14 November 2024
With the Autumn Budget focused on investment and growth, the housing market sentiment is optimistic. However, with fast-paced growth comes economic tension. As labour is already stretched and funding for the supply chain is challenged, the construction industry grapples with how to achieve these targets.
The government’s promise to remove the anti-growth legislation and reform the planning system is critical to achieving new housing targets, but can the industry cope with delivery?
House prices rebound
Two years on from the infamous mini-budget which sent the UK housing market spiralling, the market has shown its strongest performance in the latest quarter since the end of December 2022. Buoyed by interest rate cuts, house prices increased by 1% in Q3. Northern Ireland (3.1%) and Scotland (1.8%) topped the indexes. The trend continued in more affordable areas, with average house prices in the north-west growing by 4% compared to the first three quarters of 2024. The annual rate of house price growth has reached 3%.
Transactions continued their upward trajectory this year, reaching almost 300,000 sales in Q3. There has been a 4% increase in sales in 2024 compared to the same period last year.
Will 2025 volumes make a dent in the 1.5m new homes target?
In recent months, we have seen national housebuilders report their annual results, revealing reductions in new build completions. While they predict increases in the coming year, there is some caution, and these volumes are unlikely to reach levels of two years ago and meet housing targets. In the government’s first 100 days in office, housing data reported the number of residential projects fell by 17% and planning approvals decreased by 20% according to Glenigan. This fall in activity is due to homebuyers waiting for interest rates to fall further during 2024 and is likely to continue into Q4 as the industry historically quietens over the festive period.
The British Property Federation's quarterly Build-to-Rent (BtR) statistics showed that annual completion fell across the 12-month average, and the number of applications has fallen by 12% since the last quarter. The last 12 months has still seen 22,000 completions in BtR.
Investment in technology and modular solutions needed to meet housing targets
With ambitious housing targets and a commitment to removing red tape, the spotlight shines on the industry building methods and complex supply chain. Technology is advancing rapidly and modular builds offer efficiency and standardisation. However, with so many business failures in modular construction, how can the industry and government restore confidence in this opportunity? Standardisation of build is a key driver to increase volume and is well-suited for affordable housing and BtR properties, but many housebuilders would need to overhaul their infrastructure and operational set up, requiring significant investment.
The Chancellor announced a commitment to continue funding for research and development (R&D) in the Autumn Budget. The advancement of technologies such as robotics, generative AI and design of new materials will be critical towards meeting targets, and the industry warrants a slice of the £20bn budgeted.
The government's proposal to build new towns, healthcare and educational facilities, and speed up planning processes, could benefit from a modular approach. The current supply chain and labour challenges, particularly acute in some parts of the UK, could be mitigated through factory-produced housing and the use of technology. The higher degree of repeatability can also enhance quality and reduce material waste, achieving carbon targets and creating new skills and jobs in the industry.
The UK can also learn from its international network, with success seen overseas in the delivery of modular accommodation and technology to enhance project design, delivery and management.
What does the Autumn Budget mean for housing supply?
The Budget was the largest fiscal loosening in decades, and while the Monetary Policy Committee (MPC) cut interest rates in November, it may slow the speed of future cuts. The £5bn of funding for the sector and announcement of incentives for small and medium-sized enterprises (SMEs) and first-time buyers is welcome. We await the details on the distribution of this funding, alongside the planning reform promised by the end of the year. The Right to Buy retention for local authorities was welcomed, along with infrastructure announcements critical to creating places where people want to live. Overall, a positive Budget, but one unlikely to materially move the needle towards the targets.
Mortgage rates drive activity
Mortgage rates are influencing market activity. In the past quarter, mortgage lending rates have dropped on average by 0.5%. A 75% Loan-to-Value (LTV) five-year loan averaged 4.1% for the quarter, which is more than 1% lower compared to the same timeframe last year. These rates have hit their lowest levels in two years.
The market has seen a 3% increase on mortgage approvals during Q3. New home approvals have increased by around 7%, reaching their highest levels in two years.
Incentives target first-time buyers
Nationwide Building Society announced intentions to attract first-time buyers by inviting mortgage applications to borrow up to six times their income with a 5% deposit. Housebuilder Bellway is enticing buyers with promotional offers, including a 5% cash contribution towards the purchase price of their new build homes. House prices have risen substantially relative to incomes, with the average house price-to-earnings ratio reaching a multiple of eight in the last two years, steadily increasing since the turn of the millennium and expected to continue rising.
Future outlook for the UK housing sector
Among the many policy announcements and government statements driving positive sentiment into 2025, the removal of anti-growth legislation and planning reform stands out. Other initiatives like the Industrial Strategy, National Wealth Fund, and Skills England will support industry growth. However, a radical overhaul of the housing market’s delivery is dependent on investment in technology and collaboration. For that, it is too early to tell.
RSM predictions
- House prices will increase between 4% and 5% by the end of the year.
- Over the next five years, house prices are likely to see a 20% increase.
- We stand by our previous prediction that an upturn in housing volumes will start to be seen from spring 2025.
- The devolution of planning and focus on housing demand calculations will foster more collaborative partnerships with local authorities, leading to geographical changes in build volumes.
- Increased targets for affordable housing will result in public and private company partnerships.
- Changes to inheritance tax (IHT) in pension funds could divert previously invested funds, now subject to IHT in estates, into property, with investors viewing the industry as a growth area.
For more information, please contact Kelly Boorman.