Why Developers must build more

June 6, 2024

The start of 2024 has shown a positive shift in the new homes market, with an increase in viewings and reservations compared to last year. According to NHBC’s sentiment survey, there has been a noticeable rise in demand (site visitors) nationwide since January, reaching positive levels in March for the first time since the September 2022 'mini-budget.'

At the beginning of the year, buyers quickly responded to the decreasing mortgage rates in January and February. The average rate for a two-year fixed mortgage at 75% loan-to-value dropped to 4.3% in January, almost 2% lower than the peak of 6.2% in July 2023. Consequently, net reservations surged to a net balance of +21 in February compared to the previous year, as reported by NHBC.

Sales rates among major housebuilders improved, with all reporting increases in Q1 2024 compared to the latter half of 2023. Although buyers remain sensitive to mortgage rates and headline pricing, the need for sales incentives from developers seems to be decreasing. However, agents note that these incentives still help close deals when profit margins are tight.

‍

Can supply match the demand?

The burst of activity early in the year highlights a significant pent-up demand that can be released when borrowing costs fall. Current forecasts suggest that the bank base rate will be cut in the next few months, with financial markets expecting this by August. Although the market may fluctuate until then, a rate cut will likely boost activity in the latter half of the year. Our long-term market outlook predicts increased activity and potential for price growth starting in 2025, supported by a stronger economy and gradual reductions in the bank base rate.

However, the new homes market may struggle to meet this demand. Recent forecasts indicate that housing delivery in England is set to drop to its lowest level in a decade, with site starts for all homes (including affordable and rental) down 24%, and private units down 27% in the year to Q1 2024 compared to 2023, according to NHBC data. Developers of all sizes, from the top 10 to smaller players, have seen similar reductions in the number of plots starting on-site. While new home completions across England in 2023/24 are expected to be only slightly down from the previous two years, the delayed impact of reduced starts suggests an increasing shortage of new build homes in the near future.

‍

Regional Challenges

The decline in development activity is intensifying pressure on markets that have already struggled to meet housing needs. The map highlights local authorities across England where new home completions in the year to Q1 2024 fell short of housing needs (as defined by the standard method) and where the situation is either not improving or worsening based on planning consents. 35% of local authorities across England did not meet housing needs over the past year, and their pipeline is shrinking. Clusters of these authorities are most evident in London, much of the South East, and parts of the North. NHBC data confirms that local authorities currently delivering below need, with a shrinking or flat pipeline, have also seen a dramatic fall in starts over the past year in the wider area. Areas such as Brighton and Hove, Medway and Kent, Surrey, Norfolk, and Greater Manchester have all experienced starts on-site falling by over 40%.

‍

Rental Market Trends

Meanwhile, the rental market is also experiencing significant changes. The average rent in England rose to £1,183 in May 2024, a 1.4% increase from April's £1,166, marking the highest average rent since October 2023. Specific regions have seen notable changes, such as a 4% rent increase in the West Midlands from April to May 2024, and a 2% increase in the North West during the same period. Annually, rents in England have increased by 6%, with the North West leading with an 8.1% annual rise. The average rent in the North West reached £960 in May 2024, up from £888 in May 2023.

Additionally, the average void period in England has increased by 10.5% on both a monthly and annual basis, now averaging 21 days. Greater London has the fastest rental market with an average void period of 18 days, while the West Midlands has the longest at 25 days. Interestingly, the North West saw a decrease in void periods from 20 days in May 2023 to 19 days in May 2024, reflecting increased tenant demand in the region.

‍

Opportunities for Developers

These trends indicate specific areas where there will be a shortage of homes and less competition in a few years, just as the housing market is expected to recover. Developers with planning consent should move forward with their sites to be well-positioned to meet the rising demand from buyers eager to transact as mortgage rates become more affordable. If the current trend of 6-7% year-on-year rent increases continues, average rents could exceed £1,400 per month in the near future.

‍

The Bottom Line

The current housing market dynamics highlight a significant rise in demand, leading to higher rents across the country. With the average rent in England reaching £1,183 in May 2024 and notable annual increases, such as the 8.1% rise in the North West. This surge in demand, coupled with an undersupply of new homes, is not only driving up rental prices but also positioning the market for long-term capital value growth.

Why Developers must build more

You may also be interested in...

Why buy property in Eastbourne? UK buy-to-let investment by the sea

Leasehold vs freehold: Which is better for buy-to-let investors in 2025?

Why Manchester is one of the UK’s best property investment locations