The market for new homes is changing, with a shift from private buyers to build-to-rent as well as an ageing population. A restructuring of the sector is on the cards with major implications for architects
The house-building sector is in the throes of huge change, some obvious, some less so. That sums up the mood from the latest report released earlier this month (October) at the annual Housing Market Intelligence conference, organised by the Home Builders Federation in partnership with NHBC.
The report brings together the thoughts of leading industry experts across a range of key topics. The dominant thread linking them this year proved to be ‘change’. Indeed, many of the experts suggest the sector is in a period of transition sparked by major shifts in the political, economic, social, technical, environmental and regulatoy factors that determine how housebuilders operate.
If the level of change described in the report does amount to a major transition for the residential development sector, the implications for architects working in that sector are massive. Inevitably, this presents both opportunities and threats.
The contributors to the report do not suggest that the newly installed Labour government is the primary catalyst. They argue that the pressure for change has been decades in the making, running far deeper than party politics and political preferences.
However, the current government clearly recognises the need for change and has placed housing and house-building central to its growth mission. This is likely to speed up the process. Only time will tell us how well the government understands the multiple challenges ahead and how effective its policy prescriptions will be.
Stepping back, the phrase ‘housing crisis’ has been in common use for decades and suggests major change might have been on the cards for some while. So why has radical change not already taken place? It may well be that many critical fragilities in how we deliver housing have been disguised. The UK does have a reputation for muddling through. It is not hard to spot a patchwork of policies over the years that have papered over emerging cracks as well as economic quirks, such as a sustained period of extraordinarily low interest rates, relieving immediate pressures to address the need for fundamental change.
Meanwhile, there has been a constant chorus over three or more decades suggesting that the faults in housing delivery could be fixed by freeing up planning. This has deflected focus on other major challenges within the housing market and the many emergent trends that have constrained the delivery of homes.
For almost five decades, following the decline in public sector house-building, the delivery of new homes has rested primarily on speculative housebuilders. In the main, they adopted the traditional ‘current trader’ business model. This is where they build homes and sell them, primarily to private households, to meet immediate demand. As with any business model, it is shaped to balance risk and profit. But inevitably this heavily influences both what types of homes are built and how they are built.
This approach was hugely successful in delivering new homes through the late 1970s and 1980s as home ownership increased and large numbers of young households entered the housing market. The trouble is that, since the late 1980s, the customer base has been dwindling. This stems not from planning restrictions, but largely from demographics and the relative price of homes to earnings.
It is getting harder for housebuilders to attract buyers because there are fewer households buying homes. This is clear from Chart 1 (above) which shows the decline since a high point in the early 1980s.
And the pool of potential buyers of new homes is likely to keep dwindling. One big reason for this is that entry to the market for young households is getting ever tougher. The ratio of house prices to earnings has grown steadily over decades, increasingly pricing out first-time buyers. This created a major slump in the number of first-time buyers after the global financial crisis.
A second reason is that the number of home movers is shrinking. This is partly because the average age of home owners is rising, in turn because of low numbers of first-time buyers for many years and also because first-time buyers tend to be older than they once were.
The age of home owners matters when it comes to the level of transactions, because the statistics show older home owners are less likely to move. As Chart 2 (above) shows, the number of homeowners over 65 has risen steadily this century while the numbers under 45 have decreased, with a slight blip more recently, partially reflecting the period of ultra-low mortgage interest rates.
It is important to recognise that there is a relationship between how many new homes are sold to households and the overall total of home sales. Between the 1970s and the global financial crisis, new homes accounted for about one in ten of sales, with second-hand homes (as housebuilders tend to call them) clearly dominant. Although the dynamics of this relationship are unclear, it suggests a relatively stable ratio and a pattern of behaviour within the market.
Following the global financial crisis, the pattern was disrupted. For instance, the introduction of Help to Buy provided an incentive to buy a new home. This boosted the annual share of new home sales. With the ending of the scheme, all other things being equal, we might expect the ratio to return closer to one in ten.
Given the relationship between transactions and the sale of private homes to households, the implications are clear. If housebuilders want to keep selling homes directly to households at the rate they did in the past, they will need to boost the attractiveness of new homes over the existing stock. If this is not possible and they want to build and sell the same number of homes, they will have to find other customers.
And they have been. The number of homes built by mainstream housebuilders for housing associations, or indeed for private rental, has risen greatly over recent years. Chart 3 (above) shows the aggregated number of homes completed and the share of private sales within that for Barratt, Bellway, Persimmon, Redrow and Taylor Wimpey. Since 2002, the share of private sales has fallen from 84 per cent to 74 per cent. Back at the turn of the century, that share was above 90 per cent.
This chart data does not include the impact of Vistry, formerly Bovis, which has ramped up the proportion of non-private completions through a focus on partnerships, which sees it building mixed-tenure developments in joint venture with housing associations or investor partners.
Much of this trend has its roots in the obligation for housebuilders to deliver homes through Section 106 agreements set by planning authorities. These are generally taken on by housing associations, and the number built has risen substantially in recent years.
Importantly, this process exposed private speculative housebuilders to the social sector and forged relationships between them. Today these relationships are increasingly the basis for partnership deals, often formed through joint ventures. This has helped housebuilders maintain levels of building as the private sector market has struggled.
Furthermore, many other sizeable housebuilders have shifted their focus away from speculative private sale. Telford Homes began to pivot its business model towards delivering homes for the build-to-rent market almost a decade ago, before being acquired by the global real estate group CBRE in 2019.
These shifts in business models, which are gathering pace, are indicative of change in the marketplace, as housebuilders look to redefine their role. The joint venture, MADE partnership, which Barratt has entered with Homes England and Lloyds is a further sign of changing times.
The growing difficulties of making open market sales to households has seen housebuilders increasing their focus on the rental sector.
But the challenge of selling homes in the open market to households is only one of many challenges. The demographics of the population is changing, which means the customer base is changing. One big shift is the increasing number of households becoming pensioners. With the second wave of baby boomers now tipping over into retirement, current estimates suggest the net increase in households in England will come almost entirely from those aged over 65.
This suggests that if we want a balanced stock, we should be building more homes suited to this demographic rather than to the notional typical family, which currently represents a major slice of the new homes built. Clearly, it’s not that simple. But there is a growing need to reshape the housing stock to accommodate an ever-increasing proportion of older people.
Beyond this, the house-building sector faces other major pressures for change – for example, to build homes that respond to climate change and the wider environment. As a result, housebuilders will have to deliver homes to far higher standards than in the past, which are also likely to be far more complex.
This must be done within a commercial environment where finding the appropriate skills is becoming much tougher. There are clear signs that major housebuilders are finding ways to introduce modern methods of construction that reduce the number of workers needed to build a given number of homes.
But the spectacular failures of modular home-building companies illustrate that ambitious and adventurous leaps into unproven approaches to house-building may not be a wise approach. It will take time (and most likely more failures) to develop new approaches and the appropriate business models and cultures to support them within the wider process of development.
In the meantime, those seeking to deliver homes are likely to struggle to find enough skilled labour to meet the government’s house-building aspirationst.
Worryingly, the current debate over housing is too quickly and too lazily distilled into a pitched battle between nimby and yimby. Indeed, the government’s heavy focus on planning as a cure for the housing crisis suggests this view may have infected the thinking in No 10.
Any comprehensive study of house-building in the UK would unearth a reality where multiple intertwined issues need to be addressed. That is if we are committed to creating homes and a housing market close to meeting the aspirations presented by successive governments over the past half a century.
The crescendo of challenges now facing house-building, many not mentioned above, suggests that the default approach of muddling through may have reached a checkpoint. If this leads to a restructuring of the sector, as it seems it may, it will inevitably have a major impact on many architectural practices. With flux afoot relating to people, planet, place, product, producers and procedures, there are major opportunities and threats for architects that operate in the residential sector