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Housing Supply

By Richard Donnell on 26 June 2015

Housing Market information is crucial to housing development, says Richard Donnell, research and insight director at Hometrack

This article was first published in Inside Housing magazine. Read the full article and case studies here.

Housing associations and local government have an important role to play in growing housing supply.

There have been many challenges in increasing supply in recent years, not least the impact of the financial downturn on end sale values of homes and the knock-on impact on development viability, as well as the shift from capital to revenue-based subsidy.

A housing recovery focused on London and the south east has exacerbated the challenges for organisations looking to expand new supply outside southern England.

The fact that the major house builders are still using Help to Buy on a third of sales is testament to the fact that demand-side challenges remain, with a new Starter Home Initiative proposed by the government to run to 2020.

The sector is adjusting, supported by low borrowing costs and a focus on diverse activities to create surpluses for expansion. Diversified activities made up 22% of turnover in 2013/14 and within this there was a 40% growth in turnover from open market property sales.

Greater diversity and a reliance on new development to grow stock and deliver cross-subsidies generates risks that need to be managed effectively.

The greatest risks come from not adequately assessing housing demand and establishing realistic price points and expected sales rates across all tenures on a scheme.

There is no shortage of demand for housing in England, it’s just a question of at what price. Simply calling homes affordable is not the same as them actually being affordable to households in the local market.

This was the downfall of the shared ownership market in 2007. Organisations need to test the affordability of housing tenures on a proposed scheme against the other housing choices facing households.

But in a competitive land market, the pressure to ‘optimise’ end sales values to pay what is needed to secure the land is the dominant driver of market behaviour and risk. It only takes modest changes in market conditions to affect sales rates and profitability or cross-subsidy.

It’s important to acknowledge that new development involves a degree of market making. Management teams need to feel confident that a scheme is predicated on a manageable level of market making where analysis can be used to inform this decision.

Greater use of joint ventures and sharing of risk between developers and landowners, where the price of the land can adjust to changes in market conditions, are ways to reduce risk.

Diversification of product is another route and Build to Rent has been heavily promoted as a solution. But the dynamics are very different to building for sale.

While the private rental market has grown in size in the last decade, rented stock is highly concentrated geographically, meaning it is not a viable solution on many schemes outside the main urban markets.

The growing emphasis on building more homes is set to increase the complexity of development in the years ahead, not least through a more diverse range of tenures.

There is no problem on the demand side for housing - the key to managing development risk is to focus on demand and affordability.

 

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