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Is the Housebuilding Warm Front Here to Stay?

Is the Housebuilding Warm Front Here to Stay?

The recent cold snap is at odds with the temperature of Scotland’s central belt housebuilding market. Much like life itself, you tend to appreciate things by contrast, and the housebuilding market feels hot right now.

It’s a great place to be as the industry recovers from the credit crunch under the umbrella of ‘cautious optimism’ and an albeit steady, but improving market.

Among a number of positive signs is the increasing competition for new sites. But is caution (like winter clothing) being thrown to the wind as the temperature rises? Or is what we’re experiencing now business as usual - a steady thaw from the days of icy recession?

My feeling - from my own experience and particularly from the recent Homes for Scotland annual conference (#buildingenough) - is that there is still some way to go until we see business as usual. We are still in the springtime of the housebuilding cycle, but it is easy to mistake the heat for midsummer because of some critical factors.

It is – as ever – a complex picture and one that was well illustrated by Faisal Choudhry of Savills, who spoke at the conference.

A mismatch in supply and demand is creating tension. There are many reasons for this. As a nation we are not building enough new homes to meet demand. This is evidenced by recent reports: Edinburgh’s house prices are rising faster than every other UK city. Transaction volumes, in terms of sales of new and second-hand homes, are well up across most of the country when compared with the same period last year.

In the central belt there is demand across all tenures. Help to buy kick-started the new build market and will be withdrawn eventually, but mortgage rates are still low (despite the recent rate rise) and available to those with deposits. The Aberdeen market is showing signs of improvement.

The key issue is the lack of available and suitable development land in the right locations. It is this demand for land that is turning up the heat in the market and encouraging competition amongst housebuilders, and RSLs alike, for sites.

It takes a long time and a lot of investment to get a site ready for development and we are feeling the after effects from the recession in that respect. More importantly though, the two fundamentals that are creating supply issues are problems with the planning system and constraints caused by lack of infrastructure.

Infrastructure covers a range of site specific matters but generally the points that come up time and time again are issues with utilities (particularly water), transport connections and lack of school capacity. Dealing with these issues ties up a lot of capital relatively early in the development process and are often costs that the housebuilder will have to carry for years before a profit from a site can be turned. It is a fundamental barrier to those SMEs that are largely missing from the market.

Faisal’s SWOT analysis of the market was fascinating and thoroughly researched. In my view the strengths and opportunities win out over the weaknesses and threats at this time, but there is a fine balance between all these variable factors and a change in one can have very positive or very negative effects on a delicate market. Can the Scottish Government help crack this and create more positive influences?

Several speakers at the conference (including Matthew Benson of Retties) discussed how the cost of creating infrastructure might be funded differently. One example was the notion of using pension funds (rather than housebuilders’ balance sheets) to meet the high capital costs, with a long term re-payment (50 years +) from benefitting homeowners. Such a solution would mean more affordable up-front house prices, but will this catch on? How secure can that income stream be? Would the saving in capital costs be passed on to the purchaser?

This is an industry known for finding ways of ‘getting it done’ and working through problems. Novel thinking and focused government support combined – now that combination may well create the perfect conditions for a more settled outlook…

Scott Peterkin

Partner

Burness admin