As any estate agent knows, housing transactions are far below what they were in the glory days of 2006-7 and inventory is hard to get. That’s true for the resale market, but it’s equally true for new homes, even though the Government has been hurling money and support at housebuilders since 2010.
Figures from the National House Building Council, which is the leading warranty provider for new homes, showed 200,700 houses registered in 2006-7. (NHBC registrations cover about 80 per cent of the total market.) After the crunch, that fell to just 85,000, even by 2010-11 with the market recovering, the number of houses registered was still only a little more than half the level seen at the top of the boom, at 117,500.
However, the recent picture has been much better than these statistics suggest in terms of inventory actually coming on the market. SmartNewHomes tracks new homes coming on to the market – its portal handles four-fifths of all new houses – and while it showed the final quarter of 2011 as somewhat muted, the market seems to roar back in January 2012 with a 41.4 per cent increase, which Steve Lees of SmartNewHomes put down to “a flurry of new scheme launches.” That growth has continued, with the figures for April showing new homes coming on to the market have nearly doubled since last year.
Build volumes have remained historically low, however. Smart New Homes noted in June 2011 that just 34,000 planning permissions for new homes were granted in the first quarter of 2011 – half the level seen five years before – and Steve Lees warned at the time that, “The Government and industry should not rest on its laurels. This is from an extremely low base and we are still a long way from building the thousands of extra new homes needed each year to meet the UK’s housing demand.”
DOING THE DEAL
While developers are building fewer houses than in the boom, though, they are at least pricing realistically – more so than many private vendors who are holding out for higher prices. New homes are now priced £16,878 lower than the average price in the wider market, according to SmartNewHomes.
That’s not the same across the country, though. Kevin Ellis, New Homes Director at Romans, says that in the south-east, where Romans operates, newbuild is still selling at a premium to older properties. But, he says, “There is a greater willingness to do deals,” though developers are still getting an average 96 per cent of asking price achieved on new properties.
“By and large,” he believes, “pricing will be driven by a developer’s stock position on a particular site.” Developers don’t have an incentive to wait – they need the cash flowing through – so they are naturally less reticent about keen pricing than private vendors. “They’ve taken a bit of a hit on the margin so they can get the workflow coming through,” he says.
He also believes the structure of the market has become healthier, by comparison with the apartment-heavy, city centre-focused market of 2006-7. “Developers now are generally building across the board,” he says; “The bigger operations are spreading their risk by building in all the different price ranges. It’s a much more sensible and balanced market.”
One major problem, though, is that housing is a market with long lead times. The availability of new housing may be improving at the moment, but the Drivers Jonas Deloitte London Residential Crane Survey shows the number of schemes being developed in the capital has more than halved from a year ago – from 81, to 55 six months back, and just 35 new schemes this summer. With new activity slowing, and an increasing number of schemes progressing to completion after a rapid pickup in starts about two years ago, this summer will see a glut of new properties, but in the medium term we could see supply dry up again.
Anthony Duggan, head of research at Drivers Jonas Deloitte, says it’s too early to call this a definite slowdown, but says there is real unease in the market. That’s particularly the case outside central London; three-quarters of new housing starts are in inner London, with a focus on the overseas buyer and the higher price range, while starts in the outer boroughs have dried up.
That’s borne out by the DCLG housing starts figure for the first quarter, which was down 11 per cent. It seems likely, then, that stock availability is likely to start contracting nationwide in the final quarter of this year. Kevin Ellis says that local authorities where Romans operates are “missing government targets by a country mile” in terms of new housing approvals – though housebuilders are beginning to increase the volume they’re building, and there’s a bigger appetite for buying land than there has been for some years.
One major difficulty facing the market has been the lack of finance – both for housebuilders, who have faced a funding freeze, and for buyers. It’s no surprise that housebuilders listed on the stock exchange seem to be doing better than others, as many were able to raise money in 2009.
One problem with the NewBuy scheme is the higher rates.’
The credit crunch hit buyers of newbuild properties even harder than the average property buyer. Many lenders cut the LTVs they were willing to offer on new properties to a maximum 85 per cent – 65 to 75 per cent for flats – and some decided to stop lending at all on newbuild apartments in certain areas, where they considered there was an oversupply. Higher deposit requirements also hit the first time buyer market, a core segment for most housebuilders.
Pricing will be driven by the developer’s stock position on a particular site.” Kevin Ellis, Romans Land & New Homes
Kevin Ellis says that while the mortgage market is recovering, it remains rather volatile, and lower LTVs together with much tighter credit scoring are still a problem. One problem with the government’s NewBuy scheme, for instance, is the high rates that lenders want for NewBuy mortgages – obviously that reflects higher risk, but it doesn’t help first time buyers with tight finances.
Lenders also chop and change their products. “You can have Santander this month all over the market, then suddenly they lose their appetite,” that’s where Romans’ subsidiary mortgage adviser, Flower, can help source better deals, but many buyers still head to the high street banks where, he says, they’re not getting much joy. He points to the smaller building societies as the lenders of choice for the new home market – “They’re more flexible and creative,” he says, “and have been more positive about lending to newbuild.”
THE NEWBUY SCHEME
The government’s flagship scheme, NewBuy, helps purchasers buy a property with only a 5 per cent deposit, and should help “up to 100,000 households” according to DCLG. However, the DCLG press release includes an estimate that one million people – including 380,000 first time buyers – can afford mortgage repayments but don’t have large enough deposits to get a mortgage; so the scheme only meets 10 per cent of current demand.
It’s also debatable how much NewBuy changes what’s available to buyers. Many of the larger housebuilders already had similar schemes; for instance, Taylor Wimpey’s ‘Take5’ scheme has been available since February 2011, while Barratt’s Head Start and Persimmon’s Helping Hand finance 15 per cent of the asking price.
However, smaller developers without access to such financial firepower have found the market stacked against them. Many offer discounts or offer to pay stamp duty, but since lenders deduct such incentives from the property valuation when calculating the LTV, such offers can be counter-productive. It’s ironic, then, that many of the smaller developers don’t have access to the NewBuy scheme.
GET BRITAIN BUILDING
The Get Britain Building fund, which provides financial support for developers, was also widely criticised for cutting out the smaller developer, since it was limited to sites with more than 25 homes. Recently, the bar has been lowered to allow sites with 15+ properties. But again, it’s small beer in terms of the total market, as Steve Lees notes; “Get Britain Building is likely to produce 16,000 homes; that’s way short of the quarter of a million we need. We commend the scheme and it kickstarted some developments, but it’s very small.”
While private sector newbuilds are growing again, total starts are still stagnant since affordable housing (accounting for roughly a fifth of housing stock and new building) has troughed. The first half of the 2011-12 financial year saw only 429 affordable housing starts, massively down year-on-year. True, that reflects a transition period, while policy has switched from direct public funding to the affordable rent model; none the less, a massive decline in construction is hardly helpful to the economy or the housing market, and the stats have already led to a war of words between housing minister Grant Shapps and his shadow counterpart Jack Dromey.
The plot thickened in July with a negative National Audit Office report on the new programme. It pointed out that nearly a fifth of contracts with developers still haven’t signed, and that the programme is heavily back end loaded – half the homes won’t be delivered until 2015, the final year of the programme. Comptroller and auditor general Amyas Morse also pointed out that the programme increases the level of risk for housing providers, who are finding it increasingly difficult to raise finance. “There is no room for slippage.”
IT’S JUST NOT WORKING
It seems that neither this government nor the last has managed to ensure an adequate supply of new housing, despite many different initiatives. Kevin Ellis believes government commitment to new housing has been patchy; “It’s on the political agenda at one point, then it isn’t, then it’s back.”
Steve Lees believes government schemes simply haven’t been ambitious enough; for instance, he says, NewBuy is a good idea “but there’s a question mark over the number of people it will help.” He also believes government action has not been sustained; schemes have been chopped and changed too often. “You get somebody new as housing minister,” he says, “and then it’s out with the old, in with the new; there’s constant change. Let’s support initiatives properly and on a greater scale, so they really make a difference.”
But, he says, there is no single magic bullet. “Is it planning? Is it investment? Is it availability of mortgage finance? There are quite a lot of different things affecting the market that need a catalyst.” Planning policy, for instance, has to be addressed – and has been, though some councils won’t be putting the changes into effect until 2013 – while it is difficult to encourage developers to increase investment unless mortgage availability for buyers is freed up.
The shortfall of newbuild may be one factor keeping property prices higher than they would otherwise be. Is there a danger that increased development could lead to a glut of property on the market?
Kevin Ellis doesn’t think so. He says even if local authority targets for new housing are met, “in reality that isn’t going to bring prices down, because you won’t have 2,000 of the same house all coming on the market at the same time” – developments will be spread among different locations and price ranges. There’s demand from private rented sector landlords as well as for owner occupation; and the growth of rental means that in three or four years’ time when the market gets back to normal, there will be a big pipeline of renters wanting to buy.
It’s easy to get bogged down in short term politics and statistics, but the stark fact is that the UK has consistently failed to deliver the new housing we need in the longer term. Household formation is forecast to run at 232,000 a year, and yet even at the top of the boom, housing starts undershot that figure by nearly 20 per cent. Since 2001, net additions to the nation’s housing stock have only exceeded 200,000 in a single year. Steve Lees says, “We are not building enough and we haven’t been for a number of years” – something has to be done.”