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How low can it go?
Published 18 February 2024
So much for 240,000 new homes a year. We’ll be lucky to build even 120,000, says Richard Donnell.
This year, the building industry’s cuts in response to the economic downturn will result in the lowest level of home building since the Second World War. As a consequence, almost everyone believes the 240,000 homes a year target is unlikely to be met – and questions are being raised about the prospect of building even 120,000 homes a year, half the recent target.
The fact is that the vast majority of homes are built by private developers. This includes affordable housing, some 70 per cent of which in 2006–07 was delivered as planning gain on section 106 sites.
The impact of the downturn is worse than in previous cycles because development has changed. From 1998, planning policy shifted towards high density brownfield sites – a trend that increased the complexity and risk of development. By 2007, just under half of all homes being developed were flats, mostly high density schemes. As demand fell the cash flow from sales dried up with adverse consequences for developers’ business plans.
It is not just private house builders that have felt the pinch. Housing associations have become more involved in development, buying up land to build mixed tenure schemes. They are also feeling the impact of weaker demand.
The problem for all developers is restricted cash flow resulting from a major decline in demand together with a lack of mortgage finance. Developers are unable to sell sufficient numbers of units to maintain their businesses, let alone grow them by starting on new sites. The main focus during the past 12 months has been in shifting the stock of housing coming though the development pipeline – a figure we estimate to be close to 200,000 homes. This has involved greater use of generous incentives to support sales as well as delaying schemes and building them out more slowly.
While the industry has been focused on clearing unsold stock, there is little sign of any appetite to start building new homes. The latest data from the National House Building Council shows there were less than 11,000 private housing starts in the three months to November 2008 – down 72 per cent on the previous 12 months. Affordable housing starts were down 9 per cent, while overall completions were down 31 per cent.
Looking ahead, developers realise that they need to re-align their land banks and planned schemes so that properties are more saleable. This is likely to mean lower densities, lower development values and protracted discussions with local authorities over the level of affordable housing. The reality is that falling house prices and weak demand mean that many proposed housing schemes are unviable. This will be unwelcome news for local authorities who are only just waking up to the fact that many of the assumptions underpinning development plans and delivery trajectories are rapidly unwinding.
The Homes and Communities Agency is looking at how it can inject funds into schemes to secure delivery of housing, but the sums involved in turning around the industry are vast – many times greater than the agency’s not insignificant budget. The only way of supporting output in the short term is to focus financial assistance on schemes that are already on site, although the scale of the investment needed to ensure viability will be significant.
There has been talk of shifting homes planned for sale into the intermediate rental sector. This may get occupiers into newly developed housing but with the rental income just a fraction of the full value of the units, will do little for housing output. These proposals need an investor to buy the units off the developer to help generate cash flow to enable the developer to move on to the next scheme.
None of these trends bode well for housing delivery in the near term. Faced with continued credit constraints and weak demand, developers will continue to scale back business to a sustainable level. This will compound what is an unprecedented tightening in housing supply – through historically low levels of new housing starts and overall transaction volumes.
In choking off supply we are building the clear potential for a rapid return to housing unaffordability in the near future. The loss of skills in the housing development industry means that a supply side response will take many years to feed through. More than ever we need to start developing policies that can try to secure less volatility in the supply of homes over the long term.
Richard Donnell is director of research at Hometrack.
