Private housebuilders currently build the majority of new homes in Great Britain. We estimate that the number of homes they could potentially build in England is 150,000 per year by 2020 if the barriers to volume expansion are removed.

The largest housebuilders have the capacity to increase output through measured and planned expansion. Better finance availability will support the medium-sized, often regional, housebuilders to expand. The smaller housebuilders are not expected to recover back to their former levels but will be able to expand output via niche opportunities and through custom and self build.

Levels of housebuilding

Private housebuilding levels (starts) have been increasing over the last six years since the downturn. Graph 4 shows the growth of the sector and the breakdown by housebuilder size estimated using the number of NHBC builder registrations. Not only are housebuilders increasing their output to meet demand, they built approximately 45% of all new affordable homes last year.

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^{Source: NHBC, DCLG, Savills Research}

The majority of new homes (54%) are being built by the 11 largest housebuilders (those building over 2,000 homes a year) and levels of starts have recovered to 20% below their 2007 peak. One third of new homes are being built by medium-sized housebuilders (100 to 2,000 homes a year) who are back to the levels of building in 2007.

The group that has struggled the most since the downturn are smaller housebuilders. Although some have expanded to produce more than 100 homes per year to become medium-sized, others have stopped registering new homes altogether contributing to the 10% decline in registered housebuilders in 2014 vs 2013.

Help to Buy

Help to Buy Equity Loan and NewBuy schemes supported 30,146 sales of new homes in England in the year to March 2015. Among many of the largest housebuilders an average of 32% of sales are supported by Help to Buy.

We estimate Help to Buy will support 30,000 new home sales per year and our estimate of potential delivery of homes by the private sector up to 2020 relies on its continuation. If Help to Buy comes to an end after its current funding expires in 2020, we are likely to see start volumes tapering off up to two years before the end of the scheme in anticipation.

Access to funding

Access to funding is easing for SME housebuilders. Competition among lenders means that the range of choice continues to grow. According to SPF Private Clients, a financial services broker, there are currently 45 different borrowing options available to SME builders. This is in sharp contrast to the very restricted market following the downturn.

Big banks which previously preferred to focus on major housebuilders are now prepared to advance in the region of 60% of the cost of a project to smaller players. Finance for up to 75% of a project is now available from about 20 specialist development lenders while debt funds, which are prepared to advance the full cost of a project, are increasingly looking beyond the M25 and further afield.

Current constraints

Providing returns to their shareholders is a priority for the nine listed housebuilders. Their operating margins are returning to their target of 15-20% over the cycle, having been increasing from negative levels since 2008. Typically, their strategy is to deliver controlled growth in housing numbers while maintaining or expanding their margins.

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^{Source: Thomson Reuters}

Planning delays are commonly cited as a constraint to the sector with reduced capacity of local authority planning departments owing to public spending cuts.

The cost and availability of materials have been major constraints but the problem is easing with the industry responding to the increased demand. Brick manufacturing plants have been reopened and two billion bricks are expected to be made in the UK this year.

The availability and cost of labour, particularly of bricklayers and joiners, has become a considerable constraint with workers able to command greater pay or benefits. This shortage of labour has meant that current sites have taken longer to complete.

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^{Source: HBF Survey Q1 2015}

In order to overcome the problem, apprentices and former military personnel (e.g. Persimmon’s Combat to Construction initiative) are being recruited and the Home Builders Federation is attempting to encourage experienced people who left the industry during the economic downturn to return. Now that the exchange rate is increasing in their favour, we may also see an increased flow of skilled labour from Eastern Europe returning to support the industry in the UK.

Future delivery

Our projection that the private sector has the potential to deliver 150,000 new home starts a year in England in 2020, is based on larger house builders pursuing controlled growth averaging 6% per annum during the next five years or 33% by 2020. However, several do have plans for more significant expansion. The boldest, Bovis, is planning to double their output to build 5,000 to 6,000 homes per year.

We’ve also taken into account the increase in the number of medium-sized builders registered. We estimate that this group, which is benefitting from better finance conditions and opportunities that are not in direct competition with the majors, has the potential to increase the number of annual starts by 30% by 2020.

The reduced availability of labour will continue to affect the smallest housebuilders the most as they have less capacity to train new people. As a result we only expect them to increase output by 17% by 2020. However, their output will be bolstered by the custom build and self-build sector which aims to double their contribution to the number of new homes built annually, according to the National Custom and Self-Build Association (NaCSBA).