House prices and rents are not high enough to build more....

 Labour entered government 2 years ago with the promise of building 1.5 Million net new houses during their 5 year term in office. Simple maths - but too challenging for Labour politicians, that's 300,000 per year.

Year 1 = 208,600.  Year = 199,500

Now this is advanced maths - way beyond any Labour politician's capabilities - they now need to build 364,000 per year instead of 300,000 as they have failed to meet target in years 1 and 2.

So why are Labour failing at this so badly?

I begrudgingly have to admit the problem is not entirely Labour's fault....

For a basic standard of house, construction costs are now around £1,800 per square metre. That's roughly 50% on labour and 50% on materials. An affordable home is around 90 square metres so the construction costs are £162,000.  That assumes zero land costs and zero planning bureaucracy.

Let's assume Labour planned to build 1.5 Million affordable homes.  They had the land already and planning costs were waived.

So we are talking about Labour spending £243 Billion to do this.

Hmmm.  Defence spending is currently £66 Billion and they couldnt find the money to increase that by inflation.....

Problem 1.  There isnt the money for this.

Solution.  Borrow the money...

Let's assume they borrow £243 Billion to build these houses.  Let's treat it like a mortgage and take out 30 year bonds to finance this.  The current borrowing rate is 5.7% on 30 year gilts.

So we are talking £13.8 Billion in interest payments against the gilts. So this equates to £9,300 per property to service the debt each year.

Interestingly private landlords can borrow to buy a rental property at lower rates than the government - a quick search shows rates are around 5.24%.  I think that says more about what a bad risk the UK government  has become that there's a premium compared to the man on the street.

The average rent charged by councils for a 2 bed house is £650 per month so a rental income of £7,800 per year. Of course there are costs council's incur such as insurance,  safety checks, maintenance etc which is deducted from the rent so this £7,800 is not 100% available to service the finance costs.  I'm inclined to make this a level playing field with private landlords and introduce section 24 for government so that these finance costs are not allowable.....

Private landlords will not be the answer to achieve the house building target - they are able to do basic maths unlike Labour politicians and work out the business case does not make sense.

However it's pretty obvious that the rent does not cover the finance costs. The government is losing money on every property they build and will do every year for 30 years of the loan term.  There's no capital repayment factored into this - this is effectively an interest only mortgage so £243 Billion will have to be found in 30 years time. Simple answer - borrow yet more money in 30 years time.....

However the problem is actually worse in areas where there is demand for social housing.  Council rents in London are £715 per month but land prices are higher and so far we've been ignoring these.  Build social housing in high demand areas and the equation means you're losing even more money....

So let's factor in land. In London land is around 60% of the overall cost. So let's assume we build the house for £162k then the land will be an additional £243k making the house price £405k. The cost of borrowing at 5.7% is therefore £23k per year yet we are renting it out for £8,580 per year....

So the gross rental income will be £8,580. Assuming 90% of the rental income goes towards servicing the debt. If we increase rents by 3.5% each year then the loan could be repaid in about 70 years....

The average house price for an existing property in the North of England of 90m2 is £180,000.  Obviously the house is built on land so you are buying land. To build this house from scratch is £162,000 and the land has a value so in reality houses are selling for less than it costs to actually build it.  Houses are too cheap in many parts of the UK. Some of my rental properties would sell for £180k but the cost to build them is nearly £500k -  I therefore have to  insure them for £500k. Some areas are too cheap therefore it makes zero sense to build more properties in these areas.

So what's the answer?  Either make house prices and rents increase to restore balance or to reduce the construction costs.

The first option is distorting the market - likely to backfire.

Reducing construction costs would require the trades to be paid less (which probably means they will find something else to do) or material costs need to fall (unlikely given Labour are unwilling to reduce the price of energy or reduce the burden on businesses).

Therefore that's unlikely to happen.  Prices are fixed and so are costs.

Maybe robots building houses is the answer?

I just hope Labour continue to fail at this house building programme - if they succeed it means the productive quarter of society will be paying yet more taxes to subsidise  housing for the next 3-4 generations.