Ten Factors That Favour an Increase in the UK Housing Inventory

Politicians of all stripes made housing promises in the May 2015 election. But what’s already in place or on the drawing boards is helping to add much-needed homes.

With the 2015 election now settled, many Government programmes and policies are a little more certain. The re-election of the incumbent Mr. Cameron suggests a likely continuation of many initiatives, including those affecting the supply of housing. This can be largely reassuring to homebuilding companies and investors and it should at least define the playing field for homebuyers.

In the immediate aftermath of the election, real estate company Savills predicted that prices of homes in prime central London will increase by 22.7% by 2020. The head of residential research also projected that prime properties outside of the capital will increase by a bit more, 23.9%. Lower-priced properties will likely rise more modestly, by 10.4% in London and 19.3% elsewhere.

High prices stimulate increased supply in classic economic theory, however the shortage of housing amidst high prices – unaffordable to many – have confounded theorists with regard to UK housing. It’s clear that inventories need to be increased, building 200,000+ new homes per year simply to meet existing demand; instead, far lower numbers (120,000-140,000 new building homes) have characterised the past decade.

That said, several factors suggest homebuilding will be on the increase, funded by housing associations, REITs, individuals, homebuilders and real asset fund managers. Following is a run-down of ten factors that will and can drive an increase in the number of homes being built – and perhaps which will challenge those price increase projections:

1. Employment – Not only are more people working in the UK today than since the financial crisis of 2008, but employment in Britain is rising at twice the rate as elsewhere in the Eurozone, including Germany. Work and Pensions Secretary Iain Duncan Smith announced in early 2015 that about 11,000 people are returning to work every week in the UK. Figures from Eurostat indicate that 30.8 million people across the continent have returned to work, taking employment throughout Europe to pre-recession levels.

2. Help to Buy – Buyers of homes up to £600,000 value can finance their purchase with just a 5% deposit, while the government will loan the buyer 20% of the value and a mortgage is necessary for the remaining 75%. Fees to the government for the 20% equity loan are not charged for the first five years of ownership. Propertywire.com reported in early 2015, about two years after the scheme’s introduction, that more than 77,000 homes have been purchased under the plan and that “as a result house building levels continue to climb.”

3. Right to Buy – This is the scheme that allows most council tenants to buy their council home. The purchase is at a discount. While it is focused on existing structures, it technically should contribute to new building as council homes are intended to be replaced when sold to private owners. This is a contentious issue, as social housing construction has lagged. The charity Shelter, which advocates for more affordable housing in all forms, notes that the waiting list for social homes has 1.8 million households, up 81% since 1997.

4. Starter Homes Initiative – Aimed to satisfy first-time buyers (under age 40) by eliminating the 20% portion of a new-build price associated with Section 106 affordable housing contributions, this programme involves the construction of quality homes (up to £500,000 value) mostly on brownfield (previous use) land. Much of this is in urban environments and thus makes use of existing infrastructure and does not encroach on greenfield/greenbelt lands.

5. Right to Acquire – Similar to Right to Buy, this enables housing association tenants to buy their homes at a discount (purchase from housing associations, councils, the armed services and NHS trusts and foundation trusts). Discounts range from £9,000 to £16,000, depending on local costs. While this funds purchases of existing structures, the housing associations theoretically (and practically) can use proceeds from those sales to build more, according to Work and Pensions Secretary Iain Duncan Smith.

6. Low interest rates – Political analysts say with the Conservatives’ victory in the May election that interest rates will remain low for longer. Those rates are at historic lows, such as ten-year fixed (<3%), five-year fixed (<2%), and three-year fixed (<2%). First-time buyers have more difficulty finding the standard 20-25% deposits, however the aforementioned programmes help with that when individual thrift or, more likely, the “Bank of Mum and Dad” are unable to assist.

7. NPPF – The National Planning Policy Framework is almost entirely about increasing the supply of housing that is affordable. It places mandates on local councils to establish growth plans, and more than half of the country’s local planning authorities have done so. This replaces a regional system that did unpopular top-down planning and which was bureaucratically unwieldy.

8. Right to Build – Aimed at self-builders and small homebuilding firms, this land release scheme provides access to council-owned land. Would-be builders can challenge local councils to release appropriate land, which also helps satisfy NPPF mandates. There are 11 local councils among a first wave offering Right to Build plots, using a pot of £550,000 to fund “suitable and serviced” plots of land. For example, Cherwell will receive £90,000 to expedite construction of 2,000 custom-build homes.

9. Greenbelt relaxation and adaptation – One of the most contentious issues around housing in the UK is to expand development into the many greenbelt lands surrounding most major cities. Alternatives are to build on urban disused land (brownfields) or to increase the reach of high rises. But the pressure to build out has many proponents and in fact more than 5,600 homes were constructed on these areas in 2013 alone. Some cities do greenbelt swaps, trading disused greenbelt land for urban brownfields, allowing houses on the periphery of the city and installing parkland in the urban core.

10. Greater London Authority interest free credit – Builders who construct affordable homes in the capital are eligible for no-cost credit. This programme is entirely designed to increase the stock of properties that are available to middle income workers. Investors clearly find it appealing because of the reduced development costs of interest-free loans.

What still looms is the slight chance a mansion tax will be imposed, which would affect prime properties valued at £2 million or more in London and the foreign investors who are largely blamed for price run-ups.

Investing in real estate in any form carries risk and reward. Speak with an independent financial advisor (IFA) to discuss what best fits your individual investment goals.