Lively discussions were held throughout the day.
Industry forecast: what lies ahead 2
Published: 15 December, 2010
Roger Humber, consultant and former chief executive of the Housebuilders’ Federation, offered a chilling reality check to BMF members.
Important as the economy un-doubtedly is, there are other negative factors that will limit the size of the housing market as a whole and depress the newbuild sector, although not necessarily the RMI market.
I do not see the same imminent recovery in any part of the domestic housing market as we are seeing in, say, exports and manufacturing. However, RMI should expand much more quickly than newbuild will recover.
We saw a small improvement in second-hand house prices last year and early this year which, along with the suspension of home information packs, resulted in a surge of houses onto the market and a resulting loss of most of the earlier house price gains, over the past three months – London excepted – which almost always has to be the caveat.
The reason was simple – effective demand in the housing market is seriously constrained by mortgage shortages.
In 1988, we built 210 000 new homes. In 2007, after years of flatllining at about 140 000-150 000 a year, we crept back to 182 000 in Great Britain. Last year, new starts were just over 80 000 and this year look like being 95 000-100 000.
The housing market – measured by newbuild and total transactions – was much smaller, even at the height of the 2007 boom than it was in the 1980s boom. Together with the credit crunch and its aftershocks, it has been reduced by 50%.
As far as newbuild is concerned, lack of mortgage funding has been a vital factor in its collapse, particularly in 2008 but there are a number of other factors obstructing its recovery.
What are the causes of the current and likely continuing housing market malaise?
- Mortgage supply.
- Expenditure cuts on housing.
- Planning uncertainty.
- Regulatory costs.
- Development viability.
The availability of mortgage finance has not recovered from the aftershock of the credit crunch. Lending on mortgages for house purchase has fallen from £108bn in 2007 to probably £60bn this year.
The number of banks still making mortgage loans is just three – down from over 200 in 2007.
Building societies, Nationwide apart, can barely lend, being under savage restrictions from the FSA, aimed at rebuilding their balance sheets. Many of those who benefited from Bank of England support in 2008 and cannot repay, will be allowed to go broke or forced to merge if they can find a solvent partner. The message seems to be that unlike the banks, they are not too big to fail. The building societies, as a movement, are a busted flush.
BMF managing director Chris Pateman and Timbmet managing director Wendy Trott talk business.
The scale of mortgage lending will almost certainly be inadequate to support a growing housing market for some time.
If purchasers want to buy new, the housebuilder who has struggled to make a sale will see 10% knocked off the price by the mortgage lenders’ valuer – meaning that the sale is put at risk, unless they accept a lower price.
The terms of mortgage lending are both taking out many buyers and are also pushing down house prices.
These conditions will not change soon and it is likely that lower loans to value, requiring 20% deposits and mortgage caps will become permanent.
All this has serious consequences for the size of the housing market, for its rate of recovery and for house prices.
Existing equity-rich owners can easily obtain mortgages of say 50% of valuation and won’t much worry about down valuation, provided their sales chain holds up – but even then, 50% of those break down because the bottom of the chain can’t perform.
First-time buyers, particularly of new homes, are at their lowest percentage since 1950 – and that’s even after the magic worked by the bank of mum and dad who, in truth, are now a major source of finance in that market.
Buy-to-let investors have also been excluded from the market by the lenders – and that is a particularly significant factor for housebuilders. Many inner city blocks of flats were built almost entirely for anticipated sale to investors.