Throughout the second half of the financial year we experienced a loss of momentum in the UK housebuilding industry. Here, we explore some of the key challenges which the sector has faced up to Q4 and which are likely to hangover into FY 23/24. We also pick up on some emerging themes and reasons for optimism moving forward.
The Bank of England increased its base rate on 23 March from 4% to 4.25%. Higher mortgage rates together with the cost-of-living crisis, is predicted to restrict affordability further and this has translated into reduced sales rates in Q’s 3 and 4. In Q3Savills forecasted a 10% fall in the UK average house price and, whilst there will be distinctions between regions, a rates hike coupled with the demise of Help to Buy does not appear to suggest that buyers (particularly first-time buyers) will be well placed to capitalise on any decrease in prices.
Despite this, some experts have identified an emerging distinction between the newbuild and second-hand market: with the former expected to out-perform the latter. Savills has reported how a similar trend emerged following the financial crisis in 2009, because homeowners were reluctant to sell their properties in an illiquid market. Certainly, the newbuild market has the potential to offer credible opportunities to first-time buyers provided that innovative alternatives to Help to Buy can be found and gridlock in the planning system can be overcome (see below).
Housebuilding has become one of the hottest of all political hot-potatoes this year. In December, the Government unquestionably took a backwards step when it watered down its 300,000 p/a delivery target. Since that announcement we have seen many authorities relent on new Local Plans and this has left so many in the industry scratching their heads.
Michael Gove has responded to his December announcement by declaring that the UK’s housing model is broken and that more homes are desperately needed. Meanwhile, Labour has pledged to increase home ownership to 70%. Whilst that offers some hope it is perhaps not unsurprising that a pro-build rhetoric from both major parties will emerge as we get closer to a general election. At present we look to progressive authorities (such as Calderdale which last month resolved to adopt a new local plan amidst the post-Gove pressure) to identify and promote suitable and deliverable sites to tackle the UK’s housing crisis.
The industry has experienced a significant increase in the cost of building materials and a shortage of skilled labour. These issues are a cause of concern for housebuilders and are likely to be particularly problematic where they are already contractually committed to a purchase. Financial appraisals conducted by housebuilders prior to Q2, may now be inaccurate and subsequently we are seeing deals either being re-negotiated or going abortive.
Expectations are for the labour crisis to endure throughout 2023 and to continue into 2024. It is reported that the construction industry is likely to see more skilled workers retire in upcoming years than any other industry. Fortunately, however, research from BuildPartner indicates that material prices are stabilising, easing some of the financial strain on housebuilders.
The housebuilding industry continues to battle with the nutrient neutrality crisis and subsequently the implementation of many schemes has been stalled whilst mitigation strategies are agreed at a national and local level. It is estimated that 120,000 homes are currently being delayed across 74 local authorities as a direct result of neutrality issues. However, Local Authorities are starting to emerge with strategies for unlocking these sites. For example, South Somerset District Council recently announced a new nutrient credit model which will allow developers to purchase credits in order to offset their proposed schemes.
The requirement for new developments to deliver a 10% biodiversity net gain is scheduled to become mandatory in November 2023. In previous publications we have highlighted the challenges that this will bring to the industry (from a delivery to a viability perspective). Whilst we await further developments from Local Planning Authorities in the delivery of a statutory credit scheme, the private BNG ‘unit’ market is already flourishing with a range of providers ready to sell units to developers in order to offset any gains which cannot be delivered on-site.
The effects of the widespread uncertainty in residential sales has unsurprisingly had a knock on effect when it comes to land acquisition. From Q2 onwards we have seen many developers step-back from new acquisitions. That may well continue into FY 23/24 and have a stabilising effect on land values which had risen dramatically in line with the house price boom post-lockdown.
Ultimately all developers need land to deliver new units and this uncertainty ought not to hang around for as long as many had feared. An emerging trend within the industry has seen greater use of joint-ventures and partnership models as a way of de-risking the development process for many in the market. It appears likely that this trend will continue through FY 23/24.
There are several alternatives to the Help To Buy Scheme which could reduce the impact of its demise. Examples include the Deposit Unlock Scheme, Deposit Boost, Home Reach and First Homes, which, together with the extension to the temporary reduction in stamp duty (cuts to stamp duty will remain in place for the next two years) have the potential to encourage activity in the new build market, particularly for first-time buyers.
The cost-of-living crisis is also likely to influence buyers to look at smaller and more energy efficient properties which has the clear potential to boost activity in the new build market. House builders who prioritise truly sustainable developments with high energy-efficiency credentials appear to be best-placed to capitalise on this new trend in buyer demand.
As much as the current economic climate could result in levels of homeownership becoming stagnant in the next FY, this is potentially good news for those operating in the build-to-rent sector. In Q3 the British Property Federation reported a 15% level of annual growth for the sector underpinned by a 93% rise in private renting since the early 2000’s. It should be noted that BTR schemes will have most impact in communities where people can live and work in the same place and so may not be suitable for more rural regions.
The housebuilding industry is facing an unprecedented range of challenges from all angles. Whilst this will continue in FY 23/24 the industry has demonstrated its robustness on many previous occasions and can do so again. We hope to see more progress in nutrient mitigation strategies and in the delivery of BNG, greater support, investment and reward for sustainable development and a greater appetite for solving the UK’s housing crisis at a national and local political level.