What’s changing?

Even before the recent mini-budget and subsequent economic turmoil, the housing market was moving away from the low interest rate environment that it has enjoyed over the past decade. Base rates have been rising since the start of 2022, and even in August were forecast to reach 2.5% by early 2023. However, the market response to September’s mini-budget means that rates are now expected to climb to 4% by the start of 2023, and stay at this elevated position until 2024. Coupled with the rising cost of living, this will put pressure on household budgets, restricting affordability, and leading to falls in both house prices, and market activity (see our Mainstream residential market forecast).

Market activity

In 2023, higher rates and stretched affordability are likely to mean activity levels across the whole housing market falls to around 870,000 transactions. This would be equivalent to 82% of the anticipated level of activity for 2022, and 27% below the 2017–2019 pre-pandemic average.

At the same time as this wider drop in activity is expected, the new homes market in England has to contend with the end of the Help to Buy scheme. The scheme has supported 31.4% of all new homes sales since its inception in 2013 and 36% in the three years to Q1 2021. It also enabled new homes to take a greater share of overall market activity, rising from 1 in 10 transactions to 1 in 9. As the scheme ends, that ratio is likely to return to the long-term lower proportion, although schemes such as Deposit Unlock do have the potential to fill some of the gap.

We would therefore anticipate new build market sales in 2023 to total around 90,000, down from 133,000 in 2021. Although a significant change, this reduction is coming off the back of extremely high levels of sales activity, shown in the chart below. Data from the listed housebuilders shows an average sales rate of 0.8 sales per outlet per week over the last year and a half. A fall back to 0.6 sales per outlet per week would be in line with the 2014–2016 average. Overall market activity is expected to rise from 2024, and if the 1 in 10 ratio of new build to second hand transactions holds, we would expect new build market sales to return to 110,000 per year by 2025.

Why might new build perform differently?

However, there are exceptions that new build could outperform the wider market. In 2009, following the global financial crisis, the drop in new build transactions was proportionally less than the drop in overall market activity. By June 2009, new build transactions had fallen by 50% from their peak, while second hand sales were down by 62%. In an illiquid market, where homeowners were reluctant to put their properties on the market, new build homes became the easiest, or indeed only, option for those who still had to move. A similar scenario is likely to emerge now, particularly once interest rates stabilise, and then begin to fall in 2024.

Affordability will be most pressured for buyers dependent on mortgage finance for their purchase. Savills’ new homes sales data suggests that around 49% of new build purchasers are buying without the need for a mortgage, compared to 35% across the whole housing market. Of these buyers, 43% are dependent on the sale of their existing property, but 53% are completely chain-free. We anticipate that cash buyer numbers will be more robust in 2023 than other parts of the market, falling by 14% compared to a 35% fall in the number of first-time buyers (FTBs). Given the higher numbers of cash buyers in the new homes market, there is again reason to believe transaction volumes may perform more strongly than the wider market.

We expect falls in both prices and activity levels to have less of an impact in the North West, Yorkshire and Humber and North East. Buyers in these markets are less stretched due to lower house price-to-income ratios than those in London and the wider South East, and therefore have a greater ability to weather rises in mortgage rates. This is important as overall delivery in these regions is more dependent on open market sales, with less of the pipeline delivered as affordable housing or Build to Rent. 71% of new build completions in the North East were for sale in 2019–2020 according to Land Registry data, compared to under 60% in the South East and South West.

Will alternative tenures fill the sales gap?

Affordable housing

Our last completions forecasts, published a year ago, found that the 2021-2026 Affordable Homes Programme (AHP), and the expansion of Build to Rent would be critical to filling the gap left by the end of Help to Buy. In a market downturn, counter-cyclical forms of delivery will be ever more important; in 2010–2011, as private housebuilders were recapitalising, housing associations (HAs) were responsible for 43% of all market and affordable completions, up from 23% in 2007/08. Currently, HAs directly build or fund the development of just over 22% of all new homes.

We anticipate that demand for shared ownership over the next two years will remain relatively strong. It will appeal particularly to FTBs who find their budgets curtailed by rising mortgage costs. They may no longer wish to remain in the private rented sector, as asking rents have increased by 12% over the past 12 months. Paying the rent of 2.75% on the unowned share of the property will be much more affordable than servicing a mortgage at rates of 6% on an open market sale property.

At £64,000 per home, grant levels under the AHP are higher than for any previous programme. That will make it more viable for HAs to deliver homes across a range of tenures. However, overall affordable delivery is likely to fall, as S106 volumes decline with a wider market slowdown, and unlike in 2010–2011, the current AHP does not allow for “mopping up” units that were originally intended for market sale. Equally, rising build costs, increased building safety requirements and the proposed cap on rent rises are putting pressure on development budgets. Development has already been halted on 13,000 affordable homes, 10% of all HA development planned for the period as pressure has increased on HAs finances.

Build to Rent

We know there is significant underlying institutional investor appetite for residential housing. Investors have collectively stated aspirations for in excess of 870,000 single family units, against a current pipeline of only 20,000 homes. In our previous completions forecasts, we expected Build to Rent delivery of both multifamily and single family homes to reach 30,000 per year by 2025.

Despite the rising cost of debt, previously agreed investment deals are still being completed. The pipeline for delivery of new Build to Rent homes should be secure for the next 18 to 24 months. However, the market for new deals is more challenging, as price adjustments and the rising cost of borrowing have created uncertainty over yields. Fewer new investment deals are expected this year and into the start of 2023, feeding forward into a drop-off in new supply completing at the end of 2024.

Single family Build to Rent yields are higher than multifamily, so this part of the market should be less exposed to rising cost of debt. House price falls alongside rental growth will drive yield rises over the next two years; yield growth based on our house price and rental forecast is 100 bps over 2023 and 2024. At the same time, gilt yields (as measure of alternative risk-free investment options) are forecast to fall back from a Q1 2023 peak, with a rental yield premium of 150 bps above the gilt yield emerging by mid-2024.

Once there is more certainty in the market around the economic outlook and the cost of debt, we expect activity to pick up again. The fundamentals driving the sector remain strong; there is a lack of rental supply. There were -26% fewer homes available to rent in Q3 2022 than the pre-pandemic average, according to data from Rightmove. Rents have seen annual growth at 12.3% earlier this year, and we still expect 6% growth next year. Demand will be fuelled by frustrated would-be FTBs locked out by higher mortgage rates. This rise in rents may support the underwriting of new deals, and by the end of our five-year forecast period, Build to Rent is likely to form a significant proportion of all completions.