House builders’ profits explode 5x in 6 years
Profits at major house builders suggest that building more affordable homes in London is possible
Currently, private developments in London are only delivering 13% of their new housing as affordable housing. Most London boroughs have a requirement that 40–50% of housing on new developments is classed as affordable.
The argument often put by the house-building lobby is that developers struggle to make a profit on their developments. The argument that follows, is that if the Mayor or other planning authorities insisted that house builders build the required amount of affordable housing, building would stop because developments would be rendered financially unviable.
Many policy makers in the capital appear to be have been captured by this argument. In conversations with officials and consultants responsible for implementing planning policies, affordable housing requirements are often described as an ‘aspiration’ that must be ‘flexibly’ to encourage development.
A recent exchange along these lines with a policymaker in City Hall prompted me to go and look at the facts.
I looked at the annual accounts of the top five house builders in the UK over the last five years. As can be seen clearly in the table below, profits have exploded. In total, the top five house builders in the UK have seen their post-tax profits rise from around £354m in 2010, to £2bn in 2015. This is an increase of 5.5x over 6 years.
What is also remarkable is that in 2010, which is a year when house prices were in decline, only one house builder in the top 5, Barratt, made a loss. The others were all making profits, even in one of the worst years in recent times for the industry.
The sharp increase can be seen even more clearly in this chart which shows the cumulative profits of the top five.
Some of this profit can be explained by an increase in house building. More building means more profits. However if we look at the sales margins of developers, the amount they make on each individual sale, these too have increased sharply since the dark days of 2010. In all, house builders’ sales margins have increased by around 10% from around 15.5% to 25% on average, as can be seen by the table below.
It is also worth noting that the profits seen by Berkeley Homes are way out in front of the rest of the major house builders. One reason for is that Berkeley concentrates on London, where the out of control housing market allows for even greater profit levels.
Of course, it has to be said that these are gross numbers for a selection of developers. We can not derive any conclusions from these figures for any individual development proposal. However, these figures are a sum of the profits of many individual developments, and therefore they do suggest that the housing industry’s widespread use of the argument that thin profit margins require a reduction in affordable housing requirements may not be all that it seems.
What can be said is that profits in the house building industry are very healthy indeed, and on a policy level, there is clearly little need to reduce affordable housing requirements to encourage development. Indeed it could be said that one reason why profit levels are so high is because affordable housing obligations are not being enforced properly, and the high profits the industry is currently experiencing shows that there is clearly the potential for more affordable housing to be built.
Originally published at www.ourcity.london on November 19, 2016.