I usually make content about the reality of altering and extending homes in the UK. Construction costs, the planning system, building regulations, design ideas, that kind of thing. I try to keep politics out of my posts but everyone in the UK knows there’s an election coming and most people seem to think the Labour Party are going to win it.
My posts are aimed a homeowners in the UK looking to do some work to their property, so the obvious question is, will the Labour Party help them build a house extension?
No, the answer is no. But they could if they adopted one policy, and it isn’t about reforming the planning system. That policy could also reduce the number of people bidding for homes every year, thus making it easier for supply to meet demand. Keep reading and I will explain.
Why the Labour Party Manifesto Will Increase the Cost of House Extensions in the UK
The Labour Party manifesto has got a lot to say about building new homes. The highlights are policies to encourage more new towns, giving mayors more power to encourage development, fast-tack planning on brownfield sites and favouring first-time buyers if they purchase a home in a new development.
Labour mentioned what they call the “grey belt”, which is low-quality land in the green belt they hope nobody will mind being developed. Places like waste ground, abandoned buildings and car parks. And they have been at pains to stress they will protect areas of genuine natural beauty. I am broadly in favour of all this. There is a housing crisis in the UK and building more new homes is the most obvious way to tackle it. But it's not the only way.
If you already own your own home and you just want to make it bigger, labour policies aren’t relevant. In fact, they might actually make it more expensive to build a house extension. Here’s why.
Keir Starmer has pledged to build 1.5 million new homes over the next five years if elected. That’s about 50% more than the current rate of house building, and I have to ask. Where will they find all the builders to do the work?
The policies in the Labour manifesto appear to focus on easing planning restrictions and supplying more land for development. Leaving aside the fact that planning policy is devolved, so even if the Labour Party win a massive majority in Westminster, their housing policy only affects England. They don't seem to have anything to say about how these extra homes get built in practical terms.
The UK construction industry has a growing staffing shortage. 1 in 5 builders is over the age of 50, so there is a retirement crisis on the horizon. Brexit and the growing economies of Eastern Europe have encouraged many builders to return to Poland. I was in Krakow earlier this year and couldn't believe how much construction was going on.
If the Labour Party succeed in building 50% more new homes, the builders have to come from somewhere. They might end up coming from the small end of the UK construction industry. The major house builders will just pay more to poach staff from small local building firms. That means there will be fewer trades available to build the house extensions, attic conversions and internal alterations that homeowners need. And that scarcity of workers will drive up the cost of extending a home. Unless Labour do something to increase the number of builders, their house-building programme will add even more inflation in the construction industry.
It takes years to train new builders, so in the short term Labour would need to import them and that opens up the immigration debate and Brexit, which they seem reluctant to talk about.
Why the Labour Party Should Abolish VAT on House Extensions
The UK government's finances are very tight so let's suppose Labour don't invest in training a large number of new builders, and to avoid political battles they don't encourage more immigration to increase the construction workforce. They still want to build more homes so, what can they do to offset the impact of inflation in the private housing sector?
There is one thing a new labour government could do to reduce the cost of your house extension and also take the heat out of the housing market. At a stroke, they could make it 20% less expensive to work on your home if they scrap VAT on domestic construction work. VAT is not devolved, like planning, so this change would impact the entire UK instantly.
But what’s the advantage of doing this? VAT accounts for 17% of the entire UK government's tax take. That is massive and, after what happened to Liz Truss, no UK government is going to cut tax without a clear plan to pay for it.
Last year the UK built 212k new homes. But there were 1.1m residential homes sales. That means more than four out of every five residential sales in the UK were existing homes, not new homes. Many of the owners of existing homes who are selling may also be looking to buy elsewhere, thus putting pressure on the housing market and driving up house prices for everyone.
People sell up and move home for different reasons. Death, divorce, downsizing, changing jobs or moving to a better neighbourhood are among them. But many people sell because they need a bigger home and that’s where VAT comes in.
Why VAT on domestic work affects average homeowners more than rich homeowners
I have lost count of the number of clients who had to weigh up the cost of enlarging their home, against the potential increase in the value of that home. If they can't make the sums work then it makes sense to move rather than improve. With a 20% tax on that work, the scales are tipped against them from the start. You end up in a situation where it only makes sense to invest in your property if it's already an expensive home. Regular people, in average homes, have less financial room for manoeuvre.
If you are going to spend £100k + VAT working on your house, it makes MORE sense to do this if your house is worth half a million, than it does if it's only worth a quarter of a million.
Because of this, the VAT system places a greater burden on regular homeowners, than it does on those who are lucky enough to own more expensive properties. The cheaper your home, the more likely the VAT system will encourage you to sell it rather than extend it. Then you have to outbid everyone else to buy your next home.
What are the benefits of abolishing VAT on house extensions?
The current system is driving up house prices by incentivising people to move rather than improve. If we had a system that encouraged people to improve and not move it would have significant benefits.
Less churn means people don’t just build an extension, they help build a community by staying in their neighbourhood for the long term.
VAT is probably the biggest incentive for cowboy builders. Getting rid of it will create a level playing field where better builders can thrive. That will lead to more employment and apprenticeship opportunities for the next generation of builders.
It will take some homeowners out of the housing market, reducing pressure on already limited supply. I don't know how many people sell their homes to buy a bigger house every year but I am guessing it's a significant number.
Making work to homes in UK 20% cheaper will encourage owners to invest in better insulation, windows and green technology. It will also make it less expensive to maintain older, historic properties.
It's also fairer because anyone who is sufficiently wealthy to buy a plot of land and build a house currently doesn’t have to pay any VAT. This is meant to encourage housebuilding but, in reality, the system rewards a wealthy minority and penalises regular homeowners. There should be one VAT system for all.
Why the Labour Party policy on new housing needs to change
The Labour Party manifesto seems to address the housing crisis on the supply side only. This will take time to succeed if it works at all. They could have a very easy win by just slashing VAT, doing that will reduce demand for housing at a stroke, by encouraging existing homeowners to stay put.
I know there are downsides to this for the treasury. Reduced VAT revenues are obvious but also reduced stamp duty if there are fewer home sales.
There will be an upside with an increase in employment, income tax, national insurance and corporation tax from an expanding construction industry. I also suspect that growing the small end of the construction industry, your local building firms, rather than the major house builders will lead to a wider increase in prosperity across the UK in the long run.
The major house-building firms are all listed on the stock exchange, so any increase in their profits tends to be concentrated in shareholder portfolios. Creating more work for small firms will increase the profits for tens of thousands of businesses in every part of the UK.
There are 26.4 million homeowners in the UK. Even if Keir Starmer manages to build 1.5m new homes over the next 5 years, the numbers are lopsided. Yes we need to address the housing crisis, but cutting VAT on house extensions could be a rare policy that keeps both first-time buyers and current homeowners happy.
It could reduce the number of new homes we actually need to build by making it more affordable to stay in your current home. Smarter and better-informed people than me will have to work out the details but I would like to get the conversation going on this. If you are in the Labour Party, the treasury or you are a policy expert I would love to hear from you.
And if you are a homeowner in the UK, and you are thinking about altering or extending your own home, you should check out the Real Life Architecture website. There is a growing resource of free guidance on the site and you can also book my time for a paid consultation. I can check your ideas and advise you on the planning hurdles, building regulations, construction costs and other issues you might need to consider. Please read the terms and conditions before you book.
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