 years is unrealistic and even with a concerted focus on training and incentives to encourage more people into the industry, the target is unreachable.  The construction industry has always relied on immigrant labour, whether this was largely Irish labour, Polish labour or an increase in Bulgarian and Romanian labourers, it will still not be enough. The demographic of the construction industry is such that approximately 25% of the workers are within 5 years of retirement, and since 2008 the industry has shed labour, with the older more experienced workers “hanging on”. There has been little or no recruitment in the last 6 years.

Training is also at a low level in the industry, skills will take a great deal of time to develop. In the 2013 report on UK Construction: An economic analysis of the sector by the Department for Business Innovation and Skills:

Training and development activity in the construction sector is low and likely to be driven by the high number of self-employed who often face an ‘earn or learn’ dilemma. Only 17% of sole traders had funded or arranged training for themselves or indirect staff compared to 41% of employers in the wider construction sector. The self-employed are half as likely to participate in training as employees in the sector. Many businesses in construction do not have an established training plan in place. Only about 27% of businesses in wider construction said they had a training plan and 19% had a training budget. This compares to about 38% and 29% respectively for businesses across all UK sectors on average.

An increase in off-site manufacture will help, as will the better integration of supply chains, more efficient procurement and technological advancement in BIM and other modelling tools. However the industry does not currently have the capacity to deliver the numbers talked about in the Lyons Report.

The report also highlights issues of Land supply and Finance but each deserve their own separate discussion.

For Lyons’ ambitions to be achieved, the capacity of the industry will need to be significantly enlarged. We will need a increase in recruitment, a dedication to training, incentives to retain the older and more experienced members of the workforce and even after all of those measures we will need to attract labour from abroad.

The report discusses unlocking the ambitions of Housing Associations but I do not see this doubling of production from Councils and Housing Associations as being possible without having the right environment to encourage more development risk to be taken. We are all agreed on the desperate need for more housing production, however to achieve the ambitious ends described by Lyons we will need to create an environment in which development can take place and the essential components of land supply, finance and delivery capacity are all present.