Does the housebuilding sector face a re-run of the financial crisis?
The biggest challenge to developers right now is the market freeze. With house sales on ice, Capital Economics has predicted that transactions will fall by as much as 90 per cent in the coming weeks.
There are Help to Buy buyers making reservations, says Justin Gaze of Knight Frank. “But it’s a trickle.”
The industry has seen “a huge drop in income from sales,” adds Turner.
This is likely to last much longer than lockdown. Consumer sentiment has been hit hard, says Bowles. “People are not feeling secure in the economy or their personal finances, they’re seeing the headlines in the fall in the FTSE 100 and people being furloughed, and at more uncertain times people delay big financial decisions.”
So far, however, the threat to the sector does not appear to be as severe as during the financial crisis. This could change as the scale of the downturn becomes more apparent.
There are also material problems in the building supply chain. Cement production is falling, and many contractors can’t work in line with social distancing guidelines.
Gaze adds that builders were already struggling with the costs of increased requirements for sustainability, and were anticipating increased labour costs after regulations preventing migration of low-skilled workers come into effect in January 2021. The Building Cost Information Service expects the cost of housebuilding to increase by 23.6 per cent over the next five years.
Will we run out of new homes?
“When things are more normal new-build transactions will come back first,” says Bowles.
They have been able to continue marketing their properties, the homes are empty so there are fewer problems with social distancing guidelines, they have access to incentives such as the Help to Buy scheme, and new-build homes have shorter chains.
Major housebuilders are also “in a far better financial position than in 2008,” says Bowles. “They have more robust balance sheets, they can sit on zero revenue for three months and be fine.” Smaller builders, however, are under serious strain.
The subdued demand could also lead to fewer homes being built, which would take a year or 18 months to filter through into supply chain figures, says Gaze.
The halt to most housebuilding could also mean some projects could lapse on their planning permission. According to Savills analysis, this could affect 47,000 homes in England, which were granted planning permission between April and December 2017 and have not yet begun building.
What else could help kick-start the new-build market?
Extending the scheme would be welcomed, says Oliver Knight of Knight Frank, but a full market recovery will need “a broad range of incentives to ease market liquidity”. Many in the industry are calling for a stamp duty cut or holiday.
It’s an unlikely possibility, especially at a time when the Government is borrowing so heavily. But it wouldn’t matter much anyway for the new-build sector, says Bowles. First-time buyers already have an exemption, so the majority of buyers using the Help to Buy scheme aren’t held back by the tax anyway.
The planning system, which was already under-resourced and at breaking point before coronavirus, will be bottlenecked after lockdown, says Rob Hopwood of Bidwells. “If they don’t change the laws it’s going to be terrible.”
The Government is also due to introduce its First Homes program, which will offer permanent discounts on new-build properties to key workers and local people. It expected that this will act as Help to Buy’s replacement when the scheme is due to end in 2023.
Plans are unclear, and the extension of Help to Buy may also provide the Government with breathing room before revealing its policy.
“Whatever First Homes turns out to be, it will be less attractive for developers than Help to Buy,” says Bowles. The scheme will be more targeted, and the discounts will stand in perpetuity, which means the scheme shouldn’t inflate new build house prices in the same way that the Help to Buy scheme has.