Is housebuilding stuck?

As a supplier of doors to the construction industry, including for new developments we take an interest what is happening in the housing market and it seems that housebuilding is less noticeable in the headlines these days. The febrile housing market appears to have calmed and there is less excitement over house price inflation, which was down to 8.5% in November from a high of nearly 12% in June. 2015 is expected to see a further slowing of the inflation rate to 7.4% (Office of Budget Responsibility), although leading estate agents Savills predict a rise of just 2%.

Whatever the final 2015 price increase will be, and I think we are safe to assume that prices will be higher than last year, the reasons for the slowdown are complex, particularly as there is an accepted fact that there is a significant undersupply of new housing which should mean house prices would rise significantly.

One factor influencing people’s ability to buy a house is the availability of funding which is now subject to much stricter criteria to prevent buyers from overstretching themselves. This has meant a reduction in mortgage approvals down in October 2014 to 59,400 from 76,600 in January. Other factors like stamp duty reform, a potential interest rates hike and even Labour’s proposed mansion house tax are all offered as influencers on the housing market. All of these factors impact on the demand for houses, and if something is too expensive for you to buy, you generally don’t. It is the supply side of the market where the log jam is, more houses would make them more affordable and the mortgage approvals figure would start to rise. There is a significant portion of the population wanting to buy a home but are prevented from doing so by a lack of supply. It is accepted that we need to be building 240,000 houses a year and last year, which was by no means the worst, we built 141,000, why is this?

The system for granting planning permission has been cited as an obstruction in the house building sector. There have been various changes to the planning system over the last few years to make it easier to obtain permission, but bureaucratic delay and local objections hamper the process. There has been a year on year increase in permissions being granted in the last few years, which rose to 240,000 in 2014. Whilst this is the magical figure for new house builds, experience shows that this is not the number of houses that will be built and many permissions will expire.

Houses can’t be built without available land and the argument about brownfield (see my blog) versus greenbelt carries on. The Government has released surplus public sector land for house building with the anticipation that this will provide enough land for 150,000 homes over the next five years. It is a contribution, but not the answer. Large house builders have land banks, often consisting of quite large sites, which are undeveloped. It is not in their interest to build quickly on these sites, assuming they were able to, as the value of a sudden glut of houses would be reduced. It may be as well that the land is held in an area which would not be capable of supporting extensive housing. Having land is one thing but having land in an area where it will be useful, is another. The post war housing crisis was tackled, to a large extent, by local authority house building which outstripped private house building until the late 50’s. There is little taste in the political classes for a return to those days, although money has been made available for some modest projects.

Manpower is another stumbling block. It is an axiom that construction is the first industry into an economic downturn and the last one out of it, and recent events have borne this out, resulting in a skill shortage as people have left the industry. There are fewer small builders to impact on housing numbers, and they sometimes face funding issues because of the reluctance to lend by banks.

There are many initiatives such as Help to Buy, stamp duty reform and government land release that are intended to drive the housebuilding market forward. Recovering from a low stagnant base has been difficult for house builders and it may be a question of momentum. Once a head of steam is reached perhaps we will see genuine progression to the holy grail of 240,000 homes a year!

By James Cadman