Will Britain Ever Build Enough Houses?

By
the
end
of
2024,
the
UK
will
most
likely
be
headed
to
the
polls.
Housing
planning
reform
is
high
on
the
political
agenda
as
the
current
planning
system
is
one
of
the
barriers
to
housing
affordability.
Ultimately,
the
path
to
affordable
housing
is
through
increased
supply.
While
Britain’s
two
main
political
parties
are
targeting
300,000
new
homes
built
per
year,
builders
have
constantly
fallen
short
of
this
target.

Although
we
are
cautiously
hopeful
of
a
housing
market
rebound,
partly
because
of
the
stabilisation
of
interest
rates
and
building
costs,
builders
continue
to
face
a
myriad
of
ongoing
challenges,
making
achieving
this
target
in
the
near
term
an
uphill
battle.
Among
these
challenges
are
upcoming
regulatory
changes,
considerable
red
tape,
a
shortage
of
small
builders,
a
tight
labour
market,
and
incentives
required
to
attract
new
homebuyers,
all
of
which
affect
homebuilder
profitability
and,
consequently,
the
number
of
homes
completed.

Notwithstanding
the
government’s
plan
for
increased
housing,
we
anticipate
builders
will
continue
to
tread
cautiously
and
manage
housing
delivery
with
an
eye
toward
maintaining
their
own
profitability,
while
continuing
to
invest
for
the
future.

According
to
a
report
from
Resolution
Foundation,
about
one
in
10
people
across
the
UK
(roughly
6.5
million)
live
in
poor
quality
housing
–
defined
as
homes
that
are
not
in
a
good
state
of
repair,
where
heating,
electronics,
or
plumbing
are
not
in
good
working
order,
and
where
damp
is
present.

The
report
states
that
poor
quality
housing
is
concentrated
among
young
people,
low-income
families
and
those
from
ethnic
minority
backgrounds.
Moreover,
the
UK
population
is
projected
to
grow
from
approximately
67
million
as
of
mid-2021
to
70
million
by
mid-2026
and
further
to
73.7
million
by
mid-2036,
according
to
the
Office
for
National
Statistics.

Despite
the
UK’s
considerable
need
for
housing,
new
housing
remains
muted
amid
significant
property
development
challenges.
The
expectation
of
interest
rate
cuts
in
2024
should
be
positive
for
housing
affordability
and
some
demand.
However,
given
the
constrained
supply,
housing
prices
will
likely
remain
elevated
until
supply
and
demand
dynamics
normalise.

Challenges
Hindering
UK
Housing
Developments
Planning
and
Permitting
Issues

A
complicated
planning
system
and
considerable
regulatory
hurdles
continue
to
make
homebuilding
inefficient.
New
development
permits
follow
a
complex
process
and
lengthy
wait
times
resulting
in
a
slow
pace
of
development
and
increased
costs.
The
UK
government
is
pushing
for
reform
with
efforts
towards
prioritizing
brownfield
development
and
speeding
up
the
planning
system.
However,
it
is
yet
to
be
seen
whether
the
current
government
will
be
more
successful
than
its
predecessors
on
this
front.

Regulatory
Changes
Coming
to
the
Homebuilding
Sector

The
“Future
Homes
Standard”
is
part
of
the
UK
government’s
plan
to
deliver
zero-carbon
homes
by
2025.
The
standard
will
ensure
that
new
homes
are
future-proofed
and
produce
a
minimum
75%
lower
CO2
emissions
than
those
built
to
current
standards.
The
standard
prioritises
low-carbon
heating
systems
and
focuses
on
the
efficiency
of
a
building
by
improving
insulation
and
minimizing
heat
loss.

These
changes
will
require
builders
and
their
subtrades
to
enhance
their
skills
through
training
and
adoption
of
new
technologies.
Beyond
the
increased
cost
to
builders,
companies
are
likely
to
face
other
challenges
such
as
design
changes,
lack
of
expertise,
and
potential
issues
arising
from
managing
new
supply
chains
and
the
maintenance
of
lowcarbon
heat
pumps.
While
larger
homebuilders
have
likely
begun
the
transition
process
with
their
design
teams,
we
expect
smaller
homebuilders
may
struggle
throughout
the
transition
period,
with
regard
to
the
added
costs
and
training
required
to
develop
the
technical
understanding
of
the
new
regulations.

Fewer
Small
Builders
Bear
a
Disproportionate
Impact
of
Challenges

Historically,
small
and
medium-sized
enterprises
(SMEs)
played
a
significant
role
in
the
housing
market.
Unlike
national
homebuilders,
SMEs
are
often
embedded
within
the
communities
they
build,
making
them
the
most
suitable
to
assess
local
need.

Forty
years
ago,
SME
builders
(those
that
focus
on
only
a
handful
of
sites
at
one
time)
delivered
40%
of
homes.
Today,
this
figure
is
closer
to
12%
as
larger
developers
such
as
Barratt
Developments
(BDEV),
Taylor
Wimpey
(TW.),
and
Persimmon
(PSN)
dominate
the
building
landscape.
Over
the
years,
SME
builders
have
been
disproportionately
affected
by
bureaucracy
and
challenges
accessing
suitable
land.

Land
is
typically
sold
via
a
competitive
process
and
the
number
of
sites
under
100
plots
(i.e.,
those
for
which
SMEs
would
typically
compete)
have
fallen
consistently
since
2016.
We
expect
operating
pressures
will
continue
to
have
a
greater
impact
on
SMEs.
Unless
there
is
significant
government
reform
encouraging
SME
builders,
we
believe
the
problem
will
only
get
worse
as
large
builders
gain
market
share
and
continue
to
benefit
from
their
economies
of
scale
as
it
relates
to
land
acquisition,
preferential
subtrade
scheduling,
and
materials
pricing.

Affordability
Challenges
Affect
Builder
Profitability

According
to
the
Office
for
National
Statistics,
over
the
last
25
years,
housing
affordability
has
worsened
in
every
local
authority,
especially
in
London
and
the
surrounding
areas.
In
1997,
89%
of
local
authorities
had
an
affordability
ratio
of
less
than
five
times
workers’
earnings,
whereas
only
7%
had
this
level
of
affordability
in
2022.
There
are
significant
differences
in
affordability
across
the
country
and
regionally,
London
continues
to
have
the
lowest
affordability,
while
Scotland
and
Ireland
are
the
most
affordable.

Uncertainty
around
homeowner
affordability
affects
builders
in
several
ways.
In
an
uncertain
market,
builders
increasingly
need
to
offer
incentives
to
attract
new
homebuyers.
Such
incentives,
including
upgrades,
price
reductions,
waived
closing
costs,
or
reduced
interest
rates,
affect
project
profitability.
Despite
the
Government’s
initiatives
to
boost
development,
we
expect
most
developers
will
be
required
to
continue
to
adjust
prices
and
offer
incentives
to
improve
homebuyer
affordability
and
drive
demand.
Therefore,
we
expect
builder
profitability
to
remain
under
pressure.

Shortage
of
Skilled
Trades

The
UK
Trade
Skills
Index
2023
report
has
highlighted
the
need
for
937,000
new
recruits
by
2032
to
bridge
the
skills
gap
in
the
construction
and
trades
industry.
Of
this,
nearly
a
quarter
of
a
million
(244,000)
must
be
qualified
apprentices
to
fill
a
growing
gap.
The
UK’s
tight
skilled
trades
market
has
extended
construction
timelines,
raised
costs,
and
impeded
productivity.
Solutions
to
these
labour
challenges
are
critical
for
the
homebuilding
sector.
Looking
ahead,
we
expect
construction
and
financing
cost
inflation
to
ease;
however,
we
believe
the
shortage
of
skilled
labour
will
continue
to
hinder
development.
Until
there
is
significant
progress
on
this
front,
builders
will
continue
to
struggle
with
their
own
productivity
and
that
of
their
trades,
which
will
further
extend
timelines
and
could
lead
to
additional
labour
cost
inflation.

Big
Builders
Don’t
Provide
Low-Income
Housing

According
to
the
National
Planning
Policy
Framework
(NPPF),
at
least
10%
of
each
major
housing
development
must
consist
of
affordable
homes.
Outside
of
these
requirements,
homebuilders
may
have
less
incentive
to
provide
housing
aimed
at
consumers
in
low-income
brackets,
despite
the
wider
social
benefits.
Homebuilders
that
focus
on
the
step-up
or
luxury
market
are
in
a
better
position
than
those
focused
on
first-time
homebuyers.
Not
only
is
the
demand
for
these
types
of
housing
less
cyclical,
but
they
are
typically
more
profitable.

Helping
qualifying
individuals
into
homeownership
is
a
highly
political
topic.
The
Government
has
in
place
several
schemes
to
help
support
first-time
homebuyers
and
those
in
low-income
brackets.
For
example,
“Help
to
Buy”
was
introduced
in
2013
and
ended
in
March
2023.
This
Government-backed
scheme
gave
first-time
homebuyers
extra
money
to
buy
their
first
home.
If
potential
homebuyers
saved
up
5%
for
a
deposit,
the
Government
granted
a
loan
of
up
to
20%,
interest
free
for
up
to
five
years.
Approximately
292,000
properties
were
purchased
using
this
scheme
as
the
Government
provided
loans
totaling
over
£17
billion.

Although
this
scheme
has
now
drawn
to
a
close,
there
are
other
options
to
support
homeownership
such
as
the
“Shared
Ownership”
or
“Rent
to
Buy”
programmes.
However,
without
adequate
housing
supply
in
place,
these
schemes
exacerbate
the
same
housing
problem
they
are
trying
to
solve.

The
recent
stabilisation
of
finance
and
construction
costs
is
a
positive
signal
for
homebuilders
and
buyers
alike.
However,
development
challenges
continue
to
restrain
homebuilding
activity
and
require
significant
government
reform
to
reduce
the
red
tape
and
ease
restrictive
planning
regulations,
lower
the
barriers
to
entry
that
prevent
SMEs
from
competing,
and
attract
skilled
workers.

Resolving
these
issues
requires
significant
reform
from
policymakers
and
would
create
an
environment
conducive
to
higher
homebuilding.
We
expect
housing
plans
for
both
political
parties
will
continue
to
fall
under
intense
scrutiny
until
election
day.
It
remains
to
be
seen
whether
either
party’s
planned
reforms
will
be
enough
to
move
the
needle
and
finally
deliver
on
their
promises.

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