Who Will Build The Homes We Need?
We are facing an annual shortfall of 136,000 new homes across Great Britain, 100,000 of which is in England.
Private house builders can potentially start 150,000 new homes in England by 2020 if barriers to expansion are removed. Savills analysis suggests we can reduce this gap substantially if we deliver:
- More planning consents in high demand areas. The rate of new planning consents is not keeping up with the rate of housebuilding in the strongest markets in and around London and in the strongest employment markets around the country. In many parts of the South East and the east of England, the number of planning consents are falling well below objectively assessed need.
- Continued support for house builders to increase market capacity. The private sector has the potential to deliver 150,000 new homes a year in England in 2020. This projection is based on larger house builders pursuing controlled growth averaging 6% per annum during the next 5 years. This level of growth also requires continuation of demand side support such as Help to Buy beyond 2020 to prevent the market tailing off at around 2018 and a higher number of planning consents in strong markets where sales rates can increase.
- Additional building from housing associations, local authorities and large scale build to rent operators. There is also the potential for 55,000 more homes in England from housing associations, local authorities and large scale build to rent operators. The scale of this additional building is conditional on increased construction capacity (more skilled labour and materials) and more land with planning consent in the right places.
- Increased supply of land to prevent steep rise in land values. The additional potential demand for land that we are projecting will inevitably lead to higher land values, a squeeze on margins and a choking off of volume growth, unless there is a significant increase in the volume of land that is made available for development in the right places.
PLANNING MORE LAND IN THE RIGHT PLACES Over the year to March 2015, 156,000 new homes were started in Great Britain, of which 140,500 were in England. This is the highest number of new starts since the downturn in 2008 but it is still just over half of what we should be building. To meet housing need, we must deliver between 240,000 and 245,000 new homes in England per annum, 35,000 in Scotland and 14,000 in Wales. The current levels of housebuilding therefore leave us with an annual shortfall of 136,000 homes across Great Britain, including a shortage of 100,000 homes in England.
Unless further steps are taken to boost capacity, accumulated shortfall will rise to around one million over the course of the next decade. However, our analysis shows that there is potential to deliver 205,000 new homes a year in England alone provided key barriers are eliminated. One of the major constraints is the restricted availability of development land, particularly in areas of high housing need. While the number of planning consents is up, with permissions for 200,000 homes granted in England last year, this number not only still falls short of need but also is not necessarily located in the right places. Building starts we have seen an increase in new homes starts over the last two years, from 97,000 in England in 2012 to 140,500 in the year to March 2015. However, this progress could come to a halt if house builders are not able to replenish their pipeline of consented land, particularly in the high demand markets of Surrey, Hampshire and Berkshire, and in the East of England, including Cambridgeshire and Suffolk.
By measuring the 3-year average of consented residential units against the 3-year average of housing starts for each local authority, we can assess whether there is enough land coming forward for residential development, and highlight pressure points where there are insufficient sites to maintain the current state of building. These pressure points include: Babergh, South Bucks and Worthing, where the 3-year average of new homes starts is almost 5 times higher than the 3-year average of units consented. In Merton, the rate of new build starts outstrips consents by 4:1, and in Elmbridge and Watford by 3:1. The problem is not confined to high value and high demand areas or places constricted by the Green Belt; both Kingston upon Hull and Newcastle have a 3-year average of new build starts that is over 4 times higher than the 3-year average of new consents.
There is also concern that the consents that are being granted are not in the areas where there is the greatest housing need and where it is possible to build and sell the fastest. The problem is particularly acute in parts of the East of England and the South East where there is high demand. In Oxford, the 3-year average of detailed consents granted between 2012 and 2014 would meet 12% of housing need, in Brighton & Hove this amounted to 16% of need, and in East Cambridgeshire, only 7%.
CAN THE PRIVATE SECTOR DELIVER? Private house builders 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 house builders have the capacity to increase output through measured and planned expansion. Better finance availability will support the medium-sized, often regional, house builders to expand. The smaller house builders 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 house building levels (starts) have been increasing over the last six years since the downturn. Not only are house builders increasing their output to meet demand, they built approximately 45% of all new affordable homes last year. The majority of new homes (54%) are being built by the 11 largest house builders (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 house builders (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 house builders. 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 house builders in 2014 vs 2013.
Help to Buy
Help to Buy Equity Loan and New Buy schemes supported 30,146 sales of new homes in England in the year to March 2015. Among many of the largest house builders 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 house builders. 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 house builders 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.
Providing returns to their shareholders is a priority for the nine listed house builders. 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. 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. 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.
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 house builders 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.
There is potential to increase the rate of building starts from the current level of 140,500 a year to 205,000 new homes a year in England.