Industry forecast: what lies ahead
Published:  16 December, 2010

The Builders’ Merchants Federation’s Members’ Day at the Forest of Arden Hotel in Warwickshire drew over 170 delegates eager to find out about what’s in store for those working in the construction industry and how the landscape will change over the next five years.

The grim reality facing housebuilders was Anthony Hilton’s theme. The chief economist of the Evening Standard, Mr Hilton’s presentation set the scene about the market for merchants and their suppliers.

There are 26 million houses in this country, and 1.6 million of them were bought or sold at the height of the property boom in 2007. Last year the number of transactions halved to 850 000. The number of new homes has gone the same way. A total of 182 000 were built in 2007 but that dropped to 80 000 last year. The total may be as low as 70 000 this year. The value of those new homes, which in 2007 was just short of £21bn, was only £11bn last year. It is an industry with a £10bn hole in its finances.

Interestingly, a couple of weeks ago, several leading housebuilders were saying things were getting better. You have to ask what they have been smoking.

The problems run much deeper than the shortage of mortgage finance, although that obviously remains a problem. As is implied by the plunge in sales, mortgage lending halved from £108bn in 2007 to about £56bn last year, and the number of lenders has plummeted from more than 200 to just a handful.

Many of the building societies have no funds to lend to anyone, because they find it so difficult to attract savers. Potential buyers who do somehow find the necessary 20% deposit have the further problem that their lender’s valuation of the target property is likely to be 10% below the asking price, which adds to their financial pressure.

But, even if the mortgage situation were miraculously to improve, the housebuilding industry would remain in very deep trouble.

Part of this is caused by the retrenchment in the public sector. Government cuts are with us already, and more are on the way. The grant to the Homes and Communities Association, which is a major source of finance for social housing, has already been halved and other Government schemes such as Quickstart and HomeBuy Direct will most likely dry up by next year.

Some of our biggest housebuilders, including those making the most bullish noises, have become quite addicted to those subsidies. They may find ‘cold turkey’ very uncomfortable when they come to an end.

Housing has two further ingredients in its perfect storm – planning and regulation. The new Government has scrapped Labour’s policy, which set regional targets for housebuilding, and pushed them down for local government to meet. It wasn’t a great system, but arguably it was better than nothing. The coalition’s plan instead is to devolve planning to the grass roots and to develop financial incentives that will spur local authorities to build.

Critics say this will encourage ‘Nimbyism’ and, as very few local authorities actually want to promote major housing developments, it could easily lead to even fewer homes being built, particularly in the South where they are most needed.

We shall have to wait and see – but that brings another problem. A further pertinent criticism of new government policy is that it will take years for the replacement system to be up and running, and meanwhile the entire planning system is stalled.

Legislation is expected in the Commons next year and should be passed by 2012, but then there will be a further year or more while ‘guidance’ is developed and local authorities work out what it all means. All of which brings us to regulation.

Steve Morgan of Redrow said the other day that its costs were greater than the cost of bricks in the average new home. This is likely to continue – partly because of the issues around whether there is any planning ‘gain’ in which the wider community can share, and partly because of the continued pressure for affordable housing, but also because of the drive to have all newbuild by 2016 as low or zero- carbon houses.

Desirable as this certainly is in terms of saving energy and going green, it is devastating news for housebuilders. When coupled with the fact that many seriously overpaid for their land banks, it makes a lot of potential schemes unviable at current price levels.

There is an answer to this, but it is not one the industry relishes. The quick solution is for reality to be confronted. The banks have to pull the plug on some large developers so their overvalued land banks can be repriced to reflect current reality. That would help set a floor for the industry.

Without it, the grim outlook is for another four to five years of pain.

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