Before delivering any change it is vital to first understand housing market economics in more detail than TV's Homes Under the Hammer provides. As is understanding how the housing market works in the location of your scheme, for different things may or may not be achievable in different places. There are significant differences between the big city and the small town and major differences over what can be achieved or what is sought in each.
Understanding the economics of density is a key example of this. In the small town where everything is fairly low density, it may be possible to buy an existing 2 bed house with a garden for about the same price as it would cost to deliver a new 2 bed apartment. In such a scenario people will probably buy the older house with a garden instead. So there won't be market demand to build lots of apartments- so they won't get built. In the big city, space is in short supply. However, demand and wages in a big city are at a high enough level that high density homes will usually be achievable, because people will pay enough money for them to be built.
These market characteristic have a significant impact on what is actually built- because they impact on what can be achieved without losing money. It is particularly important to remember that it generally costs more to build each square metre of an apartment than it does a detached or attached townhouse- but we will go into that in more detail later.
However, it is sometimes possible to change the underlying market conditions, but this is generally a slow process. If new jobs are created in the town centre and there is sufficient life so as to make people want to live in the centre rather than further out, then people may start to be prepared to pay a premium - or prepared to pay the same price for less space - to live in the centre rather than further out. In that case density is likely to start to increase, but it rarely jumps a significant step, usually moving through a gradual transition of typologies.
In many cases to achieve this the centre needs to achieve a sort of "attractor factor" or "buzz" often going though a transition of younger people moving there for life and characteristics that suit their lifestyles. That then attracts other similar life, those people age and earn more as they age. Greater age usually means greater disposable income, that results in more money going into life generating uses in the place, so more arrive and more life follows that.
However, this is a transition that only usually happens once places achieve the structural characteristics of a successful place- if those characteristics aren't there they probably need to be achieved first. It is also a transition that can sometimes be called and sometimes consist of gentrification. When it is there are both negative and positive features of that as with any major change, but the purpose of this e-book is not to run through the politics of that.
The economics of density and housing:
High density apartments generally cost more to build on a £/sqm basis than traditional detached or attached houses. The moment any building goes over 6 stories the £/sqm construction cost increases considerably. Things like lifts, deeper foundations and stronger frames all add cost.
In most cases the sales price (Referred to as the Gross Development Value or GDV) is the price which the market will pay for the completed property. If we are looking at building a theoretical apartment scheme in say Hull, the GDV for the scheme is set by what the market will pay for each apartment multiplied by the number of them. Buyers will look at other apartments in the area and what they could buy them for, they will also look to what they could buy a larger or better property for in the wider area. In Hull there are many places where houses with gardens are pretty affordable, so there is a price point where people will probably buy one of the houses instead of the apartments, and it is that point that sets the sales price or GDV for the new apartments.
Taking that same apartment scheme in Hull, because demand is fairly subdued for apartments, the sales price is fairly low. However, the cost of constructing them is probably higher than that of building a low density detached or terraced town house. With higher cost to build and fewer prospects of selling the apartment, this would look risky to a developer. Consequently, they may also seek a higher profit margin for the apartment scheme to reflect the greater risk, otherwise they will invest elsewhere and thus not build the scheme.
So lets run through some basic economic principles. Lets start by assuming the value of all of the completed apartments in the Hull scheme is 100. Then assume the developer needs a profit of 30 to reflect the risk they are taking, and that it will cost 45 to build. That means that out of the value taken from the overall sales price, there is 25 left to pay for the land to build the project.
But the site in question for the apartment building could be put to another use. Let’s assume the site currently has a building used for car repairs. The building could be rented out and has a value based on the rent received for that use. If that value based on its current car repair use is more than 25 the owner will not redevelop; if they did, they would lose money. If the value based on the garage use and rent received is less than 25 then they may have a commercial incentive to redevelop the site for housing.
But if the cost of constructing the apartments (flats) increases, perhaps the roof costs more, or they can’t sell the apartments for as much as hoped, or perhaps the Council requires that 2 of the 20 apartments must be sold as affordable houses at a reduced rent/price. That means the viability of the scheme is changed as can be seen in the scenarios below, with the land value delivered from the development reduced in scenario 2 and 3 to below its value as a garage.
If we assume the site in use as a garage is worth 22 as a garage, then only one of the above scenarios could be delivered commercially. If the council insists on the 20% being affordable they get 20% of nothing delivered and site will likely stay as a garage unless subsidy can be provided from the public purse- and these days there is rarely subsidy available for private development. Anyway we will come back to that in more detail later. Otherwise onto section 20.
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