2023 will probably go down in the history books as one of the tougher years for housebuilders. It’s likely that fewer than one million homes will change hands, the lowest figure since 2012 and less than in 2020 when the world was locked down. The ending of Help to Buy just as interest rates started to rise in earnest ensured that new homes would make up a smaller proportion of these sales than usual.
The move to higher interest rates is likely to mark the end of the current house price cycle which began in 2008 amidst the financial crash. Between 2008 and 2022 house prices rose 91% with small falls in 2023 set to offset some of that growth. However, the beginning of a new house price cycle next year should see prices return to growth, albeit on a more modest scale than at the start of previous cycles. London is still poised to lead the way given its underperformance since 2016 when prices in the rest of the country played catch up. Here we look at the five forces poised to shape the new homes market next year, in what’s forecast to be the start of a new house price cycle:
1. Heart of the manifesto
While housing hasn’t taken centre stage in many manifestos, it’s shaping up to be a key battleground at next year’s election. The rise in mortgage rates has touched many households, although fewer than it would have done in the past. In reducing buyer demand, higher mortgage rates are also feeding through into fewer new homes being built. The scale of the drop off in completions next year for most housebuilders during the run-up to the election will make the issue increasingly political.
But by the same token, a reincarnation of Help to Buy or a similar sort of Equity Loan scheme also looks unlikely. There’s plenty of evidence of the big boost it provided to build-out rates since it launched in 2013, with a disproportionate increase in the number of new homes being delivered relative to the wider market. However, there’s also a perception that it provided a big boost to housebuilder’s bottom lines.
So while first-time buyers are likely to be heavily courted by both of the main parties, incentives seem set to be more closely aligned to the buyer rather than the property. There’s plenty of precedent for this in the form of the LISA, mortgage guarantee schemes or even a reincarnation of the HomeBuy schemes from the noughties. They operated similarly to Help to Buy, albeit on a smaller scale, but could be used to purchase both new and secondhand homes.
2. We’re probably through the worst of things
As inflation rates have fallen globally, so too have investor’s expectations of interest rates. With interest rates predicted to be lower in two years’ time than markets were forecasting even a couple of months ago, mortgage rates have subsequently fallen. Rates now sit comfortably below 5% for anyone with a 40% deposit and who’s willing to fix for five years.
So it’s likely that mortgage rates will begin 2024 at a lower level than at the start of 2023. This should boost activity and start to put a floor under further price falls. It’s our view that current pricing is likely to be sustainable at rates even a little below 5%. This is key for new home sales which tend to be more exposed to higher rates due to buyers having a higher loan-to-value profile than in the secondhand market. When mortgage rates have been materially above 5%, flat prices have weathered the storm best.
But while markets expect interest rates to fall gradually, their long-term expectations remain much higher than we’ve become accustomed to over most of the last decade. While it’s questionable whether markets are good long-term forecasters of where rates will settle, it’s ultimately these expectations that set mortgage rates. This will continue to leave the housing market at the whim of broader economic and political changes over the year ahead.
3. Build cost inflation to turn negative
Since the onset of the pandemic, the cost of building materials has risen sharply. The average cost of materials stands around 40% above where it did back in 2019. While a large chunk of this has been offset for house builders by rising house prices, as price growth has slowed, these increases in build costs have eroded profit margins.
However, like wider inflation, the growth in the cost of building materials has slowed recently. And the cost of some materials is now falling. In particular, energy-intensive materials which saw some of the largest increases, are now recording the largest falls. Data from the ONS shows that the cost of structural steel is down 25% since January while sawn and planed wood is down 9%.
But other costs, including both wages and labour-intensive products, are still rising. The cost of windows and doors has risen 24% since January. Slower sales rates compound this, with more time spent on site further narrowing profit margins, particularly at a time when house prices are falling. However, lower demand for materials will put increasing downward pressure on prices, with sand and gravel sales down 11% on last year and standing 18% below 2019 levels. So while there will be more relief from rising material costs, there will be new costs ready to rear their head.
4. Later launches
The share of homes sold before they’re built has fallen in pretty much every year since 2016. In 2016, 47% of new homes were sold before completion, a figure which now nearly halved to 25%. The off-plan sales that do take place tend to happen months rather than years before completion. This is because more of these homes are bought by owner-occupiers wanting to see a finished or nearly finished product rather than investors looking to capitalise on a few years of rising values before completion.
The dwindling number of off-plan sales coupled with rising wage costs has made spending more time on site without access to finished homes an increasingly expensive proposition. On small to medium sites these difficulties are magnified. Slower sales rates ultimately mean more time and money are being spent securing fewer sales.
With a rising proportion of sales secured at the point of completion or during the following months, more mainstream site launches are typically happening later on. Typically, this is either at completion or in the few months running up to it. With fewer first-time buyers around, a higher proportion of buyers have a home to sell making them less amenable to buying a home that’s not ready for them to move into.
5. Where are all the first-time buyers?
With would-be movers sitting tight in the face of higher interest rates, first-time buyers have disproportionately propped up the wider housing market. They purchased a record 28% of homes sold across Great Britain so far this year and their numbers have typically fallen around half as far as movers. But housebuilders, on the other hand, are selling far fewer properties to those buying their first home.
For much of the last decade, housebuilders have increasingly set up to tap into the first-time buyer market. However, higher interest rates coupled with the ending of Help to Buy have made life particularly difficult for the average new-build buyer who typically has a smaller deposit - many of whom will find that renting is cheaper than buying. Consequently, would-be first-time buyers are increasingly either renting for longer or looking at cheaper second-hand stock.
As a result, housebuilders are increasingly pivoting their marketing away from first-time buyers and towards those who already own a home. This includes aligning incentives towards someone with somewhere to sell and looking overseas. Longer term, there is also some evidence of specification shifts. These reflect both higher build costs as well as the tastes of an older buyer profile (both domestic and international) and in some cases the preference for simplicity among institutional build-to-rent buyers.
