Within a week of its election in early July 2024, the new government was shouting from the rooftops about its ambitious plans to address the UK’s housing crisis by building 300,000 new homes a year over the five-year life of the current parliament. This is mainly to be facilitated by significant reforms to the planning system, which the major housebuilders claim is a major blocker.

The last time that 300,000 dwellings were completed was in 1969/70 when 135,700 of the 306,860 homes completed that year were built by local authorities. in 2007, the best of the last 30 years, private housebuilders could only provide 195,870 new homes, which was nowhere near enough to make up for local authority completions averaging only 1,763 annually throughout those years.

According to research by the Big Issue, the private sector started construction in England on only 116,290 homes, a fall of 18% on the previous year. If housing association and local authority starts are added and Scotland and Wales are included, the total for new-build starts last year was 171,693. Even allowing for around 75,000 house splits and office conversions, the total still fell well short of the level the government hopes to achieve.

What do housebuilders need to hit the target?

The answers are deceptively simple, but in reality, solving the issues will be fiendishly difficult:

Enough land with planning permission

Further research by The Big Issue published in December 2023 showed that the eight leading housebuilders hold 918,823 plots, an increase of 49% on 2018. This would give them sufficient capacity to last 11 years at their rate of build then. Subsequently, most have announced reduced levels of housing starts, extending their land capacity through to 2040.

Much of this land already has planning permission, although not all sites are necessarily in the right place in terms of housing demand nor are they all acceptably profitable under current market conditions. The inaugural Planning Portal Market Index has found that more than a million homes in England and Wales granted planning permission since 2015 have yet to be built.

Sufficient labour resources

A range of current estimates suggest a short and medium term labour shortage in the construction sector of over 200,000 workers. The Construction Industry Training Board suggested in May 2024 that 251,000 extra workers (net of leavers) are required by 2028. Inevitably, this will lead to labour cost inflation as contractors bid up pay rates to attract and keep enough site and other staff.

Adequate financial strength

Our latest detailed report into the financial profile of the construction sector in February 2024 found that while its finances had improved, they remained well below par, with over a third of all construction companies at significant risk of failure. There is a persistent, long-term problem with insolvencies, which represent 17% of all UK failures compared to the industry’s 6% share of GDP.

If we build the houses, will the buyers come?

There is a commercial conundrum at the heart of the government’s house-building policy. The reason that the major housebuilders cut back starts in the first half of 2024 was that input cost inflation dictated that prices needed to rise to maintain profit margins. This has collided head-on with affordability issues as the cost-of-living crisis continues and interest rates are slow to come down. Housebuilders are not charities and will not invest capital in building homes that they can’t sell.

Inflation is abating both in terms of construction materials and consumer spending power, but it has not gone away. Property research analysts, Quilter Cheviot believe that that buyer affordability will not return to pre-2022 levels until mortgage rates fall below 4% and probably closer to 3%, which is some way off yet.

SME housebuilders

Almost half of new home completions in 2023 were built by the major housebuilders, leaving the remainder for smaller contractors. This will be especially so under the government’s plans to release ‘greybelt’ sites on the edge of towns and cities for housing development. These are unlikely to be of interest to the volume of housebuilders.

Our recent report into the general construction sector revealed the severe fragility of smaller contractors, including SME housebuilders. Almost half of construction companies have total assets of £50k or less and more than one in ten have total assets of £10k or less.

Understandably, their financial stability is precarious. The average financial health score given by risk monitoring specialists, Company Watch for construction entities with assets of more than £1m is 61 out of a maximum of 100, against the overall sector average of 42. But for the very smallest businesses, the health score is almost halved at only 31. There is a very real risk that a rapid expansion in activity by these SME builders will cause an even greater rate of insolvencies than the sector has already experienced.

What next for housebuilders?

There are likely to be some serious conversations between the government and the major housebuilders over running down their landbanks and increasing their number of starts, but ultimately the build rate is entirely under the control of the housebuilders unless the government is prepared to be exceptionally radical by intervening directly in the industry.

These conversations will also focus on the difficult issue of affordable housing, delivering more of which is a core objective of the government’s housing policy but which will dilute the sector’s profitability.

For smaller builders, the watchword must be caution and avoiding over-trading from their severely limited capital base. For housing sub-contractors, the risks of over-expansion across the whole housebuilding spectrum are even greater. They are always at the end of the payment queue when contractors run into problems.

If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.