We are not building enough homes in England.
In the year to March 2020 we delivered 255,000 homes.That is more than double the housing supply we’ve had back in 2012-13 but still falls some way short of the government’s target of building 300,000 homes a year by the middle of the decade.
There were signs that a slowdown was coming even before the pandemic struck.
Completions crept up 4 per cent year on year, but the number of new homes starting construction fell by 13 per cent in the year to March 2020, according to government figures.
Slowdown during lockdown
Then, of course, everything changed. While construction was exempt from the national lockdown imposed at the end of March, many housebuilders opted to close down sites anyway to reorganise their working practices to respect social distancing.
Data from construction market analysis company Glenigan suggests as many as 42 per cent of residential construction sites had shut down by the first week of April.
Key points
- Housebuilding was slowing before the pandemic
- Construction has restarted, but not on new plots
- Using Help to Buy will be the only option for those with no deposit
The focus in those early months was on completing homes in progress and those already reserved by buyers.
Private new homes starts fell to just 5,000 across the UK according to the National House-Building Council, just 5 per cent of the number started the same time last year. And just 25 per cent of pre-Covid levels of housing delivery were completed in April.
The recovery
New home reservations could continue virtually during lockdown, but the easing of restrictions to allow property viewings from May 13 kickstarted sales in both the new and second-hand market, giving confidence to builders.
Adapting to social distancing practices on site and being able to work extended hours also helped builders get back to delivering homes faster, albeit supply chain issues such as the shortage of plaster and plasterboard restricted the rate of recovery.
The number of new homes completed increased significantly from April and May, reaching 79 per cent and 97 per cent of pre-Covid levels in June and July, respectively.
Net reservations for new homes improved significantly too. A net balance of 33 per cent of housebuilders reported more sales in August compared with the same time last year, up from a balance of -79 per cent in April, according to the Home Builders Federation survey.
A sustainable recovery?
The latest data suggests housebuilders and developers are prioritising existing plots on their sites, rather than committing to starting work on new sites.
This means delivery can recover quickly for now, but that recovery will only last until those sites are finished. Housebuilders started work on just 15 per cent fewer plots in July than the average for Q1, according to the NHBC, but the number of new sites started was almost 50 per cent below pre-lockdown levels, according to Glenigan.
Despite limited site starts, activity in the land market is promising for future supply.
The land market is normally fairly quiet in the summer months but this year activity picked up throughout July and August. By Q3 transactions had returned to near pre-Covid levels. This marks a significant change from the quieter time in April and May when many housebuilders put a temporary pause on land buying.
The future of housing supply
The challenge will be whether the recent recovery in housebuilding can be sustained given starts have slowed, Help to Buy will be tapered from March and end in 2023, and as unemployment rises towards the end of the year as furlough unwinds.
The target of building 300,000 homes a year by the mid-2020s has become a greater challenge since the disruption to the market. Reaching that goal will require a more diverse range of housing tenures than the predominantly private sale approach we have today.
Table: Quarterly starts and completions data
| Starts (annualised) | Year-on-yr change in number of starts | Completions (annualised) | Year-on-year change in number of completions |
Q1 2019 | 166,560 | 2% | 169,500 | 5% |
Q2 2019 | 164,170 | 1% | 173,350 | 8% |
Q3 2019 | 159,100 | -6% | 177,550 | 9% |
Q4 2019 | 151,750 | -10% | 178,300 | 8% |
Q1 2020 | 145,180 | -13% | 176,980 | 4% |
Q2 2020 | 121,630 | -26% | 147,170 | -15% |
Source: MHCLG table 213
New homes for private sale
The demand for new homes for sale will be closely linked to transactions across the new and second markets. Our latest forecast predicts that more than 1m homes will change hands in 2020 and in each of the next four years, similar to 2019 levels.
Historically, new build sales have accounted for around 10 per cent of all transactions.
However, since Help to Buy was introduced in 2013 new build sales have made up an increasing proportion of all sales – currently around 15 per cent. Our strong transaction forecasts support continued sales in the new build market, albeit that the tapering and ending of Help to Buy will have a negative impact.
From April, Help to Buy will only be available to first-time buyers and regional price caps will apply.
However, in the absence of a government-backed scheme offering high loan-to-value mortgages, buying a new home with Help to Buy will be the only option for some looking to get on the housing ladder without saving up a big deposit.
Affordable housing
Grant-funded affordable housing can play a significant part in increasing delivery, particularly when incomes and employment are impaired by a downturn.
The need for affordable housing in England is acute so an increase in supply would be absorbed easily. We estimate there are 96,000 households in need of sub-market housing each year in England through our own research.
Sales rates for affordable home ownership, such as shared ownership, tend to move in line with the private market.
Grant funding will have a stronger countercyclical effect when applied to affordable rent and social rent tenures.
The government has extended the current affordable homes programme from March 2021 until March 2023 to allow for homes stalled due to Covid-19 to be completed, and reiterated its promise of £11.5bn of grant funding over the next five years for the next affordable homes programme.
Since 2012-13, an increasing volume and proportion of affordable home delivery has been through Section 106 planning obligations.
By contrast, in the 1990s and 2000s, including through the global financial crisis, grant funding supported the vast majority of affordable housing delivery. As S106 affordable housing delivery is reliant on the private sale market, the delivery of affordable housing is far more exposed to market conditions than in the past.
In future downturns, the government will need to find additional grants to support delivery of affordable housing or risk greater slowdowns in delivery than seen before.
Build to Rent
Build to Rent will also play a part in future housing delivery, especially as tenant demand tends to be more robust than sales demand in times of economic uncertainty and mortgage availability is more limited.
Delivery of Build to Rent homes, that is, homes purpose-built for the private rental market, has increased substantially over the past decade. Once concentrated in high-rise urban blocks, we are now seeing growing interest in suburban BTR too.
The investor appetite to expand this sector is significant. There are currently 33,000 BTR homes under construction and a further 80,000 with planning consent. We estimate that BTR completions will continue to increase; international evidence shows that during periods of weaker buyer activity, investors expand their portfolios by acquiring single family homes and new-build stock from developers.
However, potential acquisitions and development funded by investors will be subject to location, product type and price points that are suited to demand in the rental market.
Lucy Greenwood is a director in Savills’ residential research team
