Housebuilders to scale back building new homes: Will it affect prices?

The UK’s largest housing firms have revealed a dovish outlook in their most recent results, with some suggesting they will cut back on the number of new properties they develop.

It comes as household budgets remain under pressure and mortgage rates remain high due to rising interest rates and the fallout from last year’s mini-budget. These factors may lead to reduced demand for new homes.

Persimmon’s trade update last week revealed a 42 percent drop in completed property sales in the first quarter of this year — even though the average price the homes sold for was 10 percent higher than the same period in 2022.

The general picture does not differ from that of his colleagues. In the first quarter update, Taylor Wimpey reported a total order book of 8,576 homes, up from 11,119 in 2022.

In addition, the company said it would cut up to 450 jobs as part of a bid to make £19m from cost-cutting.

In its latest update in March, Berkeley said it had not changed its outlook for this year, despite a drop in revenue since the end of September compared to the start of the fiscal year. It admitted, however, that it was taking a “cautious approach” to new construction.

Similarly, Barratt Developments reported that forward sales between January and April 23 totaled £2.96 billion, about a third lower than the same period in 2022, while the net reserve rate was 30.1 per cent lower. Construction of 3,194 properties has also been completed, compared to 3,915 last year.

We look at why these companies could reduce the number of homes they build, and what that could mean for people who want to buy.

Why are home builders holding back?

Like homeowners, homebuilders have also been hit by the fallout from last fall’s mini-budget.

The sharp drop in buyer demand as mortgage rates skyrocketed, coupled with broader economic stagnation and inflation pushing construction costs up, has led to an uncertain outlook – though most expect better activity in the second half of the year.

“It is extremely capital intensive to buy land and build on it,” says Tom Nicholson, a consultant at real estate data company Outra. “You invest a significant amount of money years before you get anything back.”

It takes years to turn a piece of land into a development full of completed homes – and if those homes don’t sell for as much as initially expected, the homebuilder could take the brunt.

This is one of the reasons why these companies are cautious in their attitude to risk and often back away from building homes or buying new land at the first sign that the market could be slowing down.

“A market slowdown when you’ve invested a lot isn’t great,” said Justin Gaze, head of residential development land at real estate advisor Knight Frank.

“Many are trying to increase volumes to take advantage of house price increases, but demand is slow.”

This was reflected in a recent Knight Frank survey of homebuilders, in which 70 percent of respondents said they wanted to defer payment for land for up to three years, or pay in installments.

In a further indication of the pressures they face, more than 50 percent of respondents said they expected offering incentives to buyers would help increase sales in 2023.

Incentives may include paying a service charge for the first five years, or paying stamp duty to reduce costs, especially for first-time buyers.

Finally, the higher cost of building materials has had a detrimental effect on homebuilders since inflation started to rise – but that could ease.

The Build Cost Information Service predicts costs will increase 4.2 percent this year, up from an 11.6 percent increase in 2022.

In the Knight Frank survey, 48 percent of developers said construction costs had a significant impact on their business in the first quarter, but were expected to fall over the course of the year as construction material shortages ease.

Building permit ‘too slow’

According to Gaze, economic factors are not the main reason homebuilders are reducing the number of homes they build.

The bigger problem, he tells This is Money, is that it takes too long to get a building permit. He says the government is not encouraging the development of new housing and “is not properly funding the planning service.”

For homebuilders and developers who buy land without planning permission, it takes years to get projects off the ground.

“What happens is that the pricing of the end product is relatively inelastic,” says Gaze. “So, what they’re selling the houses for hasn’t really changed, and the reason is because there’s such a limited supply of land coming in, the homebuilders are slowly building to demand.

“They don’t build masses of houses and have to discount them because they can’t sell.”

In the Knight Frank survey, 85 percent of homebuilders said planning delays were one of the biggest challenges facing their businesses this quarter.

There’s also the issue of Nimbys – standing for ‘Not in my backyard’ – a name given to residents opposed to local housing.

Gaze says the Conservative government has taken the political position that it is better ‘not to upset the Nimbies than to build more houses’.

Nicholson agrees. “There is a significant amount of land tied up in the planning system, and even areas that already have planning permission are tied down by restrictions,” he says.

Although the Conservative government has committed to streamlining the planning systemthere have been few updates since the announcement late last year.

Will house prices fall?

If demand for homes fell enough, homebuilders could be forced to lower their prices to lure in buyers.

But right now, falling inflation and mortgage rates mean many expect buyer interest to pick up soon.

It is also suggested that the government should reduce the Help to Buy scheme, which in its former form only applied to new-build homes and boosted homebuilders’ profits.

“The developers don’t need to make price cuts to boost sales volumes,” says Gaze.

“Our general forecast is that house prices will fall in the second-hand market, but I don’t think this will affect new construction.”