Industry insights: pandemic strengthens the foundations of UK homebuilding

The stamp duty holiday “caught Bellway and its competitors napping”, the former Bellway manager said. “They weren’t expecting that move and I think they also weren’t expecting the demand that suddenly, I think exploded would be a good word, into the market, the demand for properties.” 

This surge in demand has sent prices soaring. Until June 2021, prices were inflated by up to 13% and although this tailed off to just over 10% through October, demand for properties is drastically outstripping supply across the industry. Indeed, “we’re still seeing gazumping going on, multiple viewings and final bids, closed bids, crazy things that were happening in 2005-2006”, the specialist said. 

A slowdown was forecast when the stamp duty holiday ended in September, but in reality there was no sign of any real cooling. “The second-hand market, partly… because of lack of stock, is, in the right locations, absolutely flying,” the expert added. Experts are surprised by the continued growth in sales prices, although, as they noted, there are stark regional variances. The industry as a whole logged 10% growth through end-November 2021, but only 5.1% in London compared with 12.9% in the southwest. Price growth strongly correlates with the house price to earnings ratio, which we were told is an important number to monitor. 

“What we’re seeing is a house price to earnings ratio of 8.8, which I think actually is the highest it’s ever been,” the former Taylor Wimpey MD said. “It’s quite interesting to see where the most price growth has been has been where you have the lowest house price to earnings ratio.” Through September, for example, Yorkshire and Humber saw 15.8% growth, with 15.3% in the northwest. “What you got out of that was a house price ratio of around five times.” In London, this ratio is as high as 15, and has resulted in fewer investors flocking to the capital, particularly for flats. 

As expected, not all property types are experiencing the same level of demand. Detached homes are, unsurprisingly, gaining the most value, rising 13.8% from November 2020 to November 2021. Semi-detached homes have gone up by 11.4%; terraced, 7.6%; and flats, on a UK level, down at 5.1%. However, as we heard, places like London, Bristol and Manchester tend to see their own trends play out.

Looking ahead, the former Taylor Wimpey MD cited figures from Savilles that point to slowing price growth, falling from 3.5% in 2022 to 3% in 2023, 2.5% in 2024, and 1.5% in 2026 – but, again, with regional variation. For the UK as a whole, the forecast is approximately 13% over the next five years; 18.8% for the northwest, 18.2% for Wales, 17.6% for the northeast, and 16% for the east and west midlands. “London, they’re only saying, over the next five years, is at 5.6%. I’m not sure that will happen,” the specialist said. As such, London and the East are expected to grow the least during that period. “What it’s saying is you want to be looking at developers that focus away from the South and look maybe towards the North.” With the arrival of HS2, the Midlands also stands to benefit from lower house price to earnings ratios. There’s “definitely some levelling up going on with funds coming in for growth, and that will have another impact”, they added.

Meanwhile, we heard that land values are still increasing, suggesting that housebuilders “see a good market going forward, because there’s still huge competition”. Those that secured land during what was perceived to be a cooling off period in 2020 are now reaping the benefits. “Most of the PLCs were retracting their land buying programme and looking at what they already had as being capable of delivering sufficient units over a two or three-year period,” the former Bellway manager said. However, others saw an opportunity. Taylor Wimpey, for example, bought 22,000 plots in H2 2020 and “that will feed through to some really, really strong margins”, the former MD at the company said. Bellway and Vistry also jumped at the chance and these investments are likely to bear fruit in 2023-24. There are now “unprecedented land values being achieved”, we heard. “Anecdotally, some crazy numbers, GBP 4m an acre, but then, if you look at the commercial world, the value of land for sheds has gone up significantly,” the former Taylor Wimpey MD said.

Interviews also discussed the popular Help to Buy scheme, which has been “the best incentive that the development and all the housebuilding industry could have” we are told. Homebuilders have benefited “enormously”, with the scheme contributing to a considerable proportion of profits. Although the scheme’s future is uncertain, we were told that the Government is unlikely to pull out completely. “I saw a statistic… that the Government or the Treasury has benefited just over GBP 300m of additional revenue from that scheme over its lifetime,” the former Bellway manager said. 

With strong demand, high house prices and low interest rates, the conditions are ripe for UK homebuilders. However, the industry still faces a number of challenges. New building regulations come into force in June 2022 and COVID-19 and Brexit have not only disrupted worker availability, contributing to unpredictable schedules, but also key materials, with many costs rising sharply. There is also concern over future interest rates. “You’re seeing a number of factors at play, and developers, anecdotally, are saying it’s a real challenge, but they don’t see it affecting numbers this year, but I don’t think we’ll know that until end of Q1 this year to see where last year’s play-through has impacted,” the former Taylor Wimpey MD said.