This issue describes a UK housing market that is diverse and fragmented, where conflicting signals on activity and price growth confuse those who are trying to put together the jigsaw puzzle of house price forecasts. Download here.

The biggest criticism heaped upon the Government’s Help to Buy scheme which allows buyers to move on and up the ladder with deposits of just 5%, is that it stokes up demand without addressing the problems of undersupply.

As the property market strengthens, the strong surge in interest from homebuyers fuels fears that government stimuli may deliver another housing bubble rather than more homes. That the Prime Minister decided to bring forward the introduction of the mortgage guarantee element of the scheme, originally scheduled for January 2014, only adds to the concerns.

However, behind the headlines there is growing evidence that homebuilders are responding to demand – building more, bringing forward sites and buying land.

While there is no quick fix to half a decade of underproduction, housing supply is increasing once again, albeit from a very low level. Around 37,053 residential units were granted planning approval in England during the second quarter of this year, according to Glenigan.

Although this represents a drop in the three months to March 2013, the figures are up 49% compared to the same period in 2012.

The strengthening of approvals in the North of England and the Midlands during the first half of 2013 suggests that confidence is returning to markets badly affected by the downturn. Southern England saw only a modest rise in approvals while London suffered a fall.

Government data shows housing starts in England rose 36.5% in the three months to June 2013 against the same period last year. The Department for Communities and Local Government (DCLG) recorded 33,220 starts, a 23% rise on the previous quarter.

Yet the most bullish set of data comes in the shape of the Markit/ CIPS construction purchasing managers index (PMI) which showed residential construction rising at its sharpest rate since November 2003.

Demand unleashed

All this activity is not just a reflection of an improving economy and positive sentiment but the result of the release of pent up demand from homebuyers. The Government’s Funding for Lending Scheme, introduced in July 2012, has helped boost levels of consumer lending whilst keeping rates down on higher loan-to-value mortgages.

More recently, the introduction of the more controversial Help to Buy scheme has raised even more interest from buyers, particularly those who have yet to set foot on the housing ladder.

It is still too soon to gauge how much of the interest generated by the surprise early launch of the mortgage guarantee part of the scheme will actually convert into sales.

However, the popularity of the equity loan element of Help to Buy, aimed at buyers of new build homes, is reflected in the 15,410 reservations made since that part of the scheme was introduced in April.

Figures from the Home Builders Federation show the biggest take up has been outside London with 3,898 reservations made in the Midlands followed by the East and South East where 3,133 signed up. London saw 1,099 deals made, the lowest of all regions.

The figures suggest that even with the assistance of Help to Buy, London is still out of reach of many first-time buyers – the principle consumers of the scheme so far. However, the data also shows that the equity loan is having the greatest effect where it is needed most – outside the capital where the ripple effect of London’s robust housing market has yet to reach.

The stimulation of demand in areas where the market has been more subdued, is likely to prompt builders not only to deliver existing sites faster but also to bring forward new sites and go shopping for land.

Land prices

Renewed confidence in the housing market has encouraged builders to channel their debt and equity into longer term sites and to start work on strategic sites from existing land banks.

Average land prices are now rising in line with house prices. Savills figures shows greenfield land values are up 5% on an annual basis while the cost of urban land rose by 5.2%. In comparison, average house prices rose by 4.3% over the same period according to Nationwide.

Developers are once again targeting more challenging urban and strategic land rather than simply opting for the readily developable greenfield sites. In the third quarter of 2013, urban land values grew by 2.2% against 1.3% growth in greenfield land values. The greatest increases were recorded in the South East (3.2%) and West (3.3%).

Although some sites are achieving prices last seen at the height of the market, overall growth is still well below those high levels.

Constraints to delivery

Despite the increase in activity, it is unlikely that private housebuilders will deliver enough homes to meet the projection for current household growth. The decline in capacity from SMEs and regional housebuilders, which played a significant part in delivery of homes in previous housebuilding upturns, puts added pressure on the bigger players. Housebuilders are also citing a shortage of materials and skilled workers. After five years of reduced training schemes, it will take time to train a new generation.

Given that many of the props supporting growth are temporary, the timing may work against the industry. Help to Buy is presumed to last three years.

Government support in the form of Funding for Lending will at some stage be withdrawn and interest rates will inevitably rise again. All eyes are on 2016.

Taken from
Residential Property Focus Q4 2013

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