Why Are Homebuilders Only Now Beginning To Answer The High Demand For Housing?

By Author: Bradley Weiss
Total Articles: 159

The UK Department for Communities & Local Government reported near the end of 2014 that housing starts for the third quarter were at 35,260, down by almost 4,000 starts from the second quarter of the year. But overall, starts have climbed since the historic low of 16,420 starts in the fourth quarter of 2008, an obvious result of the global financial crisis of that year.

Investors in development and homebuilding naturally keep tabs on these numbers, as the supply-demand mechanisms seem askew in the UK. Everyone – including property fund partners, for example, who buy and develop UK land on which homes will ultimately be built – knows that there is a great need to increase the housing supply in the country, a degree of demand that has been building for more than a decade. And yet homes sold at market prices as well as affordable and social housing lag far behind demand. An estimated one million households are thought to be waiting it out in shared flats and houses with family or friends.

The simplest answer to this conundrum is that home prices are simply too high and that younger, working households are not able to meet credit requirements. But why do natural market mechanisms and innovation not find answers to this dilemma? Economists weigh in with their thoughts along the lines of the following:

The greatest undersupply is in London, where housing is already most dense. There simply is nowhere left to build there, as well as in other more popular, overpopulated areas.

Greenbelt preservation, laudable in its goals, prohibits building. These are areas established almost 100 years ago when the population was less than half of what it is today.

The Thatcher-era approach to council housing. While also laudable in turning some lower-income renters into homeowners, new social housing (as it is now called) construction has failed to keep up with younger, lower-income populations.

Vested interests? The homeowners who are confronted with planning authority proposals to increase housing in their vicinity ardently protest new building as it could simultaneously create congestion, increased demand for finite city services and lower their own homes’ value by increasing local supply.

These are not easy forces to overcome – even when the national conversation has pushed Government policies to create solutions. Those include the Localism Act, which through the National Planning Policy Framework (NPPF) enables local planning authorities to make local decisions based on local needs. More than half of those authorities have formulated five-year growth plans, while others approach land-use changes on an ad hoc basis.

The role of the investors is critical to expanding the housing supply. UK strategic land developers – who work with financing from institutional investors and private individuals – will study where housing is needed most, then identify sites where development would be most beneficial. Where owners are willing to sell and local planning authorities will grant approvals, infrastructure is developed. Increasingly, the land is then sold to homebuilders who understand what kind of housing stock is most likely to sell and can be constructed profitably.

Investors have to consider where real estate might fit into their overall financial planning. This is why speaking with an objective, independent financial advisor is always advised in conjunction with all investment decisions.