Will housebuilding volumes in England recover to pre-pandemic levels?

Not until 2026, according to our updated completions forecast. The fall in new homes completions through the Covid-19 pandemic has been well documented, but it is the longer term fall in starts that will have a more enduring impact.

The Affordable Homes Programme 2021-26 will be fundamental to driving volumes back up to pre-Covid levels towards the middle of the decade. First Homes and expanded delivery of Shared ownership will partially fill the gap left by Help to Buy. The remainder of that gap will be filled by Build to Rent, supported by strong demand from institutional investors.

Completions will continue to fall in 2021/22, but are expected to pick up sharply in 2022/23, albeit remaining around 25,000 completions lower than pre-pandemic levels. We expect continued growth over the following three years, driven by the expanding Build to Rent sector, and affordable housing delivery, including First Homes. Annual completions in England should return to the levels seen in 2019 by 2025/26, but will still be significantly below the government’s target of 300,000 homes per year. 

Construction and Land Supply

The lower volume of completions during 2021/22 are mainly a function of construction timings. Completions were down only 15% during the year to 2021, but starts were down 25% and that will have an impact on completions in the following year. The first four months of the year to March 2022 have borne this out. Between August 2020 and March 2021, EPCs for new dwellings ran at or above 2019 levels. But since May 2021, they have been around 90% of 2019 levels.

This has exacerbated a trend that had emerged well before Covid. The number of homes under construction had been falling since the beginning of 2019, as completion numbers overtook starts, and we had already pointed to a likelihood that completions would fall as a result (see Q4 2019 Housing Supply Update). Although Q1 2021 was a stronger quarter for starts, rising by 49% against the previous quarter, early data for Q2 from Glenigan and NHBC suggests this upward trend has not continued.  

As chart 3 shows, based on the historic relationship between starts and completions, this fall in starts will likely feed through to a lower number of completions until at least mid-2022.

Why have starts been falling?  

One possible reason is that housebuilders were already preparing for a drop in demand as a consequence of the restrictions to Help to Buy in 2021. Certainly, Savills land agents reported throughout 2019 increased demand for smaller sites that could be completed before the Help to Buy changes, but sites of this type were in short supply. (see Q4 2019 Land MiMs)

This leads on to the second possible reason for the fall in starts: lack of land supply of the right type in the right places:

• Sites gaining permission have been getting larger, so although large numbers of plots have been gaining consent, an increasing share of them are on sites that would take longer to deliver. 
• The sites gaining permission are also skewed to lower demand markets, with the supply of consented land still stubbornly low in the least affordable and highest demand housing markets. The new Standard Method for assessing housing need by local authority released in September 2020 indicated that the Government is unlikely to take substantive action to change this.  

This means that in some areas land is in very high demand with large numbers of bidders for the available sites. This suggests that land is in short supply and may hamper delivery volumes in specific locations. In contrast, Barratt’s financial report for the year to June 2021 said that they “continue to see a good range of land buying opportunities”, likely reflecting their national coverage.

More recently, market challenges have now been compounded by a lack of materials and labour, as a result of both the pandemic, Brexit trade frictions and other unforeseen issues. Although the consequential rise in build costs has been offset by very strong house price growth to date, we expect that house price growth will slow during the rest of 2022 and continued cost growth is clearly a risk to housebuilders’ margins. These issues are more likely to adversely affect smaller housebuilders and housing associations, as the larger players tend to have more control of their supply chains.  

Demand

As new home completions start to recover, we anticipate that the tenure mix will be quite different from what has been delivered over the past decade. 

We have started by looking at the scale of demand for unsupported market sale homes (homes sold to individual buyers, without support such as Help to Buy), the single largest part of the new homes market. This has stuck fairly rigidly to the 50 year trend of running at about 10% of all housing transactions in England and we see no reason for this to change over the next five years.

Volumes held up remarkably well during 2020/21. The Covid hit during the first quarter of that year was mitigated by a strong second half and by the end of the year unsupported sales of new homes were down only 20% compared to the previous year.

We expect an increase in unsupported new homes sales in 2021/22 and a full recovery to 10% of all residential transactions in 2022/23. That results in a steady 100,000 unsupported sales of new homes each year. Although sales in the second hand market will reach a post-GFC high in 2021/22, spurred by the stamp duty holiday, this will be too short-lived for the housebuilding industry to take advantage.

Help to Buy sales reached a new peak during the last year of the scheme before regional value caps were introduced and homemovers excluded. We think the restrictions will cut Help to Buy volumes by about one third (see Budget response), although housebuilders may be able to mitigate this by changing their product mix to fit within the new regional value caps, for example. We therefore anticipate 35,000 Help to Buy sales each year for the remainder of the scheme, down from around 50,000 per year over the last four years.

Although the official Help to Buy scheme is expected to end in March 2023, it is likely that other smaller scale schemes led by the Home Builders Federation and individual large housebuilders will form some part of the market. The Deposit Unlock scheme, with Gallagher Re, has already opened on a small scale with the Newcastle Building Society. The expansion of this scheme and other innovative solutions to keeping deposit requirements low for home buyers could form an important part of the new homes sales market, although they are unlikely to reach the scale of Help to Buy.

Build to Rent

The only part of the private housebuilding market that we expect to be appreciably larger in 2025/26 compared to 2019/20 is Build to Rent. The number of homes built specifically to be rented to tenants in the private market doubled between 2016/17 and 2019/20, from around 7,000 to 14,000 completions. 

We expect Build to Rent numbers to continue their steep rise, the pandemic having caused only a brief pause in supply. If completions numbers double again by 2025/26, we will see 30,000 Build to Rent completions in one year. The appetite for Build to Rent from the investment community could support such a level of growth, while compressed yields will make the sector more competitive, particularly as investor interest has widened to include suburban locations.

At 30,000 homes in 2025/26, Build to Rent will only just have exceeded half the volume of new homes sold under Help to Buy in 2020/21. The absence of Help to Buy from April 2023 and the consequential fall in demand for new homes for sale may result in more opportunities for investment in Build to Rent. If the strength of investment demand for rented housing remains, then this sector could expand more rapidly and exceed our forecast.

Affordable Housing

With housing delivery down over the next five years, Section 106 volumes will also be down. Section 106 has become increasingly important over recent years, reaching 56% of all affordable housing delivery in 2019/20.  

Over the next five years, we expect Section 106 to deliver an average of just over 25,000 homes per year. During that time, this form of delivery will increasingly incorporate First Homes, the new affordable home ownership tenure. That means the delivery of shared ownership and affordable rented tenures through Section 106 will fall.  

Overall however, we expect affordable housing delivery to increase very substantially over the next five years, averaging just over 60,000 completions each year. This would be an unprecedented volume of new affordable housing. It will be enabled by several factors:

• Continued high levels of delivery through Section 106 or the proposed new infrastructure levy;
• The substantial Government Affordable Homes Programme 2021-26, of £12bn, which is expected to fund the delivery of 180,000 homes;
• The commitment of Housing Associations to maintain investment in new homes, despite the challenges of building safety and decarbonisation within their existing portfolios;
• The expanded investment from Local Authorities, following the lifting of the Housing Revenue Account borrowing cap;
• The rapidly expanding investment of private capital into affordable housing ( see Spotlight on Private Capital in Affordable Housing ).

The tenure mix will include small volumes of First Homes, delivered through Section 106. But overall it will be similar over the next five years to the previous five years, dominated by Affordable Rent and Shared Ownership. The delivery of Social Rented homes is likely to continue at a relatively low level.

Diversifying the tenure mix

Since 2018/19, less than half of all new homes delivery has been ‘vanilla’ unsupported open market sales. We expect this to continue over the next five years. Any successor to Help to Buy appears likely to be a small contributor to demand, certainly compared to Government investment in affordable housing and private investment in both affordable housing and market rented housing.

Despite the Government’s stated commitment to homeownership, our forecast expects an increasing share of housing built for rent – both affordable and open market. The percentage of new homes built for rent will increase from 21% in 2020/21 to 31% in 2025/26. This is new territory. A similar proportion of delivery for rent was last seen at the end of the 2011-15 Affordable Homes Programme, as developers rushed to meet the delivery deadline. But otherwise such high proportions of purpose built rented housing have only been seen during periods of recession, both after the GFC and during the early 1990s.

The challenge of land supply

These completion forecasts assume that an adequate pipeline of development land can be maintained over the next five years. In the year to September 2020, full planning permission was granted for 370,800 new homes in England, an 8% fall from the 2019 peak of 406,000 consents. However the number of homes approved in Q3 2020 grew by 21% against the previous quarter, suggesting that disruption to the planning system due to lockdown has been relatively short term.

However, in the Q2 2021 Home Builders Federation survey, 47% of respondents considered land availability to be a major constraint to development, an increase from 42% in the previous quarter. Our previous analysis has shown that in 46% of local authorities over the last five years, sites have been built out faster than new sites have been consented, depleting the consented land pipeline. If this situation persists, it could act as a serious constraint on developers’ ability to meet the ambitions set out above.