If the City Can See a Crisis in Housebuilding, It Must Be Serious

Two of the most egregious but malevolent side-effects of the version of the capitalist economy prevalent in the UK are the domination of corporate ownership by major investors and our rigged housing market.

In an exquisite manoeuvre these came together last week when the head if one of the world’s largest investment funds decided to make a stand over the “enormous” pay-outs made to three executives of a house building firm.

On first sight this might look like a lioness calling out the excessive nature of a tiger’s animal killing strategy and indeed, there is a little of the black pot and kettle about the row.

Euan Stirling, Head of Stewardship at Aberdeen Standard Investments, a global asset manager with total assets under management of £583bn, used the annual general meeting of housebuilder Persimmon to unburden his worries.

Jeff Fairburn, chief executive of Persimmon, the housebuilder, had already been forced to give up £30m in bonuses after criticism from shareholders, including Standard Life Aberdeen, but as Stirling said “the reduction in the amount accruing to him from £110m to £75m does not even get close to acceptable”.

He went on: “Being a company director … requires a personal motivation that goes beyond simply amassing a fortune. It requires an understanding of where the company sits within the society within which it operates. Little of that is evident currently at Persimmon.”

In the end almost two-thirds (64%) of shareholders failed to support the huge pay-out and just 36% voted in favour of the housebuilder’s remuneration policy. But because so many sat on their hands rather than vote against, the £200m bonanza windfall was approved by 51.5% votes in favour with 48.5% against.

It is worth looking at what is going on here. Persimmon is undoubtedly a well-run company but it has benefited from a myopic government policy aimed at helping first-time buyers but which ends up inflating houses prices.

The policy in question is Help to Buy, which giving new homebuyers an interest-free government loan worth up to 20% of a property’s value if the buyer opts for new-build. This makes it easier for them to meet the sky-high costs of buying a home.

how the modern world works

Inevitably this has helped the housebuilders — at least according to Morgan Stanley, the US investment bank. Its report last October, The Help to Buy Premium – and its Unintended Consequences, found that the gap between the price of new homes and equivalent second-hand properties had risen to 15% since Help to Buy was first put in place in 2013.

In other words, most of the 20% has gone into the price. Morgan Stanley is not a Marxist institution and its concern is over whether housebuilders will continue to reap in hyper-profits

So how is that one person could be paid £75m for a few years’ work, and indeed could have been paid £110m if he hadn’t been persuaded that perhaps the latter was a bit OTT? The problem was a woefully ill-advised long-term incentive plan (LTIP) that linked the pay-outs to the company’s dividend payments and stock market performance, which has been significantly boosted by the help-to-buy scheme.

Persimmon’s share price has more than doubled since help to buy launched in April 2013. About half of Persimmon homes sold last year were to help-to-buy recipients, meaning government money helped finance the sales.

The LTIP scheme was uncapped so when the formula delivered the gargantuan numbers there was nothing anyone could do. According to reports that chairman Nicholas Wrigley put pressure on Fairburn to donate some of his bonus to charity and although Fairbairn has made vague pledges to give some away, Wrigley did the honourable thing and resigned over his failure to cap the scheme.

That is how the modern world works. Chief executives of companies have their pay regimes set up committees of fellow directors from across the business scene. These people will often serve as non-executive directors on each others’ boards and remuneration committees.

What should be done? In a joint submission to government, the Chartered Institute of Personnel and Development and the High Pay Centre suggested a number of reforms: at least one employee on remuneration committees; publication of the ratio between the pay of the chief executive and median pay in the organisation;remuneration advisers to challenge the validity of bonus systems; and greater simplicity over both financial and non-financial measures of performance.

Meanwhile the housing market remains trapped in a problem of insufficient demand and high prices. The idea of enabling a few people to scrape together enough debt to buy an overpriced home with a government backed loan is simply ludicrous.

If we do not build enough houses for our population then prices will go up as people scrabble to get a foot on the ladder. If the government helps a few people, that does nothing to solve the structural problem.

There are many answers but here are a few: build enough new homes to match the growth in population or 300,000 a year; compel councils to set targets for their own boroughs; incentivise institutional investors to build high quality, high quantity genuinely affordable homes for rent or sale; ignite a revolution in modular housebuilding to make mass production efficient.

If anything good comes out of the Persimmon affair, it is the reminder that current housing policy — incentives to boost demand, restrictive planning policies, cuts to public sector housebuilding, free rein to housebuilders — is not working.

Solving excessive executive pay and the housing crisis would be enough work for any government. The fact that this one s paralysed by Brexit makes the task even harder. Don’t hold your breath.

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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