The last decade has seen one of the most sustained periods of house price growth in our history. The fact that this boom has coincided with an equally impressive period of wider economic growth has meant that the two have helped to fuel each other.
Which of the two was more important in sustaining the other is an argument for another day for someone smarter than myself. However, what I can tell you is that one of the key factors that has underpinned the growth in house prices is the chronic lack of supply.
So much so that the government has stepped in and set the housing market – and builders in particular – targets. The big number which stands out is its promise to build around three million new homes by 2020; an ambitious target but one that was welcomed by a host of organisations when unveiled.
However, like many things in the murky world of politics, looking behind the glitz and glamour reveals a number of issues which will impinge on whether or not this promise will be fulfilled. Much of this centres around the new build market and those that have been put in charge of delivering this massive housing expansion – developers.
Confidence is ebbing away
One of the main issues the mortgage market is faced with at the moment is that at a time when the government is placing increased emphasis on building new houses, confidence in the new build market has been ebbing away.
Many lenders have placed restrictions on what new build properties they will lend on, whether reducing the maximum loan-to-value or not lending at all.
Much of the problem has centred around valuations. Lenders have become increasingly concerned in recent years that the figure being quoted as the value of the property does not include incentives being offered by developers to prospective buyers.
This, as Iain Smith, sales director at Accord Mortgages, admits, leaves question marks in lenders’ minds as to the true value of the property they are lending on.
“There needs to be more transparency in the pricing as you don’t know what incentives are being offered so this impacts on the confidence to lend.
"When the valuer is giving the valuation, he needs to be weighing up everything, from the property itself to the local area and the incentives offered, because when the property is resold, we need to know what impact these will have on the price.”
The Council of Mortgage Lenders and the Home Builders Federation (HBF) recently announced that they would be working on this issue to improve the clarity surrounding valuations.
However, it will take time for the effects of this to work its way through the system to the people on the ground and until then, the nervousness will remain.
Meanwhile, what hasn’t helped fortify lender confidence in this area is the increasing evidence that a number of sophisticated fraudsters are targeting the new build market.
The most high profile example of this so far was in Thamesmead, London which saw four lenders involved. This has led to lenders looking more carefully at how much exposure they are taking on in one area or on one type of property. Smith insists: “Lenders don’t like it; they don’t like too much of one thing.”
Throw in the effects of the credit crunch and the impact this is having on both lenders’ ability and willingness to lend, you can understand why providers have been decidedly edgy over this area of the market.
The tricky problem of land supply
But it isn’t just the lenders that are dealing with new build issues. Developers too have many different hurdles to overcome, which are inhibiting their ability to function.
The biggest issue by far for developers is land supply.
Being a small island nation does mean that we only have a finite amount of space to build things. Combined with the need to not concrete over every square yard of green and pleasant land and most people’s objections to having major developments built near them, this means that whether you’re building five properties or Terminal Five at Heathrow, it takes a lot of work to get plans through to fruition.
John Slaughter at the HBF, insists that freeing up more land is vital to future home building and meeting government targets.
“We need to see a reverse in the trend of land coming through if we are going to meet the targets. But according to the latest government figures, the amount of land has fallen by 25 per cent between 1997 and 2005. The reason that output is up in the period from 2001 is because we are building in higher densities.”
This means flats and herein lies another problem. In order to increase the level of building in a shrinking amount of space, developers’ only solution has been to build flats. However, the demand for flats is relatively small compared to the level of building, which is leading to oversupply.
Manchester and Leeds are two of the biggest examples of this problem, with reports of blocks sitting half empty and, therefore, those that have been bought aren’t seeing the same undersupply pressures fuelling price rises.
In fact, many are now seeing potential negative equity situations; a problem primarily for the occupier but also for the lender. Many lenders now say they will not lend on new build flats and this is raising alarms.
Fahim Antoniades, director of Quantum Mortgage Brokers, comments: “There is too much oversupply and that’s what is wrong. These flats are far too expensive for key workers, families don’t want them and you have localised problems of too many of the same type of property in one place.”
Smith concurs: “There is no point building blocks and then having shanty towns with no one living in the properties. You still get areas where no one is buying but they are still building them.”
However, with the time it currently takes for projects to get from the initial stage of architects drawing up plans and getting planning permission to when the first buyers move in, it makes it very difficult for developers to react quickly to changing market sentiments. Slaughter admits that developers are shifting their focus towards house building and that changes to the planning system will help facilitate this.
“It’s all about local markets. A lot of apartment blocks are operating satisfactorily but the expectation is that we will be building more houses than flats in the future. Markets operate in cycles and the new cycle will operate with a focus on homes.
“The issue is about the planning system and PPS3 (the latest planning law) will hopefully make it easier to supply housing. The acid test though will be if this is working and that is too early to tell.”
But while this means that the market will be getting the properties which it is demanding, what does this mean for the government’s targets? As Slaughter points out: “It is more difficult to achieve targets if we are building houses, instead of apartments.” So are the government’s targets doomed to failure?
Government made no plans for a downturn
One factor which the government seemingly didn’t plan for was a downturn in the housing market and the impact this would have on building. Obviously, housing developers are private companies and they have to make a profit.
Therefore, at a time when it is increasingly difficult to sell new build properties, they cannot be expected to continue building at the same levels as they were before.
For Neil Johnson, head of PR and policy at the Building Societies Association, government policy just doesn’t match up with free market realities.
He explains: “The government’s announcements have very little to do with the market in reality. Ministers talk about doing more to get people into property but it is not that simple. The government can’t just say something and then everyone who wants a property magically gets one. It needs to look at the wider picture, rather than just saying that we need to build more houses.”
So is the government’s target for three million new homes by 2020 doomed to failure? Obviously there is still a long way to go but with the current issues affecting the new build market, it doesn’t look good.
