Are we seeing the start of a housing development slowdown?

Lots has been written in the national press in recent weeks about a supposed imminent crash in the UK housing market in the face of the darkening economic climate. Many housebuilders, however, will treat these predictions with some degree of scepticism. In the real world of buying and selling new build properties, all the data suggest that demand remains extremely high – just last week Rightmove found asking prices had risen another 2.1% in the last month. Official figures show prices up 10% year-on-year. The Royal Institution of Chartered Surveyors (RICS) meanwhile, said new buyer enquiries increased last month – the eighth consecutive month they have done so.

Developers, of course, would be mad not to have a cautious eye on the 12 months ahead, with the cost of living crisis biting, rampant inflation (still rising) and the possibility of the economy dipping into recession. But housing market crashes have been predicted all too often before, and rarely materialise – the widespread predictions of lockdown and post Brexit property crashes being two recent cases in point. The biggest builder in the UK, Barratt, sold nearly a home per site per week in the first five months of the year, well up on the same period in 2021, and well beyond the long-term average – with other listed firms reporting similar rosy trading performances so far this year.

Demand is clearly, then, still strong. But less noticed, has been growing evidence that housebuilding supply may already be weakening, seemingly in the face of challenges including materials cost inflation and planning delays. With the government having seemingly lost the will to support the expansion of the industry to deliver 300,000 homes a year – despite its promise at the last election – there is growing concern that these data are a pre-cursor to a more serious slowdown. So, what do the numbers tell us, and how worried should the industry be?

No problem

The received wisdom is that the residential development sector is, largely, in rude health, having shaken off many of the challenges of the covid lockdowns in 2020. Major listed housebuilders are mostly plotting volume expansion from an enviable position of strong balance sheets and bulging forward order books. Noble Francis, economics director at the Construction Products Association (CPA), says housebuilders are generally expecting volume growth of 5-7% this year and that the challenges for them, if they come, will be in the third quarter, after the next round of energy price rises, when the cost of living crisis deepens, impacting consumer confidence. He predicts modest housebuilding output growth of 1% this year and next.

Demand is clearly, then, still strong. But less noticed, has been growing evidence that housebuilding supply may already be weakening, seemingly in the face of challenges including materials cost inflation and planning delays.

“Whilst house price growth is still strong and cost inflation is still manageable, house builders are still happy to increase supply,” he says. “The real question is what happens after Q3, and whether the smaller housebuilders are more impacted.”

Likewise, Neal Hudson, MD of consultant Residential Analysts, says he is concerned about the market in the autumn, but feels that number so far have held “pretty firm”. “I’m pretty negative looking forward,” he says, “I think most likely we’ll see stagnation. But I don’t see anything yet to suggest a problem.”

Supporting this view of the world were recent numbers from the NHBC which appeared to show housing registrations (equivalent to starts) up sharply in the first quarter of the year – recording the highest Q1 figure since before the financial crisis.

Downward trend

But these comments, and those numbers, don’t appear to reflect all the latest data. The gold standard of housebuilding data in England are the government’s Net Additions figures. However, the problem with these is they only appear annually, around six months after the end of the financial year, so are entirely backward-looking. (The latest Net Additions numbers do show a big drop in numbers, but because they relate to the April 2020-March 2021 period, which included the first covid lockdown when the market shut entirely, they are no guide to the current market).

In between the autumn publication of these numbers, the industry uses a variety of more-or-less reliable sources, including data from Energy Performance Certificate (EPC) registrations, numbers gained largely from building control, and the Office of National Statistics construction output and construction new orders numbers, based on surveys.

Of these, the EPC numbers (created when new homes are completed) are seen by many to give the best indicator, albeit they also include EPCs created from conversions and changes of use. The latest quarterly EPC numbers show that between January and March this year there was a 5.6% drop in registrations compared to the last quarter of 2021, and, more significantly, and 8.6% drop compared to the same quarter last year. Numbers are now back down to the level seen prior to the covid pandemic and subsequent housing boom – it remains to be seen if they will drop further.

Supporting this story are the ONS numbers. According to the construction output figures, housebuilding output peaked in January this year, but has since started to drop back, declining 1.2% in March (see below). In addition, new orders for housebuilding fell back 8% in the January March quarter of the year compared to the final quarter of 2021, and are now 11% below the peak seen in the third quarter of last year. 

Housing output

2019=100

It should be said that, for the moment, all of these numbers remain at historically healthy levels, with both housebuilding output and EPC registrations similar to that seen in the quarter prior to the onset of the pandemic. The point is the trend on all three appears to be downward.

So, what about the very healthy NHBC numbers referred to above? The NHBC did not respond to a request to explain the jump in registrations, which came despite it recording – like the other data discussed – a modest drop (of 4% y-o-y) in completions. However, one industry insider said the big increase simply reflected the imminent industry shift to new energy efficiency standards in June – which had encouraged housebuilders to register homes earlier than they normally would in order to escape having to meet the more onerous new regulations. And hence, that the figures should not be read – this quarter at least – as a reliable guide.

Disappointing

And the official data isn’t the only information suggest clouds on the horizon. Home Builders’ Federation (HBF) member survey data, quoted in a report by Capital Economics, suggests that while housebuilding starts initially rebounded at pace when the first lockdown was lifted, to reach a 13-year peak in spring last year, they have since fallen back sharply. Andrew Wishart, senior economist at the firm, says that completions have also remained resolutely “disappointing” since, never echoed this initial spike in site starts.

“With the materials shortages and with input price inflation rising, it’s simply been harder than expected to get plots that builders have started finished.” Andrew Wishart, Capital Economics

So, if demand is high, what’s going on? Wishart blames the low build rates on the problems with the cost and availability of construction materials since the covid crisis, and now exacerbated by the war in Ukraine. He says: “With the materials shortages and with input price inflation rising, it’s simply been harder than expected to get plots that builders have started finished.”

Certainly, the challenges of supply chain difficulties post-covid are very well-documented and have been causing housebuilders of all shapes and sizes a huge headache – but the extent to which they have actively delayed building work is disputed. While major listed firms largely claim to have kept a lid on the problems through their buying power with suppliers and long-term strategic relationships, there is certainly evidence of housing associations delaying development programme due to materials shortages. Just last week, 46,000-home landlord Platform missed its development target by 22% citing materials shortages and cost rises, while association Great Places has missed its target by 35%, offering a similar explanation.

But there is further detail from the HBF member survey, quoted in the Capital Economics report, which points to potentially another explanation for faltering supply. This is that the number of sites which housebuilders across are operating from has actually been declining since the middle of 2020 – even during this period of booming demand and supposed expansion by the majors.

Frustration

Rico Wojtulewicz, head of housing and planning policy at the National Federation of Builders, which represents mainly SME housebuilders, is in little doubt that the planning system is the key culprit for this drop in outlets. He thinks there is already a drop off in supply – and that gridlock in local authority planning departments in the aftermath of covid is largely to blame. “It’s a combination of things – there’s materials prices, labour availability. But the main frustration is from the working from home in council planning departments – there’s just a huge delay in getting sign off of any project through to sites.

“We’ve been trying to warn government that this is going to impact upon supply but it hasn’t been taking it seriously enough – and now I think it’s really starting to bite”.

See also>> Housing minister admits planners are facing resourcing difficulties

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Wojtulewicz’s comments come after data from the government in recent months which has shown that the speed of local authority decision-making has dropped to a five-year low, and after Redrow chief executive Matthew Pratt said the system had hit its “lowest point” for years. Pratt echoed housebuilder Gleeson, which at the end of last year said the planning system was constraining its ability to open new sites to meet demand.

On top of this, the sector is concerned about a growing set of specific challenges, such as that posed in certain authorities by “nutrient neutrality” requirements – which the HBF estimates is itself holding up 100,000 homes – the upgrading of energy efficiency requirements with Part L, the Future Homes Standard, the requirement to deliver Biodiversity Net Gain, and – of course – the £8bn or so liability placed on the industry (so far) over the cladding debacle.

The final ingredient in this unpleasant broth for the sector is the apparent change of heart over housebuilding more broadly by the government. Despite a commitment in the winning 2019 Conservative manifesto to build 300,000 homes a year by the middle of this decade, the new secretary of state Michael Gove has clearly signalled the target has been downgraded, and, is much less important than other housing goals around the quality of places created. Planning reforms designed to deliver permissions have been scrapped in favour of a more “localist” approach to suit Tory backbenchers.

Earlier this month [May], Gove used an article in a national newspaper to stress his desire to take on the “vested interests” on large national developers, and in March referred to major housebuilders as a “cartel”, comments later described by Stewart Baseley, executive chair of the HBF, as “extremely worrying”.

And with the stimulus that has supported the sector’s profits through the last decade – Help to Buy – almost at an end, the lack of a government commitment to housing numbers surely signals the end of any hopes it will be replaced.

Increasingly challenging

The HBF’s Baseley says this current position is in direct contrast to the “pro development approach” from government that had seen output doubled in the decade since the credit crunch. He says: “Demand for new homes remains extremely strong, but the operating environment for builders is becoming increasingly challenging.

“We are now seeing a range of policies that are starting to constrain growth and create delays, particularly in the planning process. A growing regulatory burden and a lack of clarity from Government on key issues threatens to undermine confidence.

“Not delivering the number of homes the country clearly needs will have significant economic and social implications, and see jobs and investment cut, reduced levels of home ownership and reduced access to decent, affordable housing.”

One senior housebuilding industry source puts it in starker terms: “It’s inevitable supply is going to fall if the government stays on the track it’s on. The number of active sites is falling because of planning, it’s massively frustrating. And with everything coming down the line, chief executives are not going to go for all-out growth.”

The lack of political support, of course, makes the current concern about faltering supply all the more concerning, because it implies Mr Gove would not necessarily be mounting a white charger to ride to the industry’s rescue if the situation worsened – which, of course, is what is predicted.

“Price correction”

Resi Analysts’ Hudson says he “wouldn’t be surprised” if development activity levels start to fall from the autumn, with housebuilders increasing looking to build to rent purchasers rather than private buyers. “Housebuilders will be keeping a close eye on the market and will pull back very quickly if sales rates start to fall.”

Capital Economics’ predicts that while house prices will rise 8% this year, they will drop back 5% next year and a further 3% in 2024 during a period of what Wishart calls a “correction, not a crash”. More worrying than the price level for housebuilders, though, is the firm’s prediction on sales transactions and build volumes – it thinks transactions will drop by a third between last year and 2023, dragging housebuilding volumes down by a similar amount – to their lowest level since 2012. “Our view is housebuilders can’t make the most of the market now because of materials problems, and then when those clear up they won’t want to build because of the market,” he says.

Noble Francis says the government’s about turn on its 300k target therefore begs the question what – if anything – it will do if the industry is hit hard in the coming years. “The question is what is the impact on the sector as we appear to be moving away from constantly enabling demand, as we have done, via Help to Buy, and interest rate policy, and Stamp Duty,” he says. “What is going to replace it to drive supply?

“The government can say it wants housing associations and local authorities to build more, but these organisations all have their challenges, such as legacy buildings. The question is where is the additional supply going to come from?”

Currently, that’s not something that’s easy for the sector to answer.