A post-referendum drop in house prices may be welcomed by many, but what are the consequences for architects? Colin Marrs reports
When, during the EU referendum campaign, the pro-Remain chancellor George Osborne warned that house prices could fall by up to 18 per cent, many regarded the statement as a gaffe. The prospect of home ownership becoming more realistic was relished by many prospective first-time buyers. But for those – including architects – who rely on housing as a source of income, the fear of a downturn is real.
Increasing housing output has been a key strand of government policy, much of which is now enshrined in this year’s Housing and Planning Act. So how realistic are the prospects for a serious retrenchment in the sector? Does the government need to begin plotting a new course to see the sector through post-Brexit trauma? And what are the silver linings to the referendum cloud?
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Effect on housebuilders
Publicly at least, housebuilders are confident that Brexit will not have a disastrous effect on housing delivery. In a statement made the week after the referendum, industry body the Home Builders Federation (HBF) insisted its indicators showed that reservation and sales rates had been unaffected by the vote.
HBF spokesman Andrew Turner says the federation’s members are confident their balance sheets will not be hit by a big fall in house prices. ‘There is no reason to believe that house prices will fall significantly,’ he says. ‘Values are linked to supply and demand, and we know the former is not matching the latter by some distance.’
He also rejected the idea that lending for development finance was likely to dry up, despite large falls in bank share prices. ‘All the banks are coming out with positive statements saying that they are not going to reduce lending,’ he says.
The view is backed by Stephen Williams, UK equity analyst at investment firm Brewin Dolphin. ‘Everyone says we need 240,000 new homes a year and we are currently building only 175,000,’ he says. ‘Does the Brexit decision change that? I don’t see it. Migration into the UK might reduce slightly, but I would guess most of those are in rented accommodation anyway so the demand for new homes won’t be too much different.’
But investors have not been so sanguine, with shares in stock market-listed housebuilders plunging in the weeks following the vote. At their lowest point, shares in Taylor Wimpey were down 39.8 per cent from their pre-referendum level, while Bellway (down 37.9 per cent), Persimmon (down 38.5 per cent) and Berkeley Group (down 30.8 per cent) were also suffering. At the time of writing, these share prices had recovered slightly but were still down 30, 31, 30 and 21.2 per cent respectively.
Taylor Wimpy Chobham Manor PRP
Broking firm Liberum has estimated that if the UK enters a period of slowdown, house prices could fall by around 3 per cent next year, which it says would reduce housebuilders’ earnings per share by around 18 per cent. The differential between this worst case scenario and the higher level of share price drops led housebuilder Berkeley Group chairman Tony Pidgley to snap up more than 35,000 of his firm’s shares at a cost of £795,000.
However, the rally was halted briefly after June’s Purchasing Managers’ Index data showed a huge dip in construction output. Brian Berry, chief executive of the Federation of Master Builders, says the fluctuating figures reflect ‘a growing concern that this period of uncertainty is only just beginning’.
Some experts say that a drop in share prices will not necessarily lead to firms reining in their output. Turner says: ‘I don’t think there is a specific link between share price and development plans.’ And Adam Challis, head of residential research at property consultancy JLL, says: ‘Most housebuilders are incredibly well capitalised compared with where they were at the bottom of the market. I don’t see share prices as a material consideration.’
However, doubts surround the viability of some housing schemes if the feared drop in house prices does materialise. Sally Lewis, founding director of Stitch Architects, says: ‘There has already been controversy about the low levels of reprovision of affordable housing at schemes such as the Elephant and Castle in London. These calculations were based on viability reports. While it is fantastic that the new London mayor is focusing on affordable delivery, it could become more challenging if values fall.’
Major housebuilders may wait to commit while the shape of the post-referendum economic landscape becomes clearer
Martyn Evans, formerly creative director of developer U+I, says that viability is also vulnerable from the other side of the ledger: construction costs.
‘Construction companies are vulnerable to market fluctuations,’ he says, ‘and problems in that sector could lead to a range of problems for residential developers, from increasing costs to the survival of construction companies.’
Even at the very smallest scale, clients are thinking twice before committing to building. Paul Testa of Sheffield-based Paul Testa Architecture says a couple of house extensions have been put on hold post-Brexit as clients reappraise their situation.
Some major housebuilders, warns Turner, may also wait to commit – especially on large land acquisition – while the shape of the post-referendum economic landscape becomes clearer.
Gavin Smart, deputy chief executive of the Chartered Institute of Housing, agrees. ‘I don’t think housebuilders are packing up their tools and going home,’ he says, ‘but I am sure that they are having a pause to think about the consequences.’
Residential projects that are part of mixed-use schemes are already being affected by a pause in the commercial market.
Hal Currey of HAL Architects, says: ‘We are looking at one London scheme which has consent for residential and commercial, and exploring feasibility options for other uses. In this case, and post Brexit, the local authority is positively engaging with a view to keeping the wider scheme on track.’
We are definitely in line for a drop in turnover. I would expect house price growth to slow to low single-digit figures
Richard Donnell, director of research at residential research firm Hometrack, is convinced that some impact on the housing market is inevitable.
‘We are definitely in line for a drop in turnover,’ he says. ‘If you look at the impact of previous shocks – the dot com bubble, the second Iraq war – turnover dropped by 10 to 15 per cent. I would expect house price growth to slow to low single-digit figures in the next 12 months.’
Buyers, he says, are also likely to hold off making decisions about buying and selling homes until the economic picture is clearer. ‘I don’t think there are many people out there who want to sell at a discount,’ he says. ‘People will just wait it out. Transactions will slow until people think that it not that bad.’
Williams also points to a likely difference in the fortunes of housebuilders who are heavily exposed to the London market and those operating in the rest of the country.
‘If you talk to people outside London, we haven’t seen huge price rises,’ he says. ‘Why should house prices fall when demand is there?’
Another ‘known unknown’ for the sector is the effect on construction labour of the expected reduction in immigration following Brexit. Williams says: ‘Theoretically, you would say that if borders are more difficult to get across it will exacerbate the existing construction labour shortage. But it may be that if an Australian-style points system is introduced you could allow the required labour for house-building. But, in the meantime, we also need to ensure those people working in the UK get the message they are welcome here.’
Century House square
Effect on policy
Shortly after the referendum result, communities secretary Greg Clark called an urgent summit with leading housebuilders. Clark was reassured by the ‘don’t panic’ message he got from the gathered chieftains. Turner says there were no private sector demands for any immediate extra assistance from government. ‘We will keep an eye on indicators and press for more support if needed,’ he says. ‘Otherwise, the message was that it is business as usual.’
In a statement, Clark said there would be no sudden change in government policy. ‘The need for new homes continues as does the government’s commitment to getting them built and extending home ownership to anyone that aspires to own a home of their own,’ he said.
Turner says existing policy and financial support for government is adequate to support the market. ‘The minister reiterated his support for the Help to Buy scheme and the Conservative Party’s co-development outlook. I can’t see there is a need for a change in housing policy; it has been working fine.’
Clark was understood to have been speaking to all the Conservative Party leadership candidates to emphasise the importance of increasing housing supply as a key strand of government policy.
Tellingly, earlier this week, the country’s soon-to-be new prime minister Theresa May spoke about putting the need for new homes front and centre of her economic policy agenda. Steering clear of detail, she included a promise of ‘more housebuilding’ in a section talking about economic reform.
Yet questions hang over the prospects for regulations needed to fully implement the Starter Homes element of the Housing and Planning Act, which received Royal Assent earlier this year. However, Turner is optimistic. ‘Starter Homes is a policy that the majority of the Conservative Party has been pushing,’ he says. ‘There is no indication that the policy direction will change.’
The government needs to encourage supply through Build to Rent instead of Starter Homes
However Smart believes the current policy focus on home-ownership could come under pressure if a slowdown in the housing market does materialise.
‘In past downturns, the government has supported housing associations to deliver affordable housing schemes for rent,’ he says. ‘It was a key part of the response following the 2008 crash, removing sales and marketing risk for developers. I am not saying we should start doing that tomorrow, but we need to be planning what a counter-cyclical programme might look like.’
Chris Brown, chief executive of developer Igloo Regeneration, agrees, saying: ‘Government needs to continue its actions to diversify the housing supply base. In particular it needs to drop its single focus on new-build home ownership, and encourage more supply through rented housing – through institutional Build to Rent and council housing and housing association rented housing – instead of Starter Homes.’
Expanding Help to Buy to boost housebuilder share prices would just store up a future shock to the market, he claims. ‘As there is now money to spend, following the chancellor’s U-turn away from austerity, supply measures like local infrastructure, land remediation and direct development of rented housing on public land would be better ways to use it,’ he says.
Another policy strand – an expected cut in interest rates – is unlikely to provide a boost to demand for mortgages, claims Donnell. ‘The big thing about mortgages is you can borrow at 2 per cent today but have to be able to afford 7 per cent tomorrow. If you can afford 2 per cent then a rate cut of 0.25 per cent won’t make much difference. It is not going to open the floodgates.’
2471 HT for Cest Nicholson Brighton D 150807 HT 2
Amid the nervy atmosphere, there are some areas where confidence has actually grown in the wake of the Brexit vote, most notably in the private rented sector (PRS). Any downturn in the market for house sales is likely to boost demand for rented accommodation, says Donnell.
According to Andrew Richardson, from Darling Associates Architects, investors in PRS schemes are licking their lips at the prospect of new opportunities. ‘There is a lot of investment in the sector from the United States, and their currency is now stronger compared to the pound,’ he says. ‘I was talking to someone from one of the developers we work with who was in the States when the result came through. The reaction from investors was that it was just what they wanted to happen.’
Richardson says there is likely to be a double whammy – not just from the decreased cost of investment from increased strength of the dollar but from an easing in competition for land. ‘The market has been so overheated that it has been difficult for them to get some of their money invested and some frustration was creeping in,’ he says, ‘Now they can be more hopeful about land deals.’
Challis adds that PRS investors who are investing for the long term will be less spooked by short-term uncertainty than traditional developers. ‘It is a longer term investment,’ he says. ‘A short decrease in capital value won’t affect on their outlook.’
Firms more exposed to house-price risk might think twice about progressing their schemes
But Smart warns that even some parts of the private rented sector might be thinking twice about their business plans.
‘It depends on the model they have adopted,’ he says. ‘If it is purely a revenue-return model, based on long-term rental flows, then they will be relatively relaxed. However, some investors have a blended return model, which relies on rental in addition to churning of stock. Firms with that model are now more exposed to house-price risk and might think twice about progressing their schemes.’
Housing associations could also be shielded from any turbulence in capital markets because of the way they raise finance, according to Challis. ‘Registered landlords traditionally raise money through long elongated debt such as bonds, and as a result are better insulated than housebuilders from capital market disruption,’ he says. ‘This gives them a strategic advantage and means that they might be in a position to raise their game.’