Opinion: Brokenshire's £1bn plan to get SME developers to build more houses won't work if the economy is unstable

Simon Gerrard
James Brokenshire, the new Secretary of State for Housing, Communities and Local Government

While it may seem as if all of our politicians are spending most of their time fretting over Brexit, James Brokenshire, the latest secretary of state for housing, communities and local government, recently announced an initiative to encourage more small and medium-sized (SME) developers into the market.

The Government will be partnering with Barclays to provide £1bn of loan finance via a Housing Delivery Fund, to help support SME developers whose contribution to the sector is being dwarfed by the larger players.

The intent behind this is to be welcomed. The Government reported that 70 per cent of new homes are built by the top 10 housebuilders, but it is entirely possible that this figure is even higher. However, the reality of this fund leaves much to be desired. Not only do I believe it is likely to make little impact, but it could actually even encourage potential developers to make risky decisions.

insecurity is most likely to ward off SME builders from re-entering the market

The problem is that the fund appears to be for fairly high loan-to-value lending, at quite an expensive rate – a loan type that developers can typically already access through hedge funds and private banks. This type of lending can be very dangerous in an insecure market.

Developers are buying land and assessing their gross development value over a certain time period, so to take such loans they need to be sure that the housing market will stay level. While this is tenable over a longer 10 to 15 year period, short term fluctuations will make building schedule planning much more difficult. Add in the hysteria and potential value fluctuations due to Brexit, and irresponsible commentator predictions, and you have the perfect storm.

The new fund is unlikely to be attractive for cautious or responsible developers. More beneficial would be cheaper or subsidised lending in order to level out price fluctuations that may well occur as a result of Brexit, and to do lower risk lending at a cheaper rate to encourage good SME builders who can then increase their productivity.

If the Government are serious about supporting SME developers, then the key factor they should be working to support is market stability. Mark Carney’s recent comments that Brexit could cut house prices by a third is exactly the type of scaremongering that destroys confidence in the housing market for the public and makes costly loans unwise for potential developers.

While most will realise that comments such as Carney’s are excessive, it will undoubtedly give the impression that house prices are unstable, which generally they are not, as people always need to move.

Despite Brokenshire’s best efforts, and the dangling of funds as a tasty carrot, insecurity is most likely to ward off SME builders from re-entering the market.

In the lead up to Brexit, the best thing the Government can do to support the market and attempt to alleviate the housing crisis is to focus on encouraging stability, and eventually the developers will build.

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