Housebuilders are facing continuing challenges – but solutions can be found

Last year, only 133,213 new homes were completed, down 12% from 151,308 the previous year. What’s more alarming is the significant drop in the intention to build new homes, which plummeted a staggering 44% to 105,449 in 2023 from 189,022 in 2022.

Constructing houses is a costly endeavour, especially at scale. In the robust macro-economic climate that prevailed until the end of 2021, upfront costs were manageable, deemed necessary investments with anticipated returns. However, the scenario altered in 2022, with interest rates rising from 0.25% to 5.25% today, coupled with high inflation. These factors escalated both the cost of living and construction expenses, denting consumer confidence and inflating housebuilders’ costs.

Political uncertainty exacerbates the situation. Both the Labour Party and the Conservatives share similar housing targets. The latter pledged in 2021 to build 300,000 homes annually by the mid 2020s, but by 2022, this target had been reduced to being merely considered ‘advisory’. Meanwhile, at its 2023 Party Conference, Labour committed to build 1.5 million homes if it were to form the next government, equating to 300,000 homes a year.

Despite longstanding talks of impending planning reform, the system remains strained. It is evident that housebuilders will require substantial support to meet any set targets amidst the current challenging environment. Unfortunately, practical solutions to overcoming the development hurdles are scarce, leaving housebuilders grappling with uncertainty - and the market feeling the repercussions.

The withdrawal of government support initially implemented to rejuvenate the economy following the pandemic and cushion it from the impacts of the War in Ukraine has severely impacted consumer confidence. Consequently, there has been a downturn in significant purchases like homes, with the number of UK residential deals in December 2023 plummeting 20% year on year. Understandably, developers are hesitant to invest in developing sites without assured returns.

One possible tactic for housebuilders is to focus on selling affordable housing stock to housing associations or local authorities. For example, FTSE-listed housebuilder Vistry, following its merger with Countryside Partnerships in November 2022, announced its shift towards affordable housing. This strategic move seems prudent, considering that private registrations fell 53% in 2023 compared to 2022, whereas affordable and rental registrations only fell 22%.

However, housebuilders’ VAT recovery position varies according to whether they sell to private customers or housing associations/local authorities. Presently, housebuilders constructing housing for private sale can recover the majority of VAT incurred as a cost component, but when forward selling affordable and rental properties, VAT incurred may not be fully recoverable. This necessitates meticulous planning to minimise ‘VAT leakage’ and could potentially lead to increased costs for affordable housing.

Reconsideration of the Treasury’s VAT recovery stance in this area therefore seems warranted, to align with the future housing targets of a Conservative or Labour government after the upcoming General Election. Discussions in the sector about potential VAT policy changes to alleviate this burden are under way. Managing tax liabilities has become crucial for housebuilders, amidst cash flow challenges while developing sites, necessitating careful cash management and effective investment.

Planning problems

It is also imperative to address longstanding planning problems. Despite numerous pledges in Spring Budgets and Autumn Statements to tackle the issue, meaningful reform remains elusive. Land holdings by FTSE 350 housebuilders have surged by 67% since 2013, underscoring the challenges they face in securing planning permission for site development and house construction.

Implementing clear and consistent planning reform would be a pivotal starting point, providing housebuilders with clarity on targeted development sites. While preserving green spaces is crucial, considering the UK’s rapid population growth, a balance must also be struck between brownfield and greenfield development to adequately meet housing demand.

Housing is undeniably a necessity, yet support for the industry has often been lacking. The UK already lags behind in building the required quantity of houses, despite concerted efforts from both housebuilders and policymakers. Presently, the broader economic milieu has thrust housebuilders into a perfect storm. Urgent and substantial support for housebuilding is imperative to avert a crisis. Fortunately, viable solutions exist to furnish this support – they are just awaiting swift implementation.

Paul Atkins is partner and head of property tax at haysmacintyre