September 2011
Geoff Riley Eton College
Why are so few houses being built?
We build on less than per cent of the United
Kingdom’s land area and yet a perception
remains that Britain is a crowded island
with precious spare land left to construct
hundreds of thousands of new homes. And
we certainly need many more new homes!
The UK population is set to grow to around
67.5m by 2020.
Number of housing starts
Even if in the years ahead, there are radical changes
to planning regulations that allow more properties to
be built – will the construction industry respond to
the opportunity? The evidence at the moment is that
new house-building in the UK has slumped to
dangerously low levels, and risks deepening the
critical shortages of affordable homes across the
country.
The number of new homes completed
in England in 2010 fell to its lowest
level since 1923. Just 102,570
properties were built in 2010.
Geoff Riley Eton College
Before the global financial crisis engulfed the
mortgage-lending sector and hit directly demand for
new homes as recession took a grip on the economy,
on average between 40 and 50,000 new homes
were being started. See how sharply this figure
declined in the second half of 2008 before a gentle
recovery began. But now, more than a year after
the “official” end of the recession, house-building
remains in the doldrums. In addition a new report
from Oxford Economics on behalf of the National
Housing Federation, has found that any rebound on
construction sites has been concentrated in London
and the South, with northern regions seeing very
limited activity. Work started on only 95,445 homes
last year.
So what lies behind the slump in new home-building?
Here are three of them:
Number of housing starts
1 Financial difficulties of property developers –
many home-builders have run into financial
distress during the recession and subsequent
weak recovery. Numerous building firms have
made redundant thousands of workers, and seen
a deep cut in their profits. The supply of loans to
the property industry from the banks and other
specialist lenders remains weak and the average
cost of loans has risen. Many builders are sat on
plots of land waiting for economic conditions to
improve, for example Bovis Homes already has
14,470 plots with planning consent (and seems
to be on a buying spree in search of more land!)
2 Falling property prices and mortgage
shortages – there has been little sign of a
sustained upturn in average house prices within
the UK, and when prices are declining, the
expected profitability from completing new housing
developments takes a tumble. Rising prices act as
a signal to expand production in pursuit of higher
profits – this important signalling device in the
property sector looks pretty weak for the moment.
If, as many expect, the UK economy falls into a
“double-dip” recession, the outlook for property
values could be dire. The mortgage lending market
remains weak with lenders tightening up on the
finances needed to grant a mortgage loan. And
rising unemployment and falling real incomes will
both hit the ability of millions of people to be active
in the market for new homes.
Private enterprise
Source: Reuters EcoWin
Geoff Riley Eton College
September 2011
3 Restricted planning approvals – there seems to
be some evidence that getting final permission for
new housing schemes is taking longer than it did.
Some local authorities – themselves facing a tight
squeeze on their own spending – are scaling back
plans for ambitious new builds of social /
affordable housing. For example, according to the
UK Home Building Federation, Bristol, Milton
Keynes and Leeds and some other authorities cut
their future new housing allocations by a total of
88,000. This has a direct effect on demand in the
construction industry.
economy and reduce rents by 10 per cent. The
CEBR estimates that an increase to 300,000 annual
housing starts between now and the end of 2015
(five years after the end of the most recent recession)
could create more than 200,000 extra permanent
construction jobs and provide an extra £75 billion
contribution to gross domestic product. Construction
is a labour-intensive industry and the rising number
of full and part-time jobs created could do much to
achieve a short-in-the-arm for the British economy
especially with a continued squeeze on central
government finances.
Such a low level of new house-building inevitably
restricts the market supply of property available to
buy. This supply-shortage in the medium terms keeps
prices for existing home-owners higher but crucially
it also drags many into having to rent instead which
in turn is a factor behind the sharp rise in average
rents charged to tenants.
Where will such a rebound in property construction
come from? Some see a radical relaxation of the
planning laws as a necessary first step (to the horror
of lobby groups representing rural communities and
environmental campaigners). Others are arguing for
an increase in government funding of social housing
whilst the building industry itself is in discussions
with the mortgage lenders about ways to unfreeze
the supply of loans to would-be new home-buyers.
Either way, the collapse in new house-building has
contributed not only to the severity of the recent
downturn but will likely end up making a home to buy
and live in an ever distant prospect for thousands of
younger people.
Index
If more homes could be started, we would expect to
see a strong positive multiplier effect in many related
industries. Estimates published by the Centre for
Economics and Business Research (CEBR) find that
trebling the number of annual house building starts
in Britain might generate an extra £75 billion for the
Source: Reuters EcoWin