High house prices rising in working class areas, is it fair and is there anything that can be done?

lookstraightahead

Section62 said:

RMiller95 said:

It is excessive when you look at how much they actually make per property and how big the site is.

Then beat the developers at their own game.

Buy a building plot.  Buy your own materials.  Build your own house.

Then bank the excessive profit you think there is in housebuilding.

(Warning: You may be disappointed with the result)

Exactly what I was going to say.

This applies to lots of things in life.

zagfles

[Deleted User] said:

Shaztastic3000 said:

Sounds like you should move to a South American socialist country 

Prefer the Nordic ones. Problem is, brexit makes moving there much harder. Stuck here now.

Can get very cheap houses in Sweden, outside the major cities. Trouble is everything else there is expensive! High excise duties and VAT at 25% on almost everything. And fancy a 1 hour round trip to buy a bottle of wine (can't buy alcohol over 3.5% in normal shops, have to go to a state run supermaket and you won't find them in small towns/villages).

I love Sweden in small doses but not sure I could live there.

princeofpounds

RMiller95 said:

Daveyjp,

It is excessive when you look at how much they actually make per property and how big the site is. I could understand if it was a smaller amount but the house prices are already inflated as a result of the market which is fair enough, but the inflated price should cover the increase in materials instead of capitalising on a bleak situation for new and first time buyers.

Barratt Developments, as an example, make a net income margin of about 11% on average over the past 8 years or so (just the data I have to hand). More importantly, for those that are financially literate, they make a return on invested capital of about 7-8% on average.

Those are not big numbers at all, though they are just about acceptable it's not great for what is supposedly a roaring housing market. You could almost make an argument that the shareholders of Barratts would be better served by the management stopping building any houses and putting all the money into stock market investments in other companies, though I don't think you would quite win it.

When people look at profit margins, they forget that the really important thing is how much resources you need to put into a business in order to earn that profit, not the margin itself. If you make a widget for £1 and sell it for £10, you might think you have a good money making scheme. But if I told you the equipment to make 100 widgets cost a million quid, you wouldn't bother. So it is with housebuilding, although it isn't so much the equipment that's the problem (that can be leased) but the vast sums required to buy land and then spend years ploughing through multiple iterations of the planning cycle before you get permission to build something commercially sensible. Plus then of course things like materials, until you get to the point where you can sell houses off-plan.

Besides, the vast majority of the profit in housing development comes from getting planning permission on previously non-developable land anyway. You earn a modest margin from building, but really that's just an efficient way to monetise the planning gains you have made.

If you want cheaper houses, then the most effective thing you could do on the supply side is to liberalise the planning system. A quarter-acre of agricultural land costs (relative) peanuts, and building a basic house is not too expensive either. Actually building  (or buying) a property is within reach of couples even on very modest incomes on those terms. But as a society we have decided not to do that for the time being, and so have introduced artificial scarcity. It's up to all of us to decide if the trade-offs are correct.

This is perhaps a less true in the non-urban centre north where land values are a bit cheaper and build efficiency is more of a factor, but it still is a major factor.

Murphybear

daveyjp said:

RMiller95 said:

Daveyjp,

It is excessive when you look at how much they actually make per property and how big the site is. I could understand if it was a smaller amount but the house prices are already inflated as a result of the market which is fair enough, but the inflated price should cover the increase in materials instead of capitalising on a bleak situation for new and first time buyers.

How much do they make per property?

There used to be a saying about new build.  “A third for the land, a third for the build, a third for profit”.  I have no idea if this is true or if indeed it was ever true.  

princeofpounds

Murphybear said:

daveyjp said:

RMiller95 said:

Daveyjp,

It is excessive when you look at how much they actually make per property and how big the site is. I could understand if it was a smaller amount but the house prices are already inflated as a result of the market which is fair enough, but the inflated price should cover the increase in materials instead of capitalising on a bleak situation for new and first time buyers.

How much do they make per property?

There used to be a saying about new build.  “A third for the land, a third for the build, a third for profit”.  I have no idea if this is true or if indeed it was ever true.  

It can be true, but obviously it depends a lot on what house you are building where!

Gross profit on building tends to be lower than a third in most budgets, maybe something like 20% through a cycle unless you hit a bad project. But it varies massively, often due to house price movements.

It can take a year or two to complete a development, and if you contract materials early on in the process and have land prices on the books anywhere from 2-7 years' prior (given how slow the planning system moves) then the construction margin on the development can get way, way higher than what is budgeted. But it's not really the 'true' economic profit as it doesn't account for the opportunity cost of just selling the land for the updated value instead.