The market for new homes has changed considerably in the last few years. Constraints on mortgage lending, a weak economy and lacklustre house price growth have restricted the market and left the sector smaller, leaner and more targeted in its activity.

Developers have responded to this by focusing firmly on the family housing market and high-specification flatted schemes in established locations, aimed at owner-occupiers and downsizers.

Even before changes to the National Planning Framework, which now encourages new development to respond to ‘demand’ rather than ‘need’, market forces came to the fore. Understanding the nature of buyers in the new homes market is therefore critical to successful development and delivery today.

The equity-rich owner-occupier markets are likely to be the primary focus of housebuilders and developers over the short to medium-term. However, if revised housing targets are to be met, the first time buyer and investor markets cannot be ignored.

First time buyers

Difficulties in accessing mortgage finance continue to limit first time buyers. Today’s owner-occupier demand is dominated by the cash and equity rich. However, first time buyers remain an important market for new homes, and the industry has had to adjust and innovate to overcome the constraints this group now face. For today’s first time buyers the primary concern is being able to afford a deposit rather than meeting mortgage repayments.

In the mortgaged market the average first time buyer’s annual income of £32,500 compares to an average deposit of £26,500 – highlighting the extreme difficulty in funding a deposit though savings (see Graph 2.1). Only the fortunate ones able to call on the ‘bank of mum and dad’ have been able to get on the housing ladder in recent years. HCA’s HomeBuy Direct was successful in assisting first time buyers, something the recently launched ‘FirstBuy’ aims to continue.

The equity loan scheme provides first time buyers with up to 20% of a property’s value, and aims to assist an estimated 10,500 first time buyers over the next two years, simultaneously bolstering the market for new build product.

Although helpful, such schemes can only assist a limited proportion of the market. Housebuilders have responded with their own equity loan schemes and initiatives such as deposit matching. However, the opportunity lies in the private rented sector, and this is where the investor market is making a comeback.

Return of the investor

Domestic investors are returning to the market, albeit in a different form to those active in 2007. With lending to buy-to-let investors down -67% on the 2007 peak, today’s investors are experienced and equity rich, looking to add quality investment property to established portfolios.

Their focus is on core markets with proven tenant demand. Investors accounted for 34% of Savills new homes sales in the first half of 2011, up from a low of 7% in the second half of 2009 (see Graph 2.2).

Overseas investors are a growing force, particularly in London among quality-flatted developments in prime areas. London’s new build market has been buoyed by a steady flow of foreign buyers, attracted by weak sterling, global city status and a reputation as a safe haven for overseas wealth.

Such has been the level of overseas demand that activity is filtering out into more mainstream London markets and established high-value university towns such as Bath, Oxford, Cambridge and Edinburgh.

Looking to capitalise on this ready source of sales, many developers are taking their schemes direct to the overseas markets of Southeast Asia, with off-plan sales helping to forward fund future phases.

Overseas buyers are only good news for those locations that have the ability to attract them. In lower value, less established areas, these purchasers are absent.

Quality and diversification

In a restricted market, new development is increasingly targeted at areas that have identifiable housing shortages and proven demand, something set to continue as the National Planning Policy Framework comes into effect, underpinning the influence of market forces.

The major challenge for developers in future will be identifying and delivering viable schemes that meet the new demand profile. Only in this way will levels of pricing and rates of sale be achieved that can balance housebuilders’ growing cost and debt constraints.

Going forward, the industry will have to do more and tackle some of the big unanswered issues in order to supply property to the private rented sector and assisted first time buyers.

Taken from
Focus: Development, Investment & New Homes, 2011