Housing delivery may stall but market fundamentals will drive long-term performance

It is fair to say we have entered uncharted territory in recent weeks as real estate markets navigate the challenges of the Covid-19 pandemic and its impact on business and the economy becomes clearer.

This week, various housebuilders confirmed they will close all construction sites and pull back from the land market, the latter point something we noted in a previous update.

As a result, it seems likely that we will see a slowdown in housing delivery and completions volumes this year and next as some - but not all - building sites pause development. At present, government advice is that construction sites can remain open (subject to social distancing).

The impact of the new official restrictions - and the building hiatus - on the market will become clearer over the next few weeks. Certainly, reservations have slowed - though that’s not to say activity has stalled.

Indeed, conversations with agents in London and the regions reveal evidence of deals being agreed at all levels of the market, from Help to Buy-backed transactions all the way through to £5m prime sales, all of which provide an indication as to the depth of demand in the new homes market.

Virtual viewings have replaced physical ones in a number of developments and provide a touchpoint for potential purchasers impacted by travel restrictions, or by the latest government measures in the UK.

More comprehensive new homes market data for the first three months of 2020 in London is due next month and will allow us to draw firmer conclusions.

In the medium-term we may see demand shift to recently-completed product as buyers and investors look for tangible assets.

A pause in new homes delivery, meanwhile, comes at a time when completions volumes in England have been steadily ticking upwards, and just weeks after the government reiterated its ambition to build 300,000 homes a year by the mid-2020s. 

The latest figures show that just over 240,000 homes were added to housing stock in England in 2018/19, up 9% on the previous year, but some way below that target figure. Energy Performance Certificates (EPCs) issued for new homes, which are an unofficial leading indicator of housing delivery, show this uptick has continued through the calendar year, though they remain stubbornly below 300,000.

It is clear that meeting that stated goal requires decisions that go beyond the next few weeks or months.

And the long-run fundamentals still point to the need to up delivery. Between 2019 and 2030, the number of households in the UK will rise by 1.8m, according to forecasts from Oxford Economics.

London, where arguably the supply/demand imbalance is greatest, is already feeling the squeeze. Just 19,166 units started construction last year, down 43% compared to the 2015 peak. For inner London, this figure was just 6,049, more than 50% fewer than in 2015.

While none of this tells us when normal service will resume in the residential development market, it is a reminder of some of the fundamentals which will drive long-term performance.