Now is the time to build a million homes

You may have heard that some of the biggest losers in the stock market turmoil at the moment are Britain’s housebuilders. Those who have rode the wave of the “UK housing crisis” have been pinpointed by nervous shareholders with Persimmon and Barratts, to only name two, been hit with double digit falls. But step back and ask is this really warranted?

The building industry has always been one of the first hit due to its acute sensitivity to market sentiment and the apparent fragility of model they all operate which relies on the high demand for their product – in economic uncertainty there is a nervousness that people will still spend and therefore off the shopping list goes the house. Now forgive me if I’m naïve but I thought we had a supply issue in the UK and therefore I would have thought demand would be in place for a while – irrespective of whether or not the market takes a wobble or tumble, people still need somewhere to live. Though one area is just potential impact is the ability to generate similar levels of profit.

House prices have soared in recent years and for once not just in London, though this year to date has seen a level of stagnation and no doubt a decline is currently ongoing. The housebuilders responded well to the last recession by rebuilding balance sheets and repaying both debt and shareholders as a thank you for their support but now with a large supply of land resting on balance sheets either directly or indirectly via options it raises a question around how profitable they can be and ultimately will they continue to buy.

That house prices may fall is not in itself a bad thing: many people, including myself, have been willing this for quite some time. House prices have been racing away from wages for much too long now, benefiting existing homeowners at the expense of future generations, and a correction is well overdue.

The difficulty is what comes next, which by now we know well: housebuilding output will fall as developers turn off the taps. This has been the construction cycle that has repeated over and over since the 1970s. Builders only build on any scale in a rising market. As soon as demand falls, and prices drop, build-out rates plummet while developers wait for confidence (meaning: prices) to return. The long-run trajectory of house prices is only ever upwards.

The big housebuilders will have to reset their expectations of future price growth and probably take a hit on the landbanks they have already built. This will be hard on them, but no investment is risk free and the public interest must come first.

The public sector homes could be either made available for social housing, and the building costs recouped over the coming decades in rent. A cheaper, and therefore more politically palatable approach, could be to sell them into owner-occupation, with most of the costs recouped immediately and reinvested year after year.

The government has a lot to contemplate right now. A housebuilding programme should not be seen as peripheral to the challenge of the coming months, but central to it.

Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

Enjoy your weekend

Lee