01 December 2015
Brexit and the market for new-build houses
‘Brexit means Brexit’ may be a useful political slogan, but there is no telling how things will play out following the momentous referendum decision marginally in favour of Britain leaving the EU. Rarely have so many factors been in a state of flux, politically and economically, in the UK, in the EU itself and its other member states, and in the rest of the world.
Faced with such uncertainty and the prospect of far-reaching change on many fronts, all that we can usefully do is to confront the implications of the wide range of scenarios that could play out and focus on those key factors which are known or reasonably predictable and plan to avoid deep regret.
So what about the demand for and supply of new houses in the UK in the light of Brexit? Leave aside what Donald Rumsfeld memorably described as the ‘unknown unknowns’ and the ‘known unknowns’, as far as the market for new-build houses is concerned some important points can be made with reasonable confidence:
There is already a huge pent up demand for new houses in the UK arising from systemic under-supply over many years. On the demand side this is driven by population growth, net immigration, increasing life expectancy and changing living patterns and lifestyles. However Brexit plays out, the demand-side pressures will remain strong, acutely so in London and the South East, and also as regards the need for affordable housing and social housing.
On the supply side, planning constraints have inhibited growth, and reliance on the industry responding to market forces has generally led to a disproportionate shortfall of affordable/social housing, made more acute by public sector spending constraints imposed to tackle the budget deficit. Skill shortages are a chronic problem, notably in the hot spots of London and the South East; and only now are we seeing the early signs of a shift away from the traditional low-productivity site-based approach to house-buildings towards the greater use of high-quality factory-based techniques.
Politically, the need for a sustained country-wide house-building drive has rapidly risen to the top of the policy priorities of Theresa May’s cabinet, and opposition parties across the spectrum echo this. If anything, Brexit has underlined the case for a step change of house building by drawing a line under the Osborne-led austerity drive while, if anything, extending the horizon of low interest rates and boosting the case for selective well-targeted spending on infrastructure.
Two years ago, the Governor of the Bank of England, Mark Carney, pointed to the systemic under-supply of new houses as the biggest threat to financial stability and the durability of economic growth. To emphasise the point, he drew attention to the fact that new house-building in Canada, with half our population, has consistently been double that of the UK.
In the light of the evidence that the widely unexpected outcome of the Referendum reflected the frustration and anger of those disproportionately lower-income voters who feel left behind and disadvantaged by globalisation, advancing technology and the threats from artificial intelligence and robotics, there will be greater emphasis on new houses in the affordable and social housing sectors.
Against the background world-wide of a massive accumulation of debt, policies are being pursued by central bankers which provide only the most modest low-risk returns for investors and savers. Potentially, this means that ample funds will be available to those companies able to procure the extensive construction of cost-competitive energy-efficient affordable houses and supply them under long-term leases to social landlords or local authorities on the basis of rental income underwritten by the credit-worthy landlord.
Complementing the strong incentive for investors to focus on the housing market, not least the supply of houses to the social housing sector, a significant part of the Bank of England’s response to Brexit has been the freeing up of as much as £150 bn of lending capacity from the banks so that any household or firm which is credit-worthy and wants to borrow is able to get a loan reinforced by the further measures announced last week to ensure funds are made available through the banks to private and corporate borrowers.
Post-Brexit, the drive to increase energy efficiency and reduce carbon will continue to be a prime objective of new-build houses. The UK is committed to challenging global, not just EU, carbon-reduction targets. The marked devaluation of sterling post Brexit, may or may not be long-lived. In any event, it is already putting upward pressure on retail energy prices which increasingly will be influenced by our growing dependence on imported energy supplies.
With the shift of political focus towards the needs of those lower-income households struggling to make ends meet, fuel poverty will again become a key issue, and social landlords anxious to remain credit worthy will necessarily put a premium on houses which are not just cost competitive to build but also to run.
The Referendum decision marginally in favour of Brexit, confronts the UK and its Government with uncertainty and scope for change, some potentially painful and disruptive, on an unprecedented scale. This is already providing scenario planners with something of a field day.
The danger is that, faced with so much far-reaching change, we do nothing and later deeply regret it. In practical terms, it is often useful to concentrate on the TINAs, an expression copied from Mrs Thatcher’s periodic insistence that ‘There Is No Alternative’.
In a market where effective demand will be a real challenge, one such TINA is the need for a step change in the building of new houses across the UK, with particular emphasis on energy-efficient, cost-competitive affordability and affordable social housing.
To achieve such a step change will require the highly-traditional site-centred UK house building industry to become much more innovative and ingenious–in the spirit of Brexit, searching the world, including Europe, for the best available equipment, systems and design/manufacturing concepts. Cygnus homes is readily able to meet this challenge.