Could the year 2022 be 2006 or even 1991 for those of us old enough to remember those times?
Both 2006 and 1991 represented peaks of activity in the UK housing market. However, both points were followed by an economic recession, high unemployment and a resultant crash in both property and land values. Is this about to happen again?
What will happen to housing demand?
Rising energy and food cost inflation and the expected hike in mortgage rates are all factors that will inevitably lead to a very gradual reduction in demand for outright sale housing in the medium term.
However, it will not stop the need for affordable housing which in fact will increase in these difficult circumstances for low-income households. Nevertheless, the real trigger for a true correction in the housing and land market will only come if mass unemployment rears its ugly head again as it did in 1992 and 2010.
Given the economic response to COVID, and in a pre-election period, it is highly unlikely that the government will allow this to occur. So, our assessment is that by historical standards, demand for homes will remain elevated. It may well be that currently there are twenty buyers chasing one home in some parts, but even if this drops by 50% to ten buyers market demand will remain hot.
The planning system and other factors
Recently developers have been grappling with two significant constraints. Firstly, on the supply-side the planning system is simply not delivering consented sites at the rate required.
The will to fix the system in the short term seems to have dissipated after the departure of Robert Jenrick and the arrival of Michael Gove as Secretary of State for Housing, Communities and Local Government.
Our expectation is that the planning system will limp on for the next few years unreformed with the steady supply of sites continuing to be an issue for developers. Secondly, on the cost side global supply chains for materials will still take some time to rectify themselves so cost rises will continue. Equally, labour costs in the UK with wage inflation now taking off will ensure that this cost component part equally continues to rise for the next couple of years at least.
So overall, for-profit developers selling outright sale homes and not-for-profit Registered Providers selling shared ownership products can all be confident, especially in the south of England, that demand will hold up very well. House prices should continue to rise, albeit at a reduced pace.
What does this mean for registered providers?
For-profit developers will be faced with rising build costs, some or most of which will be offset by rising house prices due to elevated demand.
However, to extract profit developers will need to buy and develop out consented sites and thus compete for a limited supply of land on and off market. To defend their business plan aspirations, and even some of their profitability, developers are likely to continue to pay heavily for land over the next two to five years.
Unless Registered Providers relax their KPIs and accept higher cost to value ratios or longer repayment periods then they are likely to miss their development targets by 2026 due to them being less competitive in the land market.
So, will galloping land values abate in 2023? Well, they will certainly not drop back to a trot but they may reduce to a very fast canter – so the answer is no.
Written by Karl Timberlake, Land & Operations Director, V10 Homes