Economically, we have looming challenges to the living sector, but we have almost 15 years’ market movement under our collective belt since the last great unpleasantness and perhaps things are different now. Ultimately, it is all about supply and demand (and hopefully a profit element in there somewhere), but let’s look at some of the elements that contribute to that in the housebuilder sector.
On the supply side, land and material costs are challenging. Land prices are probably too hot – both for strategic and immediate sites, where landowners have minimum price expectations guided by their land agents, and everyone is looking over their shoulders at what has being agreed on other schemes. In the same way that London office rents were driven upwards through the nineties to vanity levels that, some would say, did not reflect the real value of the underlying assets, land prices are heating up for desirable sites and that has to filter through to house buyers further down the line. Couple that with significant upward pressure on construction costs, and it makes for an uncomfortable margin squeeze for developers.
On the demand side, potential shocks include affordability and affordable housing supply. If it costs more to buy land and build housing stock, that has to be reflected in an increase in house prices (or chipped margins, and no investor is going to welcome that with open arms). House prices are at a historic high multiple of average earnings, and that’s with a recent history of low interest rates. All it needs is a minor creep in the cost of borrowing, and there has to be a worry that overstretched buyers will fall out of bed. Not only is that bad for private borrowers, but it could correct house prices and then attack developers’ margins and borrowing costs. It may never happen, but it’s the elephant in the room as we row our own boat more post-Brexit.
This also has an impact on affordable housing provision and recent planning policy developments focusing on “First Homes” as a discounted market tenure product are not very helpful - the real need with affordable housing is in rented stock, not sub-market priced sale stock, and we probably don’t need to salami slice the sales end of the market. For those registered providers with the relevant skills, it is driving them to bring forward their own developments instead of relying upon developers’ section 106 obligations, and it has certainly introduced choice and added impetus to the housebuilding sector. The regulator has longstanding views on segmenting core affordable stock from other trading activities, but it is certainly likely that the affordable housing sector will continue to pursue housebuilding aggressively to strip out a layer of profit from commercial housebuilding and to continue to fulfil a role in satisfying affordable housing demand in the widest sense.
Are we looking at 2008 all over again? Probably not – the money has been through a massive learning curve since then. There are systemic challenges to the sector with land and build price challenges, and operational funding and asset management challenges as stock is repositioned to a sustainable lower carbon way of working. But the sector and our sector stakeholders are alive to the issues, and work is well in hand to manage those shocks proactively rather than reactively. Will it be easy – no. Will it be cheap – no. But is it achievable – yes, it has to be.
This article appears in our Investing in Living report. To access the full report, please click on the link to the right of this page.