Housebuilding in 2012

There are a number of industry experts suggesting what growth (or otherwise) can be predicted in the housebuilding sector for 2012.

There is a surprisingly broad range of views on the subject, but the consensus seems to be that private housebuilding (in sharp contrast to most other sectors within construction) is set for a better year.

Glenigan is the most optimistic, suggesting a 20% growth in new housebuilding starts.  The CPA, not known for groundless optimism, is suggesting a 2% growth in private sector housing (but a 25% decline in public sector building).  Business analyst Experian agrees with the CPA’s public sector forecast (suggesting a decade of stagnation in construction as a whole) but are more optimistic about private sector housing starts, which it estimates will grow by 8%.

The Home Builders Federation, in its November survey of members finds that 32% of larger builders expect sales growth in 2012, although that is in contrast with smaller firms where only 2% feel the same.

So what is going on?    I wouldn’t say that H+H is exactly bursting with heady optimism, but we are seeing signs of a sector on the rise, and there are some good reasons at Government level to suggest that much is being done to support this.

What we are hearing is that builders are now at least selling what they are building.  By halfway through last year we had demand and supply more or less in balance.  What needs to happen now is a stimulation of that demand.

For this to happen, it is the first-time buyers who need to come back into the market and start buying new homes.   Clearly the lack of credit and, in particular, the large deposits required is the main stumbling block.

I don’t actually concur with the view that new entrants to the market do not have the income or will to buy.  Far from it – those potential first-time buyers are generally paying rent that takes a much higher percentage of their income than a mortgage would represent.

This situation is not only a short-term problem for housebuilders, but also represents a long-term danger as pent-up demand can simply create the conditions for another unsustainable bubble in house prices in a few years’ time.

In announcing its housing strategy in November the Government recognised this problem and suggested government-backed mortgage guarantee insurance as a possible solution.

This seems eminently sensible.  Canada has run a scheme like this for some years and homeowners who cannot make the 20% down payment are required to insure their mortgages against default.  The government, in turn, guarantees against a default on that insurance.

The Canadian view is that this system provides a solid foundation for the housing market. Canada also benefits from stable house pricing - without the dramatic booms that have characterised the UK market for decades.

I have long been an advocate of mortgage guarantee insurance as it transfers some of the risk of future falls in house prices away from the lender.  In the new UK system (due to be introduced from April 2012) the risk is passed to the developer and the Government who, in my view, are better able to influence it.

The Government has influence over house prices through the supply of permissioned land. This is driven by planning policy:  hence the importance of the National Planning Policy Framework on future housebuilding levels.  Developers influence prices through build levels and the extens to which supply meets demand (for example, over supply of speculative house building and lead to house price crashes as recently seen in Ireland).

The net result of this mortgage guarantee insurance is that the buyer should be able to access mortgage funding without needing a 20% deposit.  Initial calculations suggest that first-time-buyers should be able to get 95% mortgages under this scheme.  Estate agent Savilles estimate that this scheme could help fund 33,000 house purchases each year.

Recent positive news from the major housebuilders on their earnings and projections for 2012 are also encouraging and, providing the government holds its nerve and manages to implement its proposed changes to planning regulations, an easing of planning constraints should also help with the availability of land.

While all these signs are more positive than negative it would be unrealistic to expect a rapid return to 2007 levels of housebuilding.   A more measured reading of the market conditions is a very slow increase year-on-year with my own estimate being that more rapid growth cannot be anticipated before 2014 when NPPF planning reforms (assuming they achieve what the Government intends) begin to have an impact.

Unless the Euro collapses of course, in which case all bets are off.