Cambridge saw a 1.7% decline in house prices in the year to May 2018, mirroring the London market’s response to political uncertainty, stamp duty hikes, and the targeting of buy-to-let mortgages. Price contractions have been most strongly felt in the new build market, with reductions in asking prices averaging between 5% and 8%. 4 and 5 bed houses have seen the largest price falls. Despite these falls, affordability remains a challenge for many buyers, with Cambridge house prices nearly twice the national average at £421,250 in Q2 2018.

The greatest affordability pressures come in the city itself, where median house prices are 13.5 times greater than median annual earnings. In comparison, in the neighbouring local authorities of South Cambridgeshire, Huntingdonshire and East Cambridgeshire, house prices are 11.0, 8.7 and 9.8 times earnings respectively. Although this still makes housing affordability a concern for many would be buyers, they are not as stretched as those seeking to buy in Cambridge itself.

The result of the disparity in affordability between the city and areas surrounding Cambridge is that large numbers of domestic buyers are looking instead to neighbouring towns. Consequently, market activity is higher in Cambridge’s hinterland; in 2017, residential transactions in Huntingdonshire were equivalent to 4.2% of stock, while in Cambridge turnover was only at 3.1%.

The impact of Brexit

Uncertainty is likely to be the driving force in the market for the next couple of years as the UK negotiates its exit from the European Union. This is most clearly seen in the number of overseas buyers in the market. According to Savills dealbook data, the proportion of non UK buyers in Cambridge has fallen from 38% in 2015 to 28% in 2017. International buyers are more unwilling to commit to a purchase while their immigration status post March 2019 remains unclear. However, Cambridge is still attracting an international workforce, who are instead looking to the rental market. In 2016 and 2017, 29% of new Savills lettings were to European tenants.

Confidence is likely to return to the market once the future of the UK’s relationship becomes clearer, and with the recent adjustment in pricing, there should be room for a return to growth. However, this is an evolving situation encompassing a wide range of possibilities. Oxford Economics’ Brexit forecast is split equally between two opposing scenarios; continued regulatory alignment with the EU (Brexit in name only) or the UK falling back onto World Trade Organisation rules (no deal).

The first scenario would likely result in a quicker bounce back after March 2019, while the latter, in combination with steadily rising interest rates, would act as a drag on growth rather than anything more severe.

Meeting housing need

Despite the slowing market, Cambridge has still delivered high volumes of new homes, with new build transactions accounting for 20% of all sales recorded by Land Registry in the year to May 2018, albeit this has fallen from 30% in the same period last year. The city also has a strong residential development pipeline; we have identified sites with capacity for over 17,000 homes, either in planning or currently under construction in the city.

However, much of the new development is aimed at the top end of the market; the average transaction value in the year to June 2018 for a new build house was £814,865, 33% higher than the average value for secondhand houses. In contrast, in South Cambridgeshire, new build values were 1.8% below secondhand values.

The local plans for Cambridge and South Cambridgeshire were given approval at examination in early September. This sets the housing requirement for the two authorities at 33,500 new homes by 2031. This is equivalent to 950 homes per year in South Cambridgeshire and 700 in Cambridge over the plan period.

To deliver this level of new housing in a more challenging market, developers will need to adopt new strategies. There have already been pricing adjustments which should help tackle the affordability challenge, but an increased focus on delivering smaller units at prices that are eligible for Help to Buy support would also help increase the numbers of buyers able to access the new build market.

Our research last year demonstrated that in less affordable markets like Cambridge, highest sales are achieved where pricing is in line with or at a discount to the secondhand market. In Cambridge itself, limited land supply and demand for variety of uses, such as hotels and student accommodation alongside residential, makes it harder for developers to deliver new homes at this price point, and therefore, rapid delivery of homes for open market sale is most likely to be found on sites in the city’s hinterland.

There is also the opportunity to deliver more purpose built rental stock. Cambridge is unusual in comparison to similarly sized regional cities as it currently has no build to rent schemes under construction, although there are proposals at an early stage for 600 PRS homes at Cambridge North. In contrast, there is a pipeline of over 1,500 PRS units in Bristol. Delivering alternative tenures will also help market absorption, and in Cambridge there is strong rental demand both from young professionals to live in the city centre and increasingly from families looking for homes in more suburban or rural locations.

Shifting focus

The focus of new housing delivery in the city will shift. Since 2012, the Southern Fringe has contributed significantly to Cambridge’s supply of new homes, with Trumpington Meadows and Clay Farm together representing 30% of all new build transactions within a 10 mile radius of the city. Over the next five years, delivery from the Southern Fringe is projected to total around 500 units, as the remaining homes on these sites are built out.

Instead, the bulk of delivery for Cambridge will shift to other urban fringe areas, predominantly North West Cambridge. The site has capacity for 5,800 homes in total, and is anticipated to deliver 1,500 homes by 2023. In the longer term, there is likely to be a growing emphasis on delivering major new sites between Cambridge and Bedford, to support ambitions for 1.1 million new jobs and 1 million new homes by 2050 in the Oxford-Cambridge corridor.

New opportunities will emerge as the new transport routes are defined, with confirmation of the new rail route expected in 2019 following a series of public consultations.

Housing requirements could shrink in response to new household projections

Although the local plans for Cambridge and South Cambridgeshire have gained approval at examination, this is subject to the local authorities agreeing to beginning an early review of the plans in 2019. This will involve reassessing housing requirements, and is likely to produce very different figures, as it will use the new standard methodology for calculating housing need introduced by the revisions to the NPPF in 2018.

The new methodology takes household projections as the baseline, and applies an uplift based on housing affordability. New household projections are due to be published at the end of September, and we anticipate they will be much lower for Cambridge than the 2014 projections, in line with latest population projections.

The 2026 projected population has dropped 10%, from 138,000 to 125,000 people. International migration which was expected to contribute significantly to Cambridge’s population is now projected to cease contributing by 2020 and by 2023 will represent a net negative for Cambridge’s population growth.

As a consequence, the standard methodology for calculating housing need, which draws on these household projections will likely produce a much lower housing target for Cambridge when the local plan is reviewed. In light of the new household projections, the government is planning to review the standard methodology, but any revisions are not expected until the end of the year, so the potential changes to Cambridge’s housing requirements will remain unclear for several months.

It is important to consider that local authorities are able to apply an uplift to the standard methodology figure based on local industrial strategies or planned economic growth. Given the affordability pressures facing Cambridge and its position in a strategic area for economic growth, it will be important to continue to plan for enough housing to ensure the city’s continued success.