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Industry forecast: what lies ahead 3
Published: 15 December, 2010
It also seems likely that tax increases, VAT, the probable reduction in jobs in some parts of the public sector and continued pay freezes in the private sector, will see a stagnation and reduction in the real disposable incomes of our core middle-income, potential purchasers.
Even assuming they can get mortgages and sell their homes, this will exert continuing downward pressure on house prices.
Major cuts have already been made in the 2010-11 budget of the Homes and Communities Agency, and these will almost certainly be further cut next year and the rest of that spending round. New social housing provision will therefore inevitably decline over the next three years.
Kickstart, Homebuy Direct – heavy subsidies that have largely enabled some of the volume housebuilders to build some of their mothballed private sales – has now largely come to an end, even if a bit of new money is eventually found for Homebuy Direct.
This will further depress housebuilding over the next two years and could destabilise some of the major plcs, who are claiming now to be out of the wood, but who are, in fact, disproportionately dependent on these public subsidies.
Another area that housebuilders will eagerly scrutinise after 20 October will be road schemes. not motorways, but by-passes and relief roads. For example, the Luton-Dunstable Bypass is the key to releasing land for some 5000 homes. If that or several similar schemes are cut or delayed, it rules out potential development, if and when the market returns.
In the medium-term, new planning systems and structures, without a regional component, will be brought forward as part of the contribution of localism to the ‘Big Society’. The Bill is supposed to be published in the autumn and is programmed for parliamentary approval in November 2011, coming into effect in April 2012.
This will have to be accompanied by totally new national planning guidance approved by Parliament.
Many commentators have said this is a recipe for Nimby-ism in high demand areas, and that housing numbers in plans will be radically reduced.
We only know the outline of that scheme at present and many people doubt that the incentives will be anything like enough to have this effect.
With many unused planning applications and much slower building rates, does any of this matter?
That depends how long the hiatus lasts. If high demand areas manage to create a planning moratorium until they bring in their new local plans – which will be 2014 at the earliest – it most certainly will matter, because irrespective of large but now non-viable allocations, land that is actually developable and viable at today’s prices, will start to run out.
Then we face the prospect of a new system under which, regardless of what housing minister Grant Shapps may hope for, the vast majority of local authorities will bring forward plans that reduce even existing rates of build below those achieved in 2006-07, let alone the old regional targets.
However, unlike the housebuilding industry, ministers are totally unconvinced that this is a problem and appear to regard this as a minor adjustment and that when incentives kick-in, in April next year, a totally new and benign era will have begun.
There is an even more pressing issue currently stopping development, even on sites with planning permission: regulatory costs. This is squeezing margins and is strangling the land market in much of the country, because it means that the residual value of land – and that’s what housebuilders pay landowners – is so low, that it is extremely difficult to buy land.
My over-riding point is that the regulatory burden is crippling; reducing it is not as simple as it sounds, nor as quick, and house price inflation is not coming to the rescue, any time soon.
Where does all this leave us? In the short-term there will be little improvement in newbuild and the outlook is deteriorating.
Mortgage availability may even worsen in the next few years, house prices almost certainly will weaken, but will continue to bounce around as people despair of selling, shortages grow, prices go up again, only to be pushed back down by a flurry of second-hand supply. Stable, long-term price growth is a long way off.
Without price growth, we need reductions in the regulatory cost base. But, despite their commitment to deregulation, government will find it very difficult to reduce the enormous burden of regulatory cost that has put the industry under water, at today’s selling prices.
There are too many lobbies and powerful political interests behind zero-carbon and social housing and making developers pay, for infrastructure for any helpful decisions to be taken easily.
I cannot see any likely scenario, other than new homes output remaining at +/-10% of current levels for the next two years at the least and perhaps for as long as five years. While the wider economy will be looking much brighter, specific problems will continue to cause housebuilding to lag behind.
By 2015, we will have a new planning system and the new arrangements for incentivising local authorities to support development will be in place. we will then know, one way or the other, whether all that is likely to work as ministers say it will.
Those remaining active in the sector will have been busy looking for new markets and concentrating on those regions and areas where they can buck the market trends. London and areas immediately adjacent are already doing better, but that ripple is weak and is not travelling far.
The market will operate differently, driven by a far more sober mortgage market.
Between now and 2015 there will be far fewer flats as a proportion of what is built and a swing back to houses. This is already under way.
For years we comforted ourselves in the industry with the thought that whatever our short-term trials and tribulations, demographics are on our side.
An increasing population and an even faster increase in household formation would underwrite the industry and ensure that shortages drive demand for new homes.
A large, ageing population of owner- occupiers, living well into their 80s, raises some serious questions about how the market functions.
Research shows that most people’s housing careers are over by the time they are 45-50 – they stop moving. the 1940s baby boomers are now in their early 60s and will mainly block their houses for up to another 20 years.
The 1960s baby boomers are now 45 or close and will block their houses for the next 40 years.
The impact of this on transactions, the ability of first-time buyers to come into the market, the need to develop products to persuade them to move, will become massive. Retirement housing, as we now know it, is not the easy answer.
Despite the existing large generation of older people, the retirement housing market remains tiny – not much more than 2500 in a good year and completely dead currently. There were just 300 starts in that sector last year.
My own view is that the industry will continue to reduce in size.
I also predict that when the banks have fully repaired their balance sheets, at least two of the major builders will no longer appear to be too big to fail and they will be broken up, leaving anything up to £1.5bn balance sheet losses to the banks.
By 2015, the industry will be much smaller, and its capacity significantly less.By then we may begin to see a new type of mortgage market, demand may be increasing – but will there be an industry capable of responding?
I don’t know the answers to that.
I only know the battles to come over viability, regulation, planning and the availability of mortgages will fully occupy us for the next five years.
This article first appeared in the October 2010 edition of Builders' Merchants News.