Efforts to boost housing output face a turgid planning, cost inflation and skills gaps. An analyst, a housebuilder and a consultant assess the near-term outlook.
*Galliford Try figures include revenue from Linden Homes and Partnerships arm
200,000 far off but progress is being made
This year is likely to be another good one for housebuilders. We expect the recovery in demand to be maintained, which should drive a continued increase in housebuilders’ volumes and fuel a solid yet sustainable level of house price inflation.
The land market is expected to remain benign, but other build costs are likely to prove trickier to manage, especially labour.
Demand should further improve as consumer confidence grows and real incomes rise, while mortgage rates remain very low for those that meet banks’ tough lending criteria.
First-time buyers will continue to struggle in the second-hand market, but new housebuilders can maintain transaction levels in this area through the Help to Buy scheme.
Housebuilders and the larger, well-capitalised independents are expected to increase volumes by 5-10 per cent, but smaller builders will struggle to grow significantly.
Social housing is unlikely to see much growth, but some progressive housing associations should expand as surpluses from private development are recycled into social housing.
Meanwhile the private rented sector may finally start to deliver meaningful volumes from 2015 onwards.
Building 200,000 homes a year in England looks far off, but progress is being made.
The land market is said to be at its most benign for 40 years. The National Planning Policy Framework has brought development land through more quickly, and competition for land has not increased.
The government appears to recognise that further speeding up planning has the potential to increase housebuilding activity.
Land demand is not rising, as smaller housebuilders struggle to obtain finance to grow and potential new entrants continue to be put off by significant barriers to entry.
Build cost inflation must be managed, especially labour, but not all material costs are rising. The biggest risks to derail this relatively steady scenario are house price falls, build cost inflation and interest rate rises.
House prices look to be underpinned by the bolstered economy, although pro-cyclical regulation may choke inflation earlier than in previous cycles, and build cost inflation is most likely containable.
Interest rates will move up eventually, but hikes in monthly payments from a 1 per cent rise in mortgage rates should be covered by wage growth of 3 per cent.
We do not expect interest rates to move up without material wage inflation.
Charlie Campbell is a research analyst at Liberum
Supply-side challenges yet to be solved
Following the Conservatives’ election win, the UK housing market looks forward a period of relative stability.
Continuity matters for several reasons, but it all begins with supply.
The coalition government introduced a programme of activities aimed at stimulating the UK housing market: Help to Buy and support for the build-to-rent/private rented community delivery model, among others. But most of these policies focused on demand, not the issue of supply.
The greatest challenge facing housebuilding is not just to secure the resources, land, funding and permissions to deliver new sites, but to find a lasting solution that delivers the bulk of mainstream housing at an acceptable rate, and provides a cross-tenure solution to delivery and affordability.
Right now we have an ageing workforce and a lack of trainees. Government statistics suggest the number of apprenticeships in construction has fallen over the past five years, comparing poorly with other sectors.
The availability of finance, flexibility of the planning system and viability of land will still be big factors this year, but there are positive signs, with housing starts up year on year in the latest DCLG figures.
We expect to see more institutional investors pursuing private rented sector assets and more housebuilders taking up these options in strategic locations.
One long-term challenge is innovation and modern methods of construction versus the traditional site-based mindset. Investment in offsite manufacturing, advanced methods and modern, sustainable materials could facilitate a step-change in the delivery of housing, but a safety net for those delivering such innovation will be required.
Despite valiant efforts and policy changes, the goal of 200,000 homes a year is one the industry does not appear to have the bandwidth to achieve.
The greatest challenge for housebuilders in 2015 and beyond is to increase supply while being in a position to have the available land, permissions, funding and people to consistently deliver the outputs being demanded.
It’s not all bad news. We can expect to see a continued rate of growth in housing market transactions, which have been gathering momentum since the election.
But pricing is likely to remain under pressure, in line with a healthy, stable economy and real income growth.
Simon Latson is national director - building consultancy, JLL
Government must build on its pledges
Not for many decades has a government come to power with such a clear commitment to increase housing output.
The Conservatives have shown an unwavering belief in promoting homeownership, an aspiration confirmed by a series of pledges. Confirmation of Help to Buy equity loan funding for the next 12 months and a commitment to maintain it up to 2020 was therefore expected, but warmly welcomed.
The scheme has been central to the increase in build rates seen since its introduction two years ago.
Increasing housebuilding output in a sustainable way requires companies to make long-term commitments on land purchase, planning applications, training and recruitment; some certainty of effective demand is imperative.
The Starter Homes proposals are a further sign of the government’s efforts to get more young people onto the property ladder.
We hope to see more detail on the scheme in the forthcoming Housing Bill, but it has to be workable for both builders and local authorities, and bring forth viable land for development that would otherwise not come forward.
More generally, how we bring greater volumes of land forward more quickly will be central to achieving government objectives.
The National Planning Policy Framework system is beginning to deliver more permissions: our quarterly Housing Pipeline report shows we are now around the 200,000-a-year mark.
But the rate at which these permissions are processed from ‘outline’ stage, when the principle of development is established, to the point where construction can start, takes far too long.
We have made suggestions to the government about speeding up this process. Meanwhile, progress is being made on the use of pre-commencement conditions by planning authorities and the negotiation of section 106 agreements.
Key to this will be how government works with local authorities to ensure planning departments have sufficient capacity to deal with more applications more quickly.
With local government finance to be squeezed further, planning departments are likely to come under increased financial pressure.
The focus on SMEs generally is welcome. This needs to be translated into policies or reforms to assist SME builders. If we are to build 200,000 homes a year, all parts of the industry will need to play their part.
Probably the biggest issue facing all homebuilders today, large and small, is skills. Recruiting, training and retaining the people required to oversee the required increase in output is a major task.
The industry is positive about sustaining recent increases in output, but is also aware that significant challenges remain.
Stewart Baseley is executive chairman of the Home Builders Federation