Stubbornly high interest rates are the biggest obstacle to the real estate recovery. The Bank of England has the opportunity to change this at next Thursday’s session.
If it followed in the footsteps of the European Central Bank and lowered rates from 5.25 percent, it would give a boost not only to residential development but to the entire economy.
When people buy or move house, spending and consumption on construction increases, from appliances to bedding.
The stagnation of the real estate sector is one of the factors leading to consolidation among home builders. The great financial crisis caused the demise of many regional construction companies, handing market powers to larger listed players. Some abused the privilege. Persimmon, the biggest offender (it paid £75m to his former chief executive Jeff Fairburn), built some homes that were deemed unsafe and was among a group of builders who abused letting freedoms.
Another wave of consolidation is underway as credit crunches and uncomfortably high mortgage rates take their toll.
Building a dream: When people buy or move house, spending and consumption on construction increases, from appliances to bedding.
The Halifax Price Index for May showed a price drop of 0.1 per cent. They have now been stagnant or falling for three consecutive months. The increase in prices and demand at the beginning of the year, when there was a drop in market rates, has dissipated.
When borrowing costs finally fall – potentially to 3 percent next year – there will be fewer homebuilders to compensate and inject competition.
All this when Labor, heavily favored to win in the July 4 general election, is counting on reform planning and housing as drivers of growth.
Overnight it was revealed that one of the weakest players, Crest Nicholson, had rejected a £650m bid from Newcastle-based rival Bellway.
The latest offer came after Crest’s fifth consecutive profit warning, with the board remaining firmly against a deal. Bellway’s push for growth follows Barratt’s winning £2.5bn takeover of Redrow earlier this year. The new head of Legal & General, Antonio Simoes, has placed a for sale sign on Cala Homes’ top ten residential builders.
Britain is in urgent need of more housing and Labor’s manifesto promises to build 1.5 million homes in the next Parliament. Some 300,000 houses a year may not seem like an outrageous goal, although it falls short of the highest figures achieved in the post-war years. The manifesto accuses the Conservatives of triggering a housing crisis.
However, despite high interest rates and reduced investment among homebuilders, some 212,000 homes were built in 2023.
The Labor Party believes it can force housing to be built by appointing more planning officers and using derelict land.
More planning officers could help. The real problem is a lack of intelligent, long-term thinking and ability.
The aim is to emulate the “proud ambition” of the Labor government of 1945. Clement Atlee and successive Conservative governments were aided by bomb sites in and around Britain’s largest cities. It is more expensive to build in abandoned areas due to cleanup costs, so getting projects underway is slow.
The creation of combined local authorities could help. Indeed, some of the best strategic decisions have been made in areas such as the West Midlands, where a determined and market-savvy Conservative mayor, Andy Street, generated dynamism. His reward would be to be removed from office. Bold ambitions in the UK have a terrible track record of being defeated by Nimbyism. There are also capacity issues. Construction capacities are scarce and there are long delays in installing new infrastructure, such as sewage systems. Large investment programs by water companies and the national rollout of fibre-to-the-door broadband limit construction resources.
It is painful that young people find it difficult to climb the housing ladder.
The Conservatives’ share buying scheme, aimed at helping first-time buyers put down a deposit, should help. Labor promises something similar with an indefinite mortgage guarantee. Even with a supermajority, Labour’s planning reforms will struggle. In the immediate term, lower interest rates could do wonders to unlock residential housing and encourage more construction. It’s up to you, Andrew Bailey and the Bank of England.