Away from the headlines of record house prices, the UK’s residential property market is facing a series of key challenges, which, if left unchecked, could pose significant risks to its ongoing stability.
Firstly, it’s likely that land prices are too hot.
Analysis by Savills shows that UK greenfield land values increased by 3.9 per cent in Q3 2021 – the highest quarterly growth in over 10 years. Urban land values rose by 2.2 per cent in the same period.
The increase in land prices is impacting the supply of strategic and immediate sites, driving demand higher. Some 89 per cent of Savills’ development agents reported increasing bid levels in Q3 2021, when compared to an average quarter. We are seeing increasing competition for good sites and compression of deal times to secure quality land supply.
With landowners and land agents increasingly looking over their shoulders at the values being agreed on other sites, it’s no surprise that minimum price expectations are rising to levels that some may argue do not reflect the real value of the underlying assets.
Another factor impacting supply is the upward pressure on construction costs. A recent report by PwC UK and the Urban Land Institute listed this as the biggest concern for property professionals. This follows the price of construction materials increasing every month for a year up to October 2021.
The current landscape makes for an uncomfortable margin squeeze for developers, even before the Residential Property Developer Tax kicks in and hits those recording profits in excess of £25m.
On the demand side, shocks include affordability and housing supply. If it costs more to buy land and build homes, that has to be reflected in an increase in house prices or chipped developer margins – the latter being the rarer outcome, considering the pressure from investors for stable returns.
As a result, property prices relative to income remain at historic highs and that is with the recent history of low interest rates, with the Bank of England holding the central interest rate at 0.1 per cent. This itself is under challenge and facing an increase.
All it needs is a minor creep in the cost of borrowing and there has to be a worry that overstretched buyers on variable mortgage rates could find themselves in trouble. First time buyers are at significant risk and often have high housing costs compared to their income. Research shows that the typical first-time buyer now needs to save 113 per cent of their annual salary for a home deposit.
Not only is this bad for home buyers, but the consequences of a changing borrowing environment could correct house prices – disrupting the market and attacking already-buffeted developer margins.
Crunch or crash?
There is one standout difference between the challenges facing the current residential property market and those seen during the crash of 2008. In 2008, the market had systemic funding challenges, while the situation today is primarily driven by low supply and the impact this has on land and home prices.
A mature and stable property market requires people to be able to move home. Stagnation is bad for a system that is reliant on running like a conveyor belt, with first time buyers hopping on and selling and buying homes at various stages.
The current shortage of affordable housing for first time buyers risks locking the market completely, and the cost impacts are felt just as acutely by social housing providers, for their own sites and also when acquiring from developers.
A crunch is as bad as a crash, and no one working in the living sector wants to see that happen.
Action – well done is better than well said
While there is no simple solution to the above challenges, it is critical that more is done to increase the supply of affordable housing on the market, in the widest possible sense. This can be achieved by developers upping their affordable commitments, taking a cut in margins, or rather – and a more realistic, palatable option – supporting social housing providers to increase the delivery of affordable
homes. This needs strategic intervention, driven by collaboration rather than commercial confrontation.
Homes England, the government’s housing accelerator, has a key role to play in supporting social housing providers and property developers on increasing the supply of new and affordable homes. The public body is uniquely placed to facilitate this.
For example, Homes England must continue making more development land accessible. This means not only driving land supply, but also enabling and remediating difficult sites – the cost of which can often be the deciding factor for developers and registered providers when assessing project viability.
The £1.8bn fund announced in the Autumn Budget 2021 will go some way in unlocking brownfield land for development, but sustained support is needed to ensure sites that are considered difficult and expensive to remediate are utilised for the delivery of new homes, especially at affordable levels.
While the property sector has been through a steep learning curve since 2008, the issues currently at hand should not be underestimated. These are systemic challenges, involving land and build prices, a shifting borrowing environment and demand side shocks.
The sector is alive to these issues and some work is taking place to manage them. However, without a clear change in approach that involves unlocking more land for development and prioritising the affordable end of the housing market, the challenges will not only remain, but worsen.
Will it be easy or cheap? No. But is it achievable? Yes, it has to be. Through a joint effort, the property sector and local and national government can manage these shocks proactively to create a more sustainable housing market.