Capacity for delivery in current market conditions

In the Economic and Fiscal Outlook published in conjunction with the Chancellor’s Spring Statement, the OBR have estimated that housing transactions will rise from around 290,000 a quarter at the end of 2024 to around 370,000 a quarter by 2029. This anticipated increase in transactions is in part driven by the expectation that planning reform and increased housebuilding will drive higher transactional activity. However, this misunderstands the relationship between housebuilding and wider market activity. 

There has been a strong link between sales activity across the whole housing market and the level of private housebuilding for most of the last 35 years. There has been a consistent 10 to 1 ratio between overall market transactions and private housebuilding starts in England, broken only during the period when the new build market was supported by Help to Buy. While planning reform may result in more theoretical capacity for sites to be brought through the pipeline, housebuilders are unlikely to expand their delivery rates unless they are sure there will be market demand for increased numbers of homes.

Private sales housebuilding activity has on average for the last five years accounted for 77% of new build starts, so is fundamental to growing the pipeline. However, current indicators for new build sales suggest little immediate potential for an upswing in demand. New build sales rales reported by the PLC housebuilders in 2024 appear to have settled at 0.6 sales per outlet per week (excluding bulk sales). Sales have remained at this level amongst the three housebuilders that have provided figures for Q1 2025. This is an improvement compared to 2023 levels, but is still 15% down on the levels seen in the pre-pandemic norm of 2017-2019, when Help to Buy boosted volumes. 

In our November 2024 forecasts, we did anticipate some increase in transaction volumes in the coming years, supported by gradual cuts in the base rate, which should improve affordability for mortgaged buyers. Our expectation was that transactions will increase by 4.8% from 2024 volumes by 2026, and by 10.6% by 2029. Assuming that this outlook for the medium term holds despite the current economic uncertainty, and that the 10 to 1 rule continues to be true, this implies private new build starts in England increasing to c110,000 homes per year. This would amount to a 46% increase from 2024 volumes, but is still slightly below the 2022-2024 average. Clearly, greater demand in the sales market needs to be unlocked for total annual delivery to move closer to 300,000 homes per year.

Where is the potential to boost demand?

The drop off in transactional activity since 2022 has been understandably concentrated in mortgaged first time buyers and home movers. While cash purchases in 2024 were within 2% of their pre-pandemic norm, purchases by mortgaged owner occupiers were down by around 17%. But this drop off was not uniform across England. 

Concentrating on first time buyers, data from the ONS shows that activity amongst first time buyers has declined significantly in London, the commuter belt and parts of the wider South East, despite these being the regions with the greatest requirements for new homes. However, there has been markedly more activity in the Midlands and the North. This pattern can also be seen in new build absorption rates. Savills analysis of new build data from the last 5 years has shown that house led, greenfield schemes in the more affordable regions of the North West, Yorkshire and Humber and West Midlands have seen higher average completion rates per week than the average across all sites, implying that these locations have seen faster sales rates than less affordable locations. 

This trend has been driven largely by affordability and mortgage regulation. The local authorities that have seen a drop of more than 10% in first time buyer activity have an average house price to income ratio of 13.31, compared to an average ratio of 8.05 in those locations that have seen a 10% increase in first time buyers. With the restrictions on high loan to income lending introduced under responsible lending rules in 2014, aspiring homeowners in areas with higher ratios have had to build up increasingly large deposits, limiting the pool of potential demand and depressing transaction volumes. 

Change in mortgaged first time buyer activity, 2013-2023

There is potential for these mortgage restrictions to be relaxed, potentially boosting transaction volumes and providing more capacity in the market for the absorption of new homes. The Financial Conduct Authority stated at the start of the year in a letter to the Prime Minister that it would “begin simplifying responsible lending and advice rules for mortgages, supporting home ownership and opening a discussion on the balance between access to lending and levels of defaults.” Options could include reviewing how much first-time buyers are allowed to borrow and enabling lenders to issue more loans to customers with smaller deposits.

While this approach could indirectly help support new housebuilding by boosting overall transaction volumes, it would not have the impact of a new build support scheme such as Help to Buy. A product targeted at new homes not only helped with the deposit barrier, but also gave buyers increased motivation to choose a new build property, thus enabling housing delivery to grow without being so dependent on winder market activity. Renewed support for new build sales, perhaps on a more targeted basis directly addressing those areas where transactions have fallen furthest, should be considered as a key part of the push to increase housebuilding volumes.

Private rental stock

There is more cause for optimism when looking at the institutional investment market. Savills’ 2025 European Investor Living Survey found that close to half of investors are looking to increase the allocation of their portfolios to the Living Sector. The Student sector is attracting the most demand, but 63% of UK investors are seeking greater investment in the multifamily sector, and 52% are targeting the single family suburban rental market. The UK also emerged as the highest priority market for European based investors to expand into.

Our survey also showed that UK investors are intending to deploy c.£23 billion of capital into the Living sectors over the next 3 years. For context, just over £14 billion of investment was made into the Build to Rent sector over the three years between 2022 and 2024. Most of this investment would be likely to be in forward funding development schemes; over the last three years 75-85% of all investment in build to rent has been as forward funding, with relatively little operational stock available to trade.

Affordable tenures

However, the greatest demand challenge is around the capacity of the affordable housing sector to buy or develop new homes. Affordable housing delivery has averaged 56,000 homes in the three years to March 2024 (24% of all new housing), with a broad 50:50 split between grant funded delivery, and nil grant Section 106. Increasing delivery from this level will be essential to increasing housebuilding volumes, as previously outlined in our 2024 paper Delivering 300,000 homes per year in England.

There are however, clear forward indicators that there is not enough capacity in the affordable sector to maintain recent levels of delivery, let alone increase it. The Government recently announced £2 billion of funding for new affordable housing for 2026-27, effectively extending the current Affordable Homes Programme for one more year. The funding is intended to support the delivery of up to 18,000 new homes, with 20% of the money available allocated to London.

The Government have stated that further funding announcements will be made as part of the Spending Review, expected in the summer, but nonetheless, the money announced so far points to a significant contraction in affordable supply, as it is lower than the annual equivalent of the 2021-2026 Affordable Homes Programme.

The situation becomes even more challenging when considering non-grant funded affordable delivery. The latest quarter’s survey data from the Regulator of Social Housing shows a reduction in planned spend on acquiring and developing new housing. For 2025-26 £14.8 billion worth of investment has been forecast. This is 5% below the previous quarter’s result, and is now the lowest amount forecast to be spent on new affordable housing since the start of the pandemic. Over half of the respondents to the survey reported scaled back planned expenditure. Given the constraints on both grant funding and nil grant S106, we estimate that affordable housing delivery will fall to around 40,000 homes per year by 2029.

Unlike in the sales market, where more market capacity could be created through relaxing regulation, increasing affordable housing delivery will require more direct investment from Government. Some financial capacity in the sector would be restored in the medium term through a rent settlement that allows annual increases at CPI+1% over an extended period. But to boost direct delivery in the short term, more grant funding, capable of supporting at least an additional 40,000 affordable homes above current delivery per year is needed as part of the Government’s drive towards their aspiration of 1.5 million homes over the next five years. 

Conclusion

Planning reform has been welcomed by the industry, but there is a need for government to go further to support demand. Our current estimates suggest that even though the volume of private housebuilding is expected to increase over the next five years, there will still be a shortfall of around 95,000 homes per year against England’s annual requirement of 300,000 homes. 

Measures addressing affordability barriers and restrictive mortgage regulation would be an effective path to unlock more sales demand, giving housebuilders more confidence to increase starts on stock intended for open market sale. But a step change in delivery for sale is likely to only come if the “10 to 1” ratio between overall market transactions and private housebuilding starts in England, can be broken, requiring Government intervention specifically targeted at supporting new build sales, rather than stimulating general market activity. Increased grant funding is also needed, and would be the simplest intervention to drive up absorption levels towards meeting the ambition of building 1.5 million new homes. However, due to the significant gap between where we think the potential demand could increase to, even with more Government intervention, it is going to prove challenging for the Government to achieve their ambitions of delivering 1.5 million homes in the this Parliament.