JUST as with small business lending, the house-building market in Britain is deeply dysfunctional. Development is being suffocated, helping to inflate house prices and stoke the red-hot rental market. In some parts of the country, the situation is particularly grim. In the East Midlands, housing starts are barely at a third of their peak levels of the mid-2000s. England needs 260,000 homes to be built annually, but just 112,000 homes were completed in 2013-14. And the biggest deficiency is right here in London.
Currently, the home-building burden is being borne by big developers, but it’s a burden they’re struggling to carry on their own. The big developers have consistently warned that they are not in a position to increase supply sufficiently to meet demand.
That is why party conference season has been adorned with promises to address the chronic shortage of residential property. Ed Miliband has pledged to build at least 200,000 new homes a year by 2020, while the Conservatives have promised 100,000 new discounted homes for young people.
These are welcome steps. But so far, all parties have failed to address one of the major issues holding back private sector house-building: a lack of finance available for small developers, the lifeblood of a healthy market. To meet demand, Britain needs to revive the fortunes of small developers, whose market share has dwindled from two-thirds of new private sector homes in 1988 to just over a quarter in 2013. And a major reason for that is a lack of finance.
High street banks are simply not in a position to meet demand. They are saddled with bad debts from the crisis, while tough capital requirements on property loans limit their lending capabilities – the FCA estimates that “slotting” encumbers banks with up to £3bn of additional equity capital requirements. And IT legacy issues make it difficult for them to lend swiftly to developers.
That is why more developers are using online marketplaces to access finance. These are often better-placed to meet small developers’ needs, and have systemic advantages over banks. For the big banks, lending to small developers often isn’t viable, but for online marketplaces it is a specialty and they excel at it. They’re not hamstrung by legacy issues, meaning they can deliver the same level of credit assessment, but in a quicker and more efficient way. At Funding Circle, we have been inundated with small developers coming to us in search of finance.
It is indicative of a broader trend that is likely to accelerate in the next decade, where more small developers and businesses access finance through online marketplaces. These players are now firmly established in the financial mainstream, and can help to unleash the potential of small developers to play their part in solving the house building crisis.
Of course, better access to finance is only part of the solution. It has to be complemented, for example, by changes to the planning system. Developers of all sizes want and need the system to be simpler, cheaper and more efficient.
But unless this country does more to help small developers, the house-building crisis will persist.