British housebuilders have suffered in the past year in challenging market conditions, but the tide may finally be turning for the sector.
New home completions, profits and share prices have slumped across much of the industry, as a tough comparison with two strong prior years is compounded by a frail British consumer.
But mortgage rates are falling, and the upcoming March budget could provide the sector with the reinvigoration it needs as a looming general election incentivises the Government to take on Britain’s housing shortage.
Housebuilders built less homes last year, as they look to protect their profits against reduced demand
The country’s 10 biggest housebuilders completed just 71,000 homes in 2023, down from 85,000 the previous year, according to figures from Peel Hunt.
And the broker expects just 69,300 homes to be complete in 2024, potentially jeopardising the Government’s target to build 300,000 homes per year by the mid-2020s, with the current yearly average standing at just 235,000.
The UK’s ongoing housing crisis, which has left Britain with a severe undersupply of affordable homes, has been compounded by cost-of-living pressures weakening Britons’ spending power.
House prices, meanwhile, have continued their upward spiral for the fourth consecutive month, rising by 1.3 per cent in January.
The typical home now costs £291,029, which is almost £4,000 more than in December.
However, high street lenders have begun cutting mortgage rates, which is helping to revive demand for existing properties.
‘Mortgage availability has improved, mortgage rates are falling, and the number of successful mortgage applications is rising,’ said RBC Capital Markets managing director Anthony Codling.
‘There remains a shortage of secondhand homes for sale and therefore the UK housebuilders are in pole position to benefit from the improving mortgage market trends.’
New build dwelling starts plummeted in the third quarter of 2023
What are housebuilders saying?
Housebuilders have protected their profits in 2023 by building fewer homes, thereby managing reduced demand brought on by multiple interest rate hikes.
According to data from the Department for Levelling Up, Housing and Communities, led by Michael Gove, the number of sites where building work had started on site was 21,300 as of 30 September, down 68 per cent year-on-year for the quarter.
In the year to 30 September, site starts fell from the previous year in six out of nine regions. Completions dropped in seven of nine regions from the previous year.
Taylor Wimpey, one of the UK’s largest housebuilders, said its outlook is uncertain for the new year, as it warned that it has entered 2024 with a reduced order book.
The FTSE 100-listed firm noted that contracts awarded to UK builders in 2023 decreased by £11.1 billion to £69.2billion, with residential housebuilding deals falling 13 per cent.
FTSE 250 peer Persimmon also cautioned that market conditions are expected to remain ‘highly uncertain’, especially with the likelihood of an election in 2024.
However, the York-based group said buyers are returning to the market amid speculation that the Bank of England may cut interest rates sooner than expected.
Persimmon also saw completions decline to its lowest level in more than a decade.
Redrow has been snapped up by Barratt Developments for a whopping £2.5 billion, forming Barratt Redrow
Another FTSE 250 builder, Vistry, said the easing of mortgage rates ‘is encouraging’ and the group is ‘optimistic that this will help stimulate demand in FY24’.
It added: ‘[And the] housing crisis [is also] expected to be at the top of the political agenda in the lead up to a general election, with Vistry extremely well positioned to play its part in increasing the delivery of affordable homes across the country.’
Meanwhile, Barratt shocked the market on Wednesday as it revealed a £2.5billion deal to acquire rival Redrow.
The merger will ‘accelerate the delivery of the homes this country needs,’ Barratt said.
Codling said: ‘Should the open market conditions improve… housebuilders are likely to outperform from here.
‘The house builders have had a good start to the year. Mortgage rates are falling and house prices are stabilising, and therefore homebuyer confidence is rising.’
What could the Government do to revive the housing market?
The UK’s housing market could well fall into the limelight ahead of the election.
The likelihood of an autumn general election means that the upcoming spring budget in March will see the government set out its plan for the economy as it looks to woo voters.
Liberum analysts Sam Cullen and Clyde Lewis identified four routes the Government could take to stimulate the market and rejuvenate the housing sector.
Chief among these options, the analysts suggest that the ‘cleanest (but most politically challenging) measure’ would be planning system reform.
Chancellor Jeremy Hunt will set out the Governments budget in March
According to housebuilders themselves, the UK’s ailing planning system is to blame for the current housing shortage, with Barratt chief executive David Thomas recently describing it as ‘ineffective’.
Codling agrees, warning: ‘The wheels of the planning system are turning very slowly.’
‘Planning departments need to things. More staff and housing targets. Planning departments are short staffed and with no targets to hit fewer permissions are being granted to build the homes we need, a classic case of what you measure is what you get.
‘I fear the budget will address demand for homes rather than the supply of homes, but it is supply rather than demand that needs to be boosted by the budget.’
The UK’s planning system has long hindered developer’s plans, they claim. Though critics in the sector in turn have accused builders of opportunistic land banking.
The budgets of planning departments have halved since 2009, and the number of plots with planning permission has tumbled by 50,000, around 15 per cent, over the past five years.
‘In our view, significant spend would not be required to reverse this trend. We estimate a return to 2010’s level of funding would cost c.£500million. Based on prior average site sizes, this might roughly double the number of approved sites, which in turn could lead to a 20 per cent uplift in volumes each year,’ Cullen and Lewis said.
Based on these calculations, there could be as much as £12billion in extra spending, which Peel Hunt says could deliver an additional tax take of £2.2billion, while 125,000 jobs would also be created in the process.
An alternative measure, the analysts argue, would be to institute a new scheme resembling Help to Buy, which was launched under the coalition government in 2013.
Only 10 to 15 per cent of buyers would have been able to make the same purchase without Help to Buy, according to Bank of England data analysed by Peel Hunt.
Lending under Help to Buy (£m)
A renewed scheme worth £5billion, the analysts say, could finance the building of 35,000 homes, and bring in £2billion in tax.
The original scheme, however, has been criticised as having caused price inflation, preventing more people from purchasing homes than the number that it aided.
The analysts suggest that this is unlikely in a demand-led scheme with a ‘relatively small number of loans’.
A cut to stamp duty could also be on the cards for the upcoming March budget, although Peel Hunt notes that it is a major revenue stream for HMRC, bringing in £11.7 billion in the last financial year.
Stamp duty is charged on the purchase price of a home and levelled at different rates above thresholds.
Stamp duty for house purchases is charged at 5 per cent for homes valued between £250,001 and £925,000 – rising to 12 per cent for properties worth more than £1.5million.
UK voting intention by housing tenure at the 2019 General Election
Scrapping stamp duty, the analysts suggest, could lead to a further 15,000 private house sales, which they add would generate an additional £800million in tax revenue, create 6,000 jobs and £11.25billion of economic activity.
The chancellor could also look to grow the number of apprentices joining the construction industry, either by increasing funding or by removing barriers faced by smaller housebuilders when it comes to hiring apprentices.
The UK construction workforce is facing the loss of a quarter of its workforce within 10 to 15 years, Peel Hunt says, meaning that 50,000 new workers need to be added each year, compared with just 15,000 in 2023.
To provide growth, the analysts suggest that the Government could increase funding for construction apprenticeships, or reorganise the apprenticeship levy which currently sees larger employers pay 0.5 per cent of their annual pay bill, while smaller employers pay 5 per cent of the cost of their apprenticeship training.
Peel Hunt says the levy prevents larger firms from ‘spending their funds as they see fit,’ while the scheme remains too expensive for some smaller firms.
