UK Housing Supply to Remain Tight, Underpinning Recovery in House Prices
Britain’s acute UK housing supply shortage is here to stay, propping up house prices, even as the Labour Party, which is likely to form the next government, pledges to add 1.5 million new homes over the next five years.
Since we are in an election year, with Prime Minister Rishi Sunak indicating he will call a general ballot in the second half, addressing the housing shortage and affordability features prominently on the agenda of all the main political parties.
The UK housing market is just beginning to emerge from the doldrums after a cost of living crisis, a technical recession, and mortgage rates hitting 16-year highs caused an affordability crunch resulting in a decline in house prices. As the Bank of England raised interest rates 14 times, taking the UK’s benchmark interest rate to 5.25% by August 2023 from a record low of 0.1% in December 2021, the costs of taking out a mortgage followed suit, touching as high as 6.85% last summer.
House Prices Are Well Supported Despite the Temporary Blip
The final figures are in and they confirm a sluggish housing market in 2023. British house prices were 2.2% lower at the end of 2023 than a year earlier, according to revised figures released on 20 March by the Office for National Statistics, which compiles the UK House Price Index, the house price indicator deemed the most accurate because it’s based on actual sold prices.
The total number of transactions had been running at about 10% below pre-pandemic levels over the last six months of 2023, with those involving a mortgage down about 20%, Robert Gardner, chief economist at Nationwide, a lender that also compiles well-regarded house price index, said in January.
Even so, a full-blown housing market crash has been averted, not least due to the scarcity of housing inventory. The housing market recovery is getting underway, mostly driven by the prospect that slowing inflation will allow the Bank of England to start cutting the official interest rate, probably as early as June. In anticipation of the move, many lenders have begun to lower mortgage rates, with the average rate on two-year fixed-rate mortgages now standing at 5.23%, according to Rightmove data.
“Once they get below 4.5%, we’ll see more buyers return to the housing market,” Richard Donnell, executive director of research at property website Zoopla,” said in September.
Demand Crippled by Affordability Woes Still Outstrips Supply
Most forecasters are still expecting house prices to fall this year on average by between 1% and 3%, with Rightmove seeing the most modest decline, and estate agents Savills predicting the deepest contraction. Property consultancy Knight Frank is the most optimistic, revising an earlier expectation for a 4% decline to a 3% increase. Savills, which made a five-year prediction, sees the property market returning to growth in 2025 and expanding 17.9% through 2028.
Considering all factors, the current weakness in the housing market seems to be only a temporary setback, particularly as property values remain at historically high levels. Despite subdued demand, new properties and existing stock coming to the market for sale fall way short of what’s needed. This limited supply continues to exert upward pressure on prices. The current Conservative government adopted a target to build 300,000 new homes each year in England by the mid-2020s laid down in their 2019 election manifesto, which was made mandatory for local governments. However, in December 2022, Michael Gove, the levelling up, housing and communities secretary, scrapped these targets following a rebellion by Conservative MPs, making them “advisory”.
Targets Set by Politicians Versus the Reality
The government missed the 300,000 target each year by a large margin, coming the closest to the goal in the 2019-20 fiscal year when there were 248,591 “net additional dwellings,” the benchmark figure for housebuilding, according to BBC Verify. This fell to 217,754 in 2020-21, the pandemic year. Subsequently, in both 2021-22 and 2022-23, these numbers were just under 235,000, the ONS said.
The Labour Party, which leads the Conservatives in opinion polls ahead of the impending parliamentary election by about a 20 percentage-point margin, plans to reinstate the 300,000-a-year mandatory housebuilding target, and it adopted a goal to build 1.5 million new homes over five years, in line with that annual target. Labour also pledged to overhaul the housing planning system, including reviewing rules about construction on green belt land, and promised to boost affordable and social home construction.
Speaking to Sky’s Sophy Ridge in May, Labour leader Keir Starmer said Labour would “get the target back” but would also look to “take on planning laws, make sure local authorities have greater powers to decide where the housing will be in their patch.” Some industry experts consider the housing planning system as the main impediment to increasing the housing supply.
How Big Is the Shortage? More Than 4 Million Missing Homes
The Centre for Cities, a think tank researching the economic challenges facing major cities, published a report last year, in which it compared housebuilding in Britain since the 1950s to the European average and identified that 4.3 million homes are missing from the UK housing supply because they have never been built.
The think tank argues that contrary to conventional wisdom, Britain’s severe housing supply crisis has its roots in the adoption of the discretionary planning system in 1947 that forms the basis of the planning framework in use today, rather than the sell-off of council-built homes in the 1980s under the Thatcher government.
The think tank estimates that even if housebuilding in England reached the current target of 300,000 new homes a year rather than the actual growth rate of between 220,000 and 240,000 new homes per year, it would not clear the housing backlog for at least half a century. Closing the gap sooner would require 442,000 homes to be built each year over the next 25 years, or 643,000 homes each year to eliminate the backlog within a decade, it said.
The estimate for the housing backlog is in the same ballpark as the findings of other surveys, including a study commissioned by the National Housing Federation (NHF) and the charity Crisis from Heriot-Watt University, which points to a shortfall of 3.91 million homes in England. To clear this, around 340,000 new homes need to be supplied each year, of which 145,000 should be affordable, according to that report.
However, instead of recommending that the government itself undertake large-scale housebuilding, the Centre for Cities suggests that the solution would be an overhaul of the discretionary planning system. It recommends replacing it with a rule-based with flexible zones that would increase the certainty of the planning process and the supply of land for development. It also said that a significant increase in private-sector homebuilding would be crucial to clear the backlog.
Conclusion
Based on the estimates for the size of the housing shortage it’s obvious that the current pace of homebuilding is a far cry from the requirements, and even the targets set by politicians would barely scratch the surface of Britain’s housing shortage.
The overhaul of the planning system is long overdue and private-sector homebuilders should be discouraged from hoarding land and raining in construction activity when house prices are falling. None of these are easy to fix in the short term and may take several decades to tackle. In the meantime, the current improvement in housing market conditions and the long-term supply constraints mean that house prices should continue to head upward.