Site visits slump as developers call for clarity

UK house prices ticked up 0.3% in October, bringing the annual rate of growth to 2.4%, from 2.2% last month, Nationwide reported this morning.

That's a strong showing given the uncertainty over changes to property and personal taxation due in the upcoming Budget. The data chimes with mortgage data published by the Bank of England earlier this week, showing lenders approved 65,900 mortgages for purchasers in September, up by 1,000 compared to the previous month.

The ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages decreased by 7 basis points to 4.19%, the lowest since January 2023.

Too optimistic

We talked on Wednesday about a private letter from the Home Builders Federation (HBF) to the Office for Budget Responsibility (OBR) pointing out that its forecast that UK housebuilding would hit 1.3 million homes a year by the end of the decade, increasing GDP by 0.2%, was too optimistic.

HBF chief executive Neil Jefferson said the OBR’s forecasts would only be achievable with incentives for first-time buyers and "reduced planned taxes on new homes that were making many sites 'unviable'."

We found out how many homes developers think they will build this week via Knight Frank's Residential Development Land Index, which includes our survey of more than 60 small and volume housebuilders. It doesn't look good: almost nine in 10 say output over the next five years is likely to reach one million homes or fewer.

While this is partly due to weak demand, policy uncertainty is also making a sizable contribution. At a national level, housebuilders say they are deferring many decisions until after the November Budget, when reforms to taxation and planning may clarify the government’s policy direction.

Housebuilding is a lengthy process, and the prevailing uncertainty is likely to weigh on delivery for several quarters. Some 43% of respondents expect housing starts to fall through the fourth quarter of the year, while 55% expect no change. Similarly, 45% expect land values to fall further.

No surprises

Six-in-ten housebuilders cited planning delays as among the most challenging factors for their business during Q3, down from 73% the previous quarter. Negative buyer sentiment is causing more concern, having risen to 43.6% in Q3, up from 36.7% the previous quarter. The low level of active registered providers came in third, at 28.2%, followed by the short-term outlook for the UK economy, at 25.6%.

Negative buyer sentiment is feeding through to activity: just 5% of respondents reported an increase in site visits and reservations during Q3, down from 18% in Q2 and 31% in Q1. Some 30% said activity had stayed the same, up from 57% the previous quarter, while 65% reported a fall, up from 25%. Almost 40% said they are discounting to incentivise buyers, while 20% are contributing to legal fees or stamp duty.

When we asked respondents to list priorities for the Budget, there were no surprises in the results with many housebuilders hoping for buy-side incentives. Exactly 76% chose affordable housing support, 71% want a revamped first-time buyer support programme, 59% chose more incentives/tax breaks to build and 50% want more funds allocated to planning departments.

Similarly, we asked housebuilders to rank what would be most likely to increase their appetite for land and development, and 40% chose more first-time buyer support, closely followed by planning reform and interest rate cuts.

A new equilibrium

For almost five years, the US housing market has been squeezed by low inventory and high prices. Homeowners have balked at average rates close to 7% and opted to sit tight, keeping inventory low and values elevated even as demand weakened.

Conditions finally appear to be easing. Average values climbed just 1.5% in August compared to a year earlier, the weakest gain in more than two years, according to the S&P CoreLogic Case-Shiller index.

"Markets that experienced the sharpest pandemic-era gains are now seeing the largest corrections, while more affordable metros with stable local economies are holding up better," said Nicholas Godec, Head of Fixed Income Tradables & Commodities at S&P Dow Jones Indices. "Looking ahead, the housing market appears to be finding a new equilibrium after the pandemic boom."

The average long-term mortgage rate dropped to 6.17% from 6.19% last week, Freddie Mac said yesterday – that's the lowest level in more than a year.

In other news...

Bank of England to cut interest rates next week, Goldman predicts (Times).