The narrative is well-worn. Large corporations that exploit finite natural resources are benefiting from a surge in prices caused by external factors and are channelling supernormal profits to their investors while consumers pay the price.
At first glance it most obviously applies to the global oil companies such as Shell and BP that have reported their highest profits in decades over the past week.
But there has been a sustained boom in the price of another finite resource: land. The profitability of the companies that turn patches of earth into habitable dwellings has attracted less attention than that of the oil titans who turn hydrocarbon sludge into fuel, but it has been no less remarkable.
Take returns on capital. On Monday, BP reported a return on average capital employed of 30 per cent for 2022. Two days later Barratt Developments, the UK’s largest housebuilder, reported a similar return for the half-year to December.
The difference was that BP’s return was exceptional. The highest it had been in the preceding five years was 11.2 per cent. But aside from one outlier year during the Covid-19 pandemic, when construction activity ground to a complete halt, Barratt’s return has consistently nudged 30 per cent in that time.
One reason is tax. BP’s tax affairs are global and complex, but add it all up and the effective tax rate on its adjusted profits for its full year was 34 per cent. The housebuilders are exposed mostly to the UK’s relatively benign corporation tax regime, so Barratt expects to in effect pay a rate that is a full 10 percentage points below BP’s for its full year.
Governments across Europe are providing help for households struggling with the high cost of energy as a result of the war in Ukraine and the associated withdrawal of Russian gas from the market. The support is wildly expensive but time-limited, and in the UK some of the cost is defrayed by a windfall tax on oil company profits.
By contrast, the state has been helping people buy houses for almost a decade through the Help to Buy equity loan scheme. Launched in the aftermath of the global financial crisis, it is finally due to close next month.
Granted, this is a loan scheme rather than direct financial assistance. The government receives interest on these loans after five years and expects the scheme to turn a profit in the long term.
But its impact on housebuilders has been tangible. It helped bring confidence back to the market and reduced the need for builders to offer margin-eroding sales incentives. Along with a strategic pivot to focusing on returns rather than volume targets, it helped transform their profitability.
A 2021 study by Tom Archer and Ian Cole at Sheffield Hallam University found that before the financial crisis each completed home netted an average pre-tax profit of slightly more than £30,000 across the nine largest UK housebuilders. By 2017 that had doubled to more than £62,000. The dividends paid out went from an aggregate £400mn to more than £1.8bn during the same period and the largesse has continued since.
Now storm clouds are gathering, though they may not prove as dark as had been feared. Mortgage rates have risen sharply. House prices are falling and construction activity slowing. Barratt’s results statement cited a 44 per cent fall in reservation rates per site compared with last year and it will buy virtually no new land this year.
The Home Builders Federation is already calling for a “new, targeted home ownership scheme for first-time buyers”, arguing that without one, deposits will remain beyond the means of most.
Government should resist this idea. A decade-long boom means housebuilders are in far better financial shape than they were ahead of the financial crisis. Barratt can cut its cloth for a less frothy housing market just as BP can for lower oil and gas prices. A long-overdue cyclical downturn will not threaten housebuilders’ viability.
It may threaten the government’s ambition to build 300,000 homes a year, though. If ministers want a chance of achieving that, they should focus on reforming the UK’s planning system, boosting skills training to alleviate labour shortages and increasing the supply of homes for rent — not on yet more demand stimulus.