England: Local Restrictions, Local Monopolies, & Construction Lags
The slow rate at which residential construction sites are built out in England, known as "construction lags" or "build-out rates," has important implications for housing affordability and economic dynamics. Construction lags are crucial for explaining property price dynamics in theoretical models, yet we must learn more about their duration or determinants in practice.
What they did: This paper (Why delay? Understanding the construction lag, aka the build out rate by Michael Ball, Paul Cheshire, Christian A.L. Hilber, and Xiaolun Yu) analyzed a unique and comprehensive dataset from the National House Building Council covering over 140,000 sites and most residential developments in England between 1996-2015. They developed a simple model of how profit-maximizing developers respond to local demand shocks in markets with varying degrees of supply constraints and competition. The model predicts demand shocks will increase build-out rates less in places with stricter supply constraints or where the developer has more pricing power.
What they found:
Positive local demand shocks (proxied by predicted local employment growth) generally increase build-out rates (i.e., reduce construction duration). On average, a one-percentage-point increase in demand reduces duration by 2.7%.
However, this impact is significantly reduced in places with more restrictive housing supply constraints, whether regulatory (tighter local planning) or physical (less developable land). A one standard deviation increase in refusal rates or shared developed land reduces the impact to 0.8-1.7%.
The impact is also reduced for sites built by developers with greater local market power (i.e., local monopolies). A one-standard deviation increase in the developer's local market share minimizes the impact to 2.1%.
Build-out rates on developments with more public/subsidized housing are less affected by demand and developer market power, likely due to the different objectives of public/non-profit providers.
Between the lines: The research findings indicate that the sluggish build-out rate in England results from a market failure in the form of developer market power in certain areas and policy failure in the form of excessively restrictive planning in some localities. These two factors are intertwined, as the intricate and uncertain British planning system imposes substantial fixed costs, leading to a rise in market concentration over time, with the top 10 firms now responsible for nearly half of all new construction. This highlights the crucial role of policymakers in addressing these issues.
Quantifying the impact: The research estimates that the 2015 construction duration in the average local authority could have been 24% faster without supply constraints or developer market power. The findings suggest that reducing constraints by one standard deviation could accelerate construction by 10% for regulatory factors, 7% for physical factors, and 8% for developer power. The effects vary significantly across locations, with regulatory constraints most significant in prosperous towns like Reading. At the same time, developer power is more pronounced in northern cities like Newcastle, and physical constraints are most prevalent in dense London boroughs. These findings offer potential solutions to the issues at hand.
The bottom line: The research findings underscore that construction lags are not merely technical or engineering factors but rather economic choices influenced by the incentives and constraints developers face in specific markets. The findings suggest that increasing build-out rates to enhance housing supply necessitates addressing both the lack of competition and the lack of developable land resulting from regulatory and geographic constraints. A key question that remains open is whether Britain's restrictive planning system has, in fact, contributed to the escalating market concentration in the homebuilding sector over time.