I’ll start on an positive note around the cautious optimism we’re seeing in the housebuilding sector over the last couple of months as interest rates have inched down. To say the last few years have been bruising for housebuilders and their supply chain would be an understatement, so any light at the end of the tunnel is welcome.
Why is the housebuilding sector struggling to deliver? Much has been written about Angela Rayner’s 1.5 million new homes target, but less around why the sector has been struggling and needs such targets in the first place. The industry was just starting to regain its optimism after the credit crunch when the pandemic hit in 2020, raising public debt to historic levels. Rapidly followed by the Liz Truss Budget, the two have combined to put an abrupt end to a long period of super-low interest, putting a massive dent in mortgage affordability. And as if that wasn’t enough to bear, along came the end of the Help to Buy Scheme in 2023.
But that’s not all
For developers of all sizes, there is still more to contend with. Large-scale skills shortages, lack of funding for social housing, biodiversity net gain regulations, green energy requirements, planning departments under resourced by 80%, reductions in stamp duty thresholds – all these have played a part in making these ‘interesting times’ for housebuilding, quite apart from recent tax rises hitting all businesses. And we still have the upcoming Building Safety Levy and Future Homes Standard to come.
Like everyone in the sector, we strongly support ambitious government housebuilding targets, and the recent announcement of £39bn investment in affordable housing. We’re less thrilled by the Prime Minister’s threats of penalties – ‘This is my message to housebuilders: get on with it. If you promise homes, you have to build them. As part of our Plan for Change, we’re introducing penalties if you don’t build them fast enough.’
This means developers will need even more certainty around demand and may need to underestimate buildout rates to hedge against the financial impact of this new ‘Delayed Homes Penalty’ – the bigger the development, the bigger the risk. No credible housebuilder can afford to risk catastrophic and existential cashflow issues by building houses that can’t be sold, nor penalties for not building to expectations.
Cash is still king
In response to the dire state of the sector since 2020, most medium and large builders and suppliers have downsized their workforces and skills base or mothballed capacity.
While at Scotts we continue to attract good talent, investing in and developing our business for future scale as the industry starts to climb out of the abyss of recent years, however, many are operating on the slimmest of margins under extreme cashflow constraints or have, sadly, not survived.
Returning to my starting point, I’m pleased to say that many indications see the market is starting to cautiously pick up, with the Construction Products Association’s Construction Industry Forecasts predicting: “The slow start to the year and weaker UK economic growth prospects, combined with higher inflation for longer and potentially fewer interest rate cuts, has led to a degree of caution. So, overall, house builders were broadly expecting a slight revision down in expectations for this year to between 3% and 8% growth in completions this year.”
While it’s highly improbable that this will bring enough new homes to meet Angela’s targets, it is good to have grounds for optimism around growth in the sector for the first time in many years. Let’s hope no more hurdles are placed in the sector’s way!
James Scott, Managing Director Scotts of Thrapston.
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