The analysts at Timetric's Construction Intelligence Center report on the current state of the UK housing market, and what's to come.
The UK’s residential construction sector has floundered in recent quarters, and despite government plans to support the expansion in the housing supply, a return to the rapid pace of growth in 2014 is not assured. This partly reflects concerns over the sustainability of recent trends in the inflated property market, particularly as interest rate rises are expected in 2017, as well as the damage to investor confidence stemming from the uncertainty prevailing over the UK’s position in the EU.
There has been great volatility in trends in new housing output in recent years. Output value contracted by an annual average of 24% in 2008 and 2009 in the wake of the financial crisis, before rebounding quickly in 2010, with new housing output jumping by 26.5%. After three years of relative slow growth, the sector soared in 2014, posting an expansion of 25% in new housing output in real terms, according to ONS statistics. However, this was not to be repeated in 2015; estimated growth in new housing stood at just 1.3% last year. Given these trends, predicting where the sector is heading in the short-term is proving to be a matter of great debate.
Upward pressure on prices
The general expansion in supply in new housing in recent years has done little to quell the upward pressure on property prices across the country. Prices increased by an annual average of 10% across the UK in 2014, with increases reaching 17.4% in London, based on data from the ONS. Although by November 2015 the average rate of increase in house prices price had fallen to 7.7% across the UK and to 9.8% in London, prices were still rising well above the rate of growth in earnings, a trend that has been sustained since 2012.
Although the property market will be weaker in 2016, prices will continue to rise. This is in part due to the expectation that the UK’s housing supply will remain constrained and insufficient to meet demand. A lack of adequate supply combined with an increasing population has fueled the increase in prices, and private developers currently lack sufficient incentives to increase rapidly their rate of production and risk lowering potential returns.
New housing output down sharply in late 2015
Concerns over the upward pressure on residential property prices stemming from insufficient supply have intensified in the wake of trends in housing construction in the latter part of 2015. In November 2015 output across the housing sector (including repair and maintenance) decreased by 0.5% in comparison to October 2015, and on a year-on-year basis construction output in the new housing sector suffered a much sharper decline. This was most notable in the public sector; output of public housing was down by 21.6% in November. In comparison to public housing, the private housing sector recorded slight increases of 2.1% in August, 1.4% in September, 4.8% in October and 2.1% in November. Overall, this equated to a 4.2% year-on-year fall in total housing output in the third quarter of 2015. This latest data on housing construction in the UK underline the pressure that is being put on the private sector to raise the housing supply.
The 2015 Summer Budget outlined government plans for the construction of 200,000 “starter homes”. However, the creation of new public housing has also been dealt a blow by reduced government funding for the Department of Communities and Local Government (DCLG), which is responsible for providing public housing through various housing associations. The DCLG has suffered budget cuts of 51% since 2010, and, unsurprisingly, this has significantly impacted housing associations’ ability to fund new construction projects.
Changes to planning regulations provide some hope
With the spotlight on private developers to increase the housing supply, there have been recent reports detailing the large amount of undeveloped land currently being held by developers, leading to suggestions that developers are withholding supply in certain areas to maintain the upward pressure on prices. Developers have countered these claims by stating that extensive planning regulations and cuts in local authorities’ planning departments have significantly slowed down progress with new developments, and they have also been highlighting industry-wide issues, such as a shortage of skilled workers following the 2008 financial crash.
In regards to planning regulation stifling new projects, the government has released a series of changes aimed at streamlining the planning process; however these changes will take time to take effect in terms of supporting faster growth in construction output. Changes include fast tracked applications and what the government has termed an ‘urban planning revolution on brownfield sites’, in which planning permission on suitable sites will be automatic. These sites are likely to present increasing numbers of opportunities for the construction industry in the near future as momentum grows among developers and local authorities to utilize them.
A GBP400 million investment package supporting the development of 20 Housing Zones on brownfield sites in London has already been announced by the government in conjunction with the London Mayor. The government has also recently announced that a register of public land has identified 40,000 sites in London that could be developed into 130,000 new homes.
Growth is projected, but downside risks persist
Assuming the government manages to generate some momentum behind its plans and that improvements in the regulatory environment take hold, the CIC forecasts that residential construction output will expand at an annual average of 3-4% in real terms in 2016-2020.
However, there are downside risks to this forecast. Although the Bank of England has recently indicated that a tightening monetary policy will be further delayed, increases in interest rates are expected in 2017, and this will start to put greater pressure on housing affordability. Although increases in interest rates will be slow and steady, the fact that the UK remains heavily reliant on high levels of household debt to drive growth, the higher cost of credit could stifle demand for new housing.
Following the increases in stamp duty for high-end properties and a reduction in buy-to-let tax relief, domestic and foreign investor interest in the UK’s property market could dwindle, especially in London and the South East where stamp duty changes will have the most notable impact. Another factor that could slow the pace of growth in residential construction is Britain’s potential exit from the European Union following a planned referendum, possibly in 2016. A tightly contested referendum will do little to support investor confidence, and the UK’s construction industry would take a hit.
Despite these factors, the fundamentals of the UK residential construction sector, in particular the shortage in housing stock, suggest that the sector will remain on a long-term upward trajectory. Indeed, if the CIC’s central assumptions hold, the sector will generate an output value of around GBP70 billion in 2020 compared to GBP56.5 billion in 2015, ensuring significant opportunities for residential developers and contractors.
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