Rishi Sunak’s new government is fighting economic fires on multiple fronts. These include record CPI inflation figures of 11.1% for October, largely led by the energy supply crunch, continuing to fuel the cost-of-living crisis; the massive strain on public finances, to the tune of a £70bn uplift in government borrowing expectations, according to the Office for Budgetary Responsibility last week; and an impending recession that the Bank of England forecasts could last through to the end of 2024.Nonetheless, we have seen in the past week that housing is very firmly on the agenda, as a pressing matter of both economic and social policy.
We are beginning to see the impact of rising mortgage costs and falling consumer spending power on house-buying activity. The latest UK House Price Index data released by the ONS showed house price growth stalling from August to September. Bloomberg Economics has forecast a drastic fall in UK house prices next year, predicting a drop by as much as 20%. Savills is less bearish, but anticipates a still less-than-palatable 10%.
The prospect of falls in price or transaction levels affects the confidence and financial position of market participants responsible for delivering new housing supply. The share prices of FTSE-listed landlords British Land, Persimmon and Barratt Homes have all suffered double-digit-percentage falls over the past six months.
In that context, the Autumn Statement delivered last week by the latest Chancellor of the Exchequer provided some welcome announcements on key property industry issues. This included business rate relief for the retail, hospitality and leisure industries. While rate revaluations will proceed in 2023, additional transitional relief will be provided for any ratepayers facing significantly higher rates as a result.
Meanwhile, the stamp duty cuts announced in September’s contentious ‘mini-budget’ are set to end by April 2025, essentially instituting a stamp duty holiday for the next two-plus years. However, the temporary continuation of a demand-side stimulus measure, the efficacy of which is much contested, will do little to alleviate the chronic supply side issues facing housing delivery.
Jeremy Hunt also revealed that an energy efficiency taskforce will be established, with £6bn of new funding to help households, businesses and the public sector save on energy bills by making improvements to home insulation and boiler upgrades. The funding will be doubled to more than £12bn from 2025 to 2028, with the aim of reducing the UK’s overall energy demand by at least 13% by 2030. Unfortunately, however, given that each home upgrade costs c.£20,000, £6bn would be enough for only 300,000 homes – a drop in the ocean compared to the 19 million homes needing a retrofit.
These positive steps are therefore at risk of being insufficient for the scale of the challenges facing the UK – while other policy decisions are actively counterproductive.
Speaking at the Confederation of British Industry conference this week, the prime minister resisted industry calls for the government to scrap plans to reduce net migration. No wonder: figures released days later estimated 1.1m people migrated to the UK in the year to June 2022, with net migration at 504,000 – a record high from the 330,000 seen in 2016, the year of the Brexit vote. EU net migration remains negative, while non-EU migration has risen due to humanitarian routes for Ukrainians, Afghans and Hong Kong residents, as well as a rebound in international students.
Still, research by the Construction Industry Training Board (CITB) shows that the number of non-EU workers in construction declined by 9% to 280,000 in 2020. The industry has struggled with substantial wage inflation, and vacancies recently hit a 20-year high. Whilst a unique set of circumstances necessitated the UK’s policies on immigration in 2022, the government must get a handle on long-term policies, ensuring industries such as construction that are crucial to the UK’s economic recovery, can recruit the skilled workers they need.
Otherwise, with rising input costs, and the prospect of a sharp decline in the value of the output, housebuilders may reconsider which sites earmarked for new developments are now viable and delay new starts. This will impact the delivery of new housing supply in the short-medium term. That slowdown may be compounded if the government is defeated in enforcing minimum housing targets for local councils, in order to achieve the manifesto commitment of building 300,000 homes per year – the subject of a backbench revolt this week. The Autumn statement was otherwise sadly silent on planning reform or schemes to replace Truss’s ill-fated investment zones.
The data is already below where it needs to be for a country with a rising population. JLL has predicted housing new starts will fall from 170,000 in 2022 to 160,000 in 2023, with London seeing a drop from 18,000 to 15,000 this year, and staying flat at 15,000 in 2023, (the Greater London Authority targets 52,000 new homes per annum.) The Construction Products Association projects total construction output to fall by 3.9% in 2023 following a rise of 2.0% in 2022, and private housing output to fall by 9% in 2023 before returning to 1% growth in 2024.
New housing schemes include much needed affordable and social housing, for sale or rent, where the trends are also negative. In an appearance in front of the House of Commons Levelling Up, Housing and Communities Committee, Michael Gove, the Secretary of State for Levelling Up, Housing and Communities, said the government has difficulty meeting its targets to reduce homelessness, which is on the rise due to the cost-of-living crisis and the influx of refugees. With the housing and communities budget cut by 62.2% since 2009/10, social landlords say the government prioritises affordable home ownership over social housing, access to funding for social housing providers is seriously constrained. The result is a decline in the delivery of new social housing, which has fallen from 30,000 new homes in 2010 to fewer than 5,000 in 2020.
A separate consequence of falling house prices is that, as people delay buying a home, demand is inevitably funnelled into the rental market. The latest ONS data on UK private rental prices showed a 3.8% increase in the last 12 months – the largest annual percentage change since the launch of the data series in 2016. That, obviously, is an unwelcome development for renters, and symptomatic of a shortage of rental property. The cut to capital gains tax exemption in the Autumn Statement further reduces incentives for buy-to-let landlords, who are already struggling to fund requirements for new energy efficiency standards by 2025. Little wonder buy-to-let landlords are leaving the industry in droves, further exacerbating rental supply.
This should, however, encourage further institutionalisation of the UK’s rental sector, as recommended in the government’s policy paper “A fairer private rented sector”. A much-needed movement since the same paper also highlights a drive to halve the number of non-decent rented homes by 2030 – said to be around 20% of total private stock. In the social sector, this is 13%. This week we heard the tragic story of two-year-old Awaab Ishak, who died due to the dangerous condition of his home, managed by Rochdale Boroughwide Housing. It’s astounding this could happen in 21st century Britain and highlights the need for the urgent refurbishment of homes not fit for purpose, not just a focus on new build volume, whether in the private or social housing markets. The 7% cap on social rents announced in the Autumn Statement will hopefully not serve to inhibit capital expenditure required both to upgrade general and environmental standards.
It goes without saying the UK Government has a lot to contend with, not least on issues relating to housing, where policy decisions often end up being counterproductive and with unintended consequences. Landlords and homebuilders in the private and social sector have to tackle a difficult and complex economic and political landscape in the year ahead. It’s more important than ever that the barriers to the planning and delivery of new homes are minimised, and standards for quality control and sustainability are delivered on, so that we can continue to finance the housing market the UK desperately needs, despite the challenging macroeconomic and geopolitical backdrop.