even if you build them, there’s no one to buy them

There is a line about the UK property market that you hear so often it barely registers any more. Politicians trot it out on the radio, charities put it in their reports and journalists write it in newspapers all the time.

You may even have said it yourself. It is: demand for new homes exceeds supply.

It’s an obvious truism, apart from one tiny detail: it is completely wrong.

Millions of people need homes. That’s not up for debate. But confusing need with demand has caused a massive policy failure.

The government is convinced that there’s plenty of housing demand; it plans to build 1.5mn homes by the end of the parliament.

It’s an approach that might be characterised by another often misquoted line that Kevin Costner’s character hears when strolling through his wheat field in a film from my childhood: “If you build it, they will come.”

Actually, the disembodied voice says: “he will come”, referring to the ghost of baseball player “Shoeless” Joe Jackson, who does indeed turn up to play against the spirits of other long-dead baseball legends in a pitch that Costner builds on his farm.

For anyone who hasn’t seen Field of Dreams, I know the plot sounds unhinged. But it’s no more unhinged than looking at the current state of the UK property market and concluding we can rely on developers to build our way out of this mess — which is evidently what the housing secretary was thinking when he donned a red “build baby build” baseball cap.

The sad reality is, despite the hat, and despite Steve Reed putting his job “on the line” if his mission fails, the chance of the government meeting its 1.5mn target is vanishingly small. As a result, it’s thrown itself into planning reform to unstick the system. Planning does need reform, but the reason why not enough homes are being built is because not enough homes are being bought.

Volume housebuilders, which typically build houses rather than flats, only build them as fast as they can sell them. And developers who build blocks of flats need to sell a large proportion “off-plan” before they can even get the finance to start construction.

So while a huge number of people need a home, there are far fewer people who can actually afford to buy one in the current housing market, due to higher mortgage rates and the difficulty of saving for a deposit. The former is measured in the millions; the latter, measured as market-sale completions, is probably stuck at around 120,000 a year across England.

So why don’t housebuilders just reduce their prices?

Because housebuilders will do just about anything — endure any hardship — before resorting to that.

Developers tend to be an optimistic bunch: you need to be when committing large amounts of time and money to projects that might only realise a profit at some point in the distant future. That means you can’t compromise on your prices, especially if you always believe the market is going to recover soon. Just one transaction at a lower price will set the benchmark for future mortgage valuations and sales on the site. Instead, they turn to buyer incentives as a way to offer discounts without affecting the headline price.

Before the 2008 financial crisis, developers had been known to book buyers on a Caribbean holiday. Sadly, those days are long gone — rules are much tighter on what can be offered without a surveyor deeming it has affected the price.

But the use of incentives has grown since the end of the Help to Buy equity loan scheme, particularly for new larger homes (where more than 70 per cent are now sold with incentives). These days they typically entail help with deposits, legal fees or transaction costs, along with some upgrade options thrown in. Though you do still find the occasional small developer offering a BMW in the hope of getting a sale done.

But incentives can only go so far, and there’s a limit to how much developers can cut their underlying prices without affecting their viability. The inflation shock that led to higher interest rates has hit developers hard.

The cost of building a new home has shot up, along with materials and labour costs, while housebuilders have faced increased regulatory costs — all squeezing profit margins. With no let-up in sight, builders prefer to sit tight and wait for the market to improve, while matching their current output to the lower numbers of people that can afford to buy.

Viability is not the same across the country. Research from Zoopla shows that the more expensive markets, such as in the south of England, are more viable. The problem is, these are the places where potential buyers have been hardest hit by rising mortgage rates.

In London, matters are even worse. Here, the only type of home that it makes financial sense to build is flats. But these take longer to build than houses, require more debt and so are riskier — and with high property taxes and low prospects of property price growth (quite aside from the recent leasehold and fire safety scandals) homeowners don’t really want flats designed for overseas investors.

Somehow we’ve ended up in a situation where, in one of the most expensive, desirable cities in the world, no one can afford to build anything that anyone actually wants to buy.

Profit margins aren’t big enough to incentivise developers to commit in today’s riskier market, while land values are insufficient to encourage the owners to sell for residential development. It’s created a spiral where delivery is falling, and it will take a lot of time and money to turn it around.

So what’s the solution?

In previous downturns, the government of the day supported the market with substantial funding to convert for-sale developments into rental ones — both private and affordable. It helped preserve market capacity but mostly focused on hoovering up the large numbers of unsold new homes putting downward pressure on prices. There’s not the same overhang of unsold homes this time — the private rented sector has been a useful exit route for many developers — but using affordable housing funding as a guaranteed buyer can be powerful.

More broadly, this problem raises the question of whether we need a wholesale change in how we commission, fund and build new homes. But that probably requires more time and money from the government, neither of which it has.

Instead of doing that, the government is easing the affordable housing requirements for developers in London and it looks likely that we’ll get a new version of Help to Buy. This may get things moving, but probably not enough to meet the 1.5mn homebuilding target.

This leads me to the conclusion that this government, like all those before it, will at some point panic and decide that a little house price inflation is exactly what we need. So it will concoct some manner of demand-side stimulus.

I give it a year before the housing secretary realises the baseball cap he really wants is the one emblazoned “buy baby buy”.

Neal Hudson is a housing market analyst