The view of housing-market optimists is that Britain has a chronic shortage of housing. The truth, however, is quite different, says David Stevenson
What's gone wrong for housebuilders?
Everything. The downturn in the British housing market is filtering through into a startlingly fast collapse in demand for new homes. In April, Taylor Wimpey (LON:TW) that sales in 2008 would fall by around 25%, and a mildly more pessimistic Persimmon (LON:PSN) was forecasting 35%. Then earlier this month the truth began to out. Bovis (LON:BVS) admitted that sales are actually coming in 70% lower than last year; Barratt Developments (LON:BDEV) says its cancellation rate has shot up over the past six weeks; and figures from the Home Builders Federation showed that reservations of new-build houses and flats collapsed by two-thirds this spring.
Will it get worse?
Almost certainly. There is no sign that the housing market will pick up anytime soon. First-time buyers (the biggest market for new-build homes) have all but left the market – driven out by prices that bear no resemblance to their incomes and the disappearance of easy-money mortgages.
And there is more pain on the way. Mortgage rates aren’t going down, regardless of how much the Bank of England would like them to (the banks just aren’t prepared to take the risk anymore) and there is every chance unemployment will soon be going up as the credit crunch bites harder into the ‘real’ economy and firms are forced to lay off workers. More unemployment means less demand for new houses.
As a result of all this, the housebuilders are beginning to slash their cost-bases. Two weeks ago, Redrow (LON:RDW), one of the UK’s largest housebuilders, chopped 15% of its workforce and hinted at more to come. The chairman of the Home Builders Federation, Stewart Baseley, delivered the depressing news that “the big names in the industry have already indicated that they need to cut costs and job numbers are going to be the first option for many housebuilders”. Persimmon has gone a step further and said it is stopping building new houses altogether “until the mortgage market improves”.
So no more new houses?
Not many. The number of new foundations being laid (housing ‘starts’) slumped in the first three months of the year. Between January and March there were 32,100 new housing starts, the lowest level since 1996 and 24% lower than the same period last year. Completions also plummeted to 39,500, down 18% on the first quarter of 2007. The number of starts also fell by 10% in the year to March 2008 to almost 18% below the 2005/2006 peak.
What’s more, 2007/2008 was the first year since 1992/1993 that the number of completions outstripped the number of property starts. “The sharp slump in housing starts in the first quarter reflects housebuilders’ deep concern about the outlook,” says Howard Archer, chief British economist at Global Insight, “as activity and prices buckle under the toxic combination of elevated affordability pressures and very tight lending conditions.”
But don’t we need new houses?
The consensus view, and the argument the housing-market optimists use when trying to present a long-term bull case is that Britain has a chronic shortage of housing. Yet plenty of evidence points the other way. Even a year ago, at the peak of the housing boom, Paul Holmes, Operations Director for first-time buyer forum Firstrung, claimed that the whole shortage idea was an ‘urban myth’. He noted that “around 750,000 dilapidated homes” were lying empty across Britain and that around 50% of new-build flats in cities such as Manchester were also unoccupied. Now that the property bubble has burst and the picture is a bit clearer, it seems Mr Holmes was right all along: from the point of view of the builders, at least, there are too many houses in Britain, not too few.
So how many empty houses are there?
The Empty Homes Agency estimates there are 840,000 empty homes in Britain, almost 4% of the total housing stock.The National Land Use figures indicate that a further 420,000 homes could be established in disused commercial properties in England, including former pubs and space above shops. So that’s 1.26 million extra homes. And a Halifax survey published in December 2007 found that 288,763 private homes in England in April 2006 had been empty for at least six months – equivalent to 1.6% of all privately owned houses. It hardly all adds up to a picture of a major shortage.
Indeed, even the Federation of Master Builders (FMB) puts the number of empty houses in Britain at around 700,000. Its suggestion? That the Government should be looking at using “more creative ways to bring redundant buildings back into use”. All in all, it seems that the halt to the building of vast new estates across Britain hasn’t come a moment too soon: we’ve more than enough empty houses already.
The eco towns we won’t need
One potential benefit from the housebuilding collapse could be the death of the Eco-town. Gordon Brown’s big green idea is that ten of these are to be built across Britain. They are to be environmentally friendly communities (low-energy, carbon-neutral developments providing between 15,000 and 20,000 homes) and the first new towns built in Britain since the 1960s.
On the face of it this sounds good – who could be against eco-friendly homes? But in fact, it makes no sense, given how many empty houses Britain already has. It would surely be greener just to refurbish those? On the plus side, given the collapse of the housing market and rising local opposition around the proposed sites, odds are the scheme will soon be forgotten.