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UK housebuilders are cutting back on new projects, according to the Financial Times.
Developers Taylor Wimpey, Persimmon and Barratt Development have announced they will ease up buying new land and developing it.
Housing charity Shelter reports that the UK is short of 1.5 million homes. The Government has recently conceded that the target of 300,000 new homes per year will not be met.
What is the cause of the housing shortfall and what are the consequences for investors? This new blog post explains.
What is the housing shortage?
The UK’s chronic housing shortage is one of the most worrying issues facing the country.
The 300,000 new homes that need to be built every year to keep up with demand are currently not being met, despite last year seeing the highest building rate in a decade. This means that even though there is not a nationwide housing crisis, a number of localised crises have arisen due to a disconnect between the supply and demand for housing in certain areas.
As many of the British cities and towns that are most economically successful often draw large numbers of people looking for work opportunities, these areas particularly suffer from their inability to meet housing demands.
Generally speaking, when there are more people looking for accommodation than there are properties available, prices rise significantly as those looking for homes compete against each other to secure a property. This can cause unaffordability issues which disproportionately affects individuals and families on lower incomes who struggle to make rent payments or save up enough money to purchase a home.
What has caused the housing supply shortage?
The primary factor driving the housing crisis is the lack of new homes being built. This problem has been present since the 1980s, when millions of council houses were sold off without any corresponding investment in new housing from either public or private sources. As a result, Britain’s housing stock has failed to keep up with population growth, leading to frustration and overcrowding among those looking for a place to live.
Another contributing factor is the rising cost of land and materials needed for new construction projects. In order to secure a plot of land on which to build, developers must often pay large sums in fees and taxes, making it difficult for them to turn a profit on their investments. Additionally, increasing wages have resulted in higher labour costs for construction companies, further driving up the cost of building new homes.
Finally, measures taken by local councils have also had an impact on housebuilding efforts. Many local authorities have implemented regulations that require developers to include certain amenities as part of their projects – such as green spaces or public transport links – further increasing construction costs while reducing potential profits. These regulations are put into place with good intentions but can have a detrimental effect on housebuilding efforts nonetheless.
Why are developers cutting down on the number of homes being built?
Chris Millington, a housing analyst at Numis, forecasted that the number of new homes built would fall by around 25% year on year in 2023.
He said, “That’s similar to the first year fall off after the 2008 financial crisis. I’ve only witnessed a fall like this once before.”
FTSE 100 Developers Taylor Wimpey, Persimmon and Barratt Developments plan to ease up on buying and developing land, pointing to economic uncertainty, a jump in mortgage rates and the end of the government’s Help To Buy Scheme as reasons for falling demand.
Persimmon estimated that the monthly cash cost of mortgage payments for certain first-time buyers had doubled over the past year. This was due to the withdrawal of the Help to Buy equity and a jump in mortgage rates. This has led to some prospective buyers to pause their search.
Jennie Daly, Taylor Wimpey’s chief executive, said, “The proposed changes tip the balance… we’re going to be more hamstrung and I don’t see any outcome other than a reduction in the overall number of homes planned for.”
What is the outcome of the housing supply shortage?
Housebuilding across the country peaked in 2020, when 242,700 new homes were built – significantly below the government target of 300,000 new homes a year by 2025.
However, development has slowed and the target has been abandoned. Further, a row has developed on planning reforms that some experts believe would make construction of homes more straightforward.
The fact that developers are now easing off due to the tougher housing sales market will exacerbate the UK’s housing supply crunch.
What does the housing supply mean for property investors?
The decrease in supply of homes has an impact on property investors.
The average price of homes are increasing at a significant rate – beneficial to existing homeowners – up by 13.6% to £372,000 in the second half of 2022 (according to Barratt).
As there are fewer new builds it can lead to a demand switch to alternatives, such as flipped properties. Demand is spread over fewer properties, which can lead to greater demand.
Touchstone Education’s Paul Smith said, “The current market conditions create a range of opportunities for investors. The fall in supply for housing pushes prices up, creating value for property investors. This is only going to increase over time as the UK population continues to rise.”
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