How could dropping housebuilding targets affect the UK property market?
By Paresh Raja, CEO, Market Financial Solutions
The chronic undersupply of homes in the UK’s property market has long been the subject of much political discourse, not to mention media attention. Indeed, the fact that the National Housing Federation (NHF) says that 340,000 new homes are needed to be built each year to stay in line with demand, it is clear to see why.
We have been told that the Government is alert to the challenge. In its 2019 manifesto, the Conservative Party promised that by the mid-2020s, 300,000 homes would be built each year. However, that commitment has been relaxed by Rishi Sunak – in a bid to throw water on a backbench rebellion – from ‘mandatory’ to ‘advisory’.
But how could this decision affect the UK property market?
The imbalance between supply and demand
At face value, it could be argued that the housebuilding targets were not having much of an effect. Successive governments over recent decades have set ambitious goals relating to the building of new homes; year on year those targets were missed.
According to official government statistics, 9,000 fewer homes than intended were built in 2016. The problem has got worse since; the data for 2021 indicates that the discrepancy between the targets and actual construction numbers had grown to 32,000.
Supporting this, research from 2021 revealed that, in the ten years preceding, almost half of England’s local councils had not constructed enough houses to keep up with population growth.
The failure to build enough homes has exacerbated the supply shortage, in turn making the property market incredibly competitive for renters and buyers alike. Prices have risen sharply as a result. In fact, the average price of a home grew from £169,090 to £296,422 between October 2012 and October 2022, while average rents in the private rental sector (PRS) shot up by 11% in 2022 alone.
Arguably, these statistics would suggest that house building targets have actually had little effect on home construction delivery.
Will relaxing the targets make matters worse?
That said, despite the fact that targets have never been consistently hit by government, there is little doubt that their existence has led to an uptick in construction levels. According to figures from the Centre for Policy Studies (CPS), for instance, 100,000 more homes were built in 2022 than in 2012, which the CPS suggests was the result of the presence of mandatory targets.
By watering down targets, the Home Builders Federation (HBF) argues that fewer houses will be built annually. In fact, the CPS see completion levels falling by between 30% and 40%, while the HBF say that 100,000 less homes will be finished.
From this data, one would imagine that the disparity between supply and demand will continue to widen following the decision to drop these targets. As such, renters and buyers will likely face more competitivity and higher prices, compounding an affordability crisis that is already close to boiling point. Certainly, with a recession on the cards, the timing is less than ideal.
Other impediments to house building
Of course, increasing supply is necessary to fulfil the growing demand for homes and to facilitate wider access to the real estate market. But it is possible that there are more variables at work that are restricting construction levels to a comparable, if not larger, degree.
The planning system, for example, has been branded as ‘the largest single obstacle to residential development’ by some real estate specialists, but has arguably been the subject of less discussion than national targets. As such, perhaps the removal of ‘red tape’ and building regulations would do more to alleviate the lack of supply.
Indeed, such an argument has been touted by Rishi Sunak and his housing ministers of late. For the Conservatives, therefore, one answer to the house building and supply conundrum could be to remove the regulations that often hold developers back. Yet such a move would seem unlikely – if Sunak was under pressure from within his own party to curb housebuilding efforts, the decision to ease planning laws would surely come up against stern opposition.
What would Labour do to alleviate the housing crisis?
Speaking of opposition, it is worth considering what the Labour Party might do to alleviate the affordability and housing crisis, if given the opportunity. Indeed, the latest polling averages put Labour ahead by 21% of the vote, which would secure Sir Keir Starmer a majority of 42 seats, so perhaps Labour’s policies will have a greater impact on the property market in the years to come.
At the party’s conference in Liverpool in September, the shadow minister for levelling up, housing and communities, Lisa Nandy, pledged that 400,000 social houses would be built under a Labour government to alleviate the deficit of homes in the country. By this argument, by improving the supply of social homes and re-committing to new housing targets, pressure would be alleviated on the PRS and wider market. However, as we are still a number of years away from a general election, it will be interesting to see whether such commitments are stuck to.
Approaching the issue from a different angle
For both parties, I would argue that there are other issues – like inflation and rising interest rates – that are doing more to exacerbate the affordability crisis than a lack of targets. Therefore, perhaps government needs to focus on fixing some of the macroeconomic pressures on the market before implementing house building targets on a national level.
Indeed, such an approach would allow those of us in the property and specialist finance sectors to tackle the problem ourselves, so perhaps there is a different angle with which we can approach the housing crisis.
For instance, there are 600,000 vacant residential properties in the UK, and 216,000 homes that have sat empty for six months or longer in England alone. Meanwhile, as demand for commercial and semi-commercial properties have decreased following the shift to hybrid and remote working, an abundance of commercial and semi-commercial properties are no longer in use. Therefore, instead of building new homes, perhaps converting or renovating these vacant units and putting them back onto the market would do more to decrease competitivity in the market.
In doing so, the supply of homes would increase without the need for government initiatives, removing the burden on Westminster to encourage construction. That said, conversion or renovation projects of this nature can be complicated, so the planning system will need to be simplified to make it easier to carry out necessary refurbishments and conversions.
Flexibility and certainty from lenders will also be required, and those of us who can provide such qualities will surely be contributing to the long-term sustainability and fairness of the market.