An overwhelming 96% of SME home builders say they are hesitant to invest in new developments because of current market conditions, according to new research from the Home Builders Federation (HBF) and specialist development lender Quantum Development Finance.
The latest quarterly survey, which assesses barriers to housing delivery and their impact on investment decisions, presents a bleak picture of SME developer sentiment.
Six in ten (61%) SME home builders expect to start construction on fewer homes over the next three months, up from 52% last quarter and more than double the 29% recorded at the beginning of the year.
The downward trend is already being seen in expectations of land purchasing, as 58% of respondents expect to purchase less land over the next three months, more than double the proportion reported at the start of the year (27%).
As the industry awaits the new Government Budget, the findings reveal a significant lack of confidence in the current policy agenda to improve conditions for SME home builders, with 95% of respondents stating that they are either not very confident or not at all confident that the Government will deliver meaningful improvements for the sector.
The research highlights the continued pressure the industry has faced over the course of the year as it is increasingly stretched by both supply-side and demand-side pressures. Development viability was the most frequently cited supply constraint, named by 84% of respondents (up from 75% the previous quarter), as new taxes, levies and inflation have added around £76,000 to the cost of building each new home. Planning delays were the next most frequently cited issue, at 72%.
On the demand side, wider housing market conditions (69%) and low buyer confidence (64%) continue to present the greatest challenges, while mortgage rates have become an increasingly prominent concern cited by 41% as lenders have repriced mortgage products in response to anticipated Bank of England base rate rises.
Housing market sentiment is negative across almost every region, with the Southwest recording the highest proportion of respondents expressing a negative outlook (88.9%), followed by the South East (83.7%). The East of England (71.4%) and London (70%) also recorded predominantly negative sentiment, highlighting the widespread nature of the challenges facing smaller builders.
Despite the difficult outlook, the survey suggests that targeted measures to stimulate demand could help support housing delivery. Three quarters (75%) of respondents said that interventions such as the proposed Your First Home equity loan scheme for first-time buyers and/or Stamp Duty Land Tax reform could encourage them to plan additional site starts. A further 18% said such measures could help bring forward sites already in their development pipeline, meaning 93% believe demand-side stimulus could positively influence their development plans.
Government has made positive progress in addressing some of the barriers facing the industry, particularly through planning policy and the planned reintroduction of first-time buyer support through the Your First Home scheme, with details expected in the Budget. However, for the scheme to have the greatest impact, its parameters must allow as many purchasers and developers as possible to access the scheme.
HBF is urging Government to build on this progress by reducing the cumulative cost of building new homes, removing fiscal barriers to development, unlocking Section 106 Affordable Housing delivery, and providing greater long-term funding for local planning authorities to strengthen planning capacity.
Improving access to homeownership and stimulating buyer demand could help unlock new development, but without action to address viability pressures, planning delays and rising costs, SME home builders will continue to face significant barriers to increasing housing supply.
Neil Jefferson, Chief Executive of the Home Builders Federation, said: “Small and medium-sized home builders are finding it increasingly difficult to operate as both the cost and burden of building each home continue to rise. In real terms, this means fewer homes being built as the cumulative impact of rising costs, planning delays and uncertainty makes it increasingly difficult for smaller developers to bring sites forward.
“As we look to the Budget announcement, Government has a real opportunity to stimulate housing delivery by addressing these pressures and building on progress in planning reforms and homeownership support by tackling both the viability and affordability challenges facing the sector.
“To restore confidence, smaller developers need targeted action that enables them to continue operating in an increasingly difficult market. SME’s play a vital part in delivering new housing, and supporting them to overcome these barriers is essential to ensuring the country can build the homes it needs.”
Oliver Thompson, Chief Executive of Quantum Development Finance, said: “Our survey shows SME builders are caught between rising costs and falling buyer demand, and the wider market tells the same story. With two-year fixed mortgage rates now close to 6% and a rate rise widely expected next month, buyers are holding back, and home builders can’t commit to new sites without confidence that homes will sell.
“From where we sit as a lender, viable schemes are being delayed not for lack of ambition, but for lack of certainty. Home builders are clear that getting buyers moving is a significant part of the answer: three-quarters would plan additional site starts if first-time buyer support or Stamp Duty reform came forward. The Budget must deliver a well-designed Your First Home scheme alongside action on costs, or the homes this country needs simply won’t get built.”
