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Housebuilders are benefitting from the gathering pace of housing market recovery and the revival is already showing signs of boosting construction levels. As builders reported growing company profits over the summer, some of the bigger players voiced their intention to increase production following a surge in buyer demand prompted by Help to Buy, the Government incentive scheme. For many, this means building on an already busy spring.

Government statistics show that building work started on just over 23,000 private homes in England during the first three months of this year. This represents an increase of 18% on the same period last year.

The rise in construction predates the launch of £130 billion Help to Buy in April aimed at stimulating house building by helping buyers on and up the property ladder. Under the first part of the scheme, buyers of new build homes can borrow an equity loan worth up to 20% of the value of a property priced up to £600,000. The second and more radical part of the measure which offers a mortgage guarantee to buyers of all properties comes into play in January 2014.

The Government says that the Help to Buy equity loan encouraged almost 7,000 reservations in the first three months. There are now more than 400 builders across the country registered for Help to Buy – some of them smaller developers that would have been kept out of previous schemes.

These figures dwarf earlier incentive measures such as New Buy that has attracted some 4,500 reservations since its launch in 2012. Together with First Buy these incentives have accounted for between 20% and 25% of sales among major volume housebuilders.

Critics of Help to Buy, which include the IMF, the previous Governor of the Bank of England and the Office for Budget Responsibility, fear that the scheme will simply stoke up property prices rather than encourage housebuilders to build.

It is not the only Government measure helping to buoy the property market. Funding for Lending, designed to provide banks with cheap money, has had a greater impact on the mortgage lending than it has on lending to small businesses. Growing demand from homebuyers with access to an improved mortgage market has in turn served to boost sales.

Can they build enough?

Barratt has indicated that their completions of new homes would rise by 20% compared with two years ago. The Help to Buy initiative will be particularly beneficial in areas where the property market has been more subdued, as building sites which may not have previously delivered the necessary sales volumes, become commercially viable.

This said, housebuilders are starting from a very low level. At an average rate of 115,000 new homes a year, house building levels in England are currently half of those needed to meet the formation of new households which is expected to rise by 220,000 a year.

Last year, private builders delivered just 88,000 homes. Since 2007, building levels have dipped to rates not seen since the 1920s.

Moreover, although the number of starts rose in the first quarter this year, the number of completions fell over the same period. That means the recent increases in house building will take time to feed through to sales.

Yet even with a Government boost, there are constraints to the number of homes private house builders can physically deliver. Some cite difficulties in recruiting a large enough workforce as a current barrier to building more. Others blame a slow planning system as another frustrating hurdle.

It is questionable whether private house building for sale can ever provide the volumes necessary to meet demands of the growing population.

At its highest in the 1960s, private house building delivered about 200,000 homes a year. We are unlikely to return to those levels in today’s market. Government incentives schemes do not alter the fact that demand for homes remains constrained by property prices that are high relative to income.

Land Banks

Property developers’ supply of land is falling

Low levels of house building have prompted critics to accuse property developers of hoarding sites in anticipation of higher land values. Savills analysis of land banks with planning permission held by the top eight listed housebuilders shows that the supply of land held by builders is in fact, falling.

Between 2007 and 2012, the number of house plots with permission held by the top eight (which includes Barratt, Persimmon and Taylor Wimpey) dropped by 105,000 to 268,000. Slowing rates of house building during the economic downturn resulted in a peak in the volume of land held by builders in 2009. That year, the eight held enough land to keep building for another 7.5 years. As the market improved, that figure declined to 5.3 years in 2012. However, it is still higher than it was at the start of the century when when developers held enough land to keep building for just over three years.

Sites with planning permission are not necessarily commercially viable. These land banks include sites in weaker markets as well as those that are currently being built out in phases. Crucially, not all sites with permission belongs to housebuilders and developers. Some 45% of permitted sites in London are, in fact, in the hands of land owners such as public bodies, local authorities and industry. Bringing these sites forward will help deliver more homes. Improved market conditions can only help.

Taken from
Residential Property Focus Q3 2013

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