Are UK housing targets achievable?

The government has identified the need for more new homes and is setting a target of 300,000 a year on average over the next five years. This is 50% above the 200,000 a year over the last five-year period, and considerably above the average achieved this century.

The Office for National Statistics (ONS) publishes quarterly figures, which are typically below 50,000 a quarter. This rate would need to go up to 75,000 a quarter. The two temporary peaks in the last 24 years were the 60,989 achieved in the last quarter of 2007 – on the back of the credit bubble before the banking crash – and the 60,370 achieved in the fourth quarter of 2022 on the back of easy money and Covid-19 recovery stimulus. On both occasions the rate moved above 60,000 it was followed by monetary tightening and a downturn.

To reach the 75,000 a quarter there will need to be a major expansion of building capacity as well as available plots with planning permissions. There will also need to be a larger supply of affordable mortgage finance to create the demand.

Quarterly completions of UK new homes:

• Q1 2023: 45 090
• Q2 2023: 47 680
• Q3 2023: 45 850
• Q4 2023: 50 650

Previous peaks this century:

• Q4 2007 60 989
• Q4 2022 60 370

Source: Office for National Statistics

Planning permissions

The Local Government Association estimates that there are 1.1 million house plots with permission available for builders. Housebuilders disagree with the method of calculation and think there are fewer. There has been an estimate of 700,000 available plots owned by the quoted larger housebuilding companies, taken from their accounts.

The English planning system is based around the idea of each council area maintaining a five-year supply of land against the target numbers of new homes in its local plan. Allowing for the likelihood that current local plans do not provide for 1.5m new homes in the UK over five years, it does nonetheless imply there are plenty of plots available to speed the build immediately if other conditions encouraged that. Builders might well want a reassurance of more permissions to come if they are to use up their present permissions more quickly, but a government reforming planning could negotiate that. If builders built and sold more, they would have cashflow to acquire more plots.

The government is seeking a way around the rules of the Habitats Directive incorporated into UK law which is said to impede the building of 150,000 homes on sites where there could be an increased discharge of nutrients into rivers.

Demand for new homes

A recent study has shown that only one in eight of those wanting to become first time buyers think they can afford to do so. (Skipton Building Society/Oxford Economics). In England, the average home is now 8.3 times average earnings. Since 1997 the ONS tells us house prices have risen around 350% whereas earnings have only risen by 100%.

This surge in prices was possible as mortgage lenders were prepared to offer a higher multiple of earnings as a loan and to take into account a higher multiple of joint earnings for a couple. For most of the last 24 years interest rates were low compared to average rates in the last century, making it possible to lend more without undermining the ability of the borrower to service the debt.

Multiples of earnings have now become so extended that it is preventing many getting a mortgage or making them cautious about doing so, given the proportion of income the debt interest will now absorb.

To achieve 300,000 homes a year, there will need to be more lower-priced homes for first time buyers. The target will be easier to hit if the Bank of England is able to bring rates down materially and keeps them down. Persistent higher rates will make it more difficult.

There is also the possibility that a high proportion of new homes be sold to older people trading in a second-hand home, as they may have sufficient equity from their house sale and a higher income to service the mortgage. Some second-hand homes are cheaper than the equivalent new home as they lack the latest technology, insulation and standards of finish that are built into modern Building Regulations.

The capacity of the industry

industry lacks skilled crafts people of all kinds. The Home Builders Federation estimates it will need 33,000 extra bricklayers to build 300,000 homes a year. There are also vacancies for plumbers, tilers, electricians and other skills.

Some housebuilding companies are reluctant to raise their growth rate further, as they need good quality reliable people and must make sure they have the management skills and abilities to handle the new staff they do take on. Wage rates and training levels may need to rise to get to the levels a 300,000 a year home industry requires.

The UK is also short of capacity to make the basic raw materials and manufactured products required in a new home. In 2022, the UK imported more than a quarter of its needs of cement, the bulk of its sawn timber and many other products. Relying on manufactured imports from China means long sea journeys which can lead to disrupted supply when prompt arrival on site matters.

The structure of the industry

There is a considerable degree of concentration, with the top ten building around half the total and the top three – Barratt, Persimmon and Taylor Wimpey accounting for 25%. They have their critics, claiming they restrict supply to keep prices up. They reply that they need to build to high standards and their business growth is restricted by labour and materials shortages.

It is difficult for small companies to enter the business as entry can be capital hungry. The firm may well have to pay large sums for the initial land but must wait many months to get the permissions to be allowed to start building. Once a company is well established with a land bank, it can start to make land profits as well as building profits, and can recycle capital as it sells the homes it is building.

The government will need to talk to the Bank of England and the clearing banks about mortgage availability and pricing to help boost demand for homes. It will need to engage with the existing housebuilders to see how it can assist in easing shortages of skilled labour and building materials.

The government has opportunities to use the schools and vocational colleges to assist in alleviating the skills shortages. It has said it will reform the Apprentice Levy to see if that can generate more apprenticeships. It needs to look at opportunities to allow and encourage more brick, tile, cement and other materials production.

To get the full benefit out of more housebuilding it needs to capture more of the value added in the UK and reduce transport of heavy materials into the UK. The public sector its responsible for over one quarter of total housing output through council housebuilding and housing association development which gives the government more leverage.