What happens when UK housing supply doesn’t keep up with demand?
February 27, 2024
This month, a study by the FT declared Britain may need up to 300k MORE new homes per year ABOVE its current annual delivery (234,400 in 2023). We are living in an age where UK housing supply is at a record all-time low in proportion to demand. What happens in the UK housing market when supply doesn’t step up to satisfy demand?
What is the current state of UK housing delivery?
According to the FT’s analysis, record levels of migration causing an “unexpected boom in the population” plus existing increased domestic demand plus an all-time low housing delivery level equals a critical juncture in UK housing delivery. As a UK housing minister might more pithily put it – situation not good. (NB situation not good for some, we hasten to add here as for investors, conversely, the situation is very good, but we’ll come to that…)
Between 2023-2036, a minimum of 421,000 new homes will need to be delivered per year – and if current migration levels continue the figure could be as high as 529,000 per year. That’s 300k MORE than current delivery levels.
The study also highlighted that the UK has far fewer homes per capita than France (775), Germany (624), Japan (594) – at only 576. It seems the state of supply is specifically a UK problem.
Housing shortage estimates do tend to get bandied about and can often vary wildly in numbers and indeed, governments tend to be very sensitive to them. However, London based company, Capital Economics, somewhat of a go-to authority, believes 300,000 is the ‘decent ballpark number’ that keeps supply and demand in a good balance. If this is the case, then present levels are currently 65,000 houses short per year.
Why is supply so down?
Prime Resi reported this month that new planning consents are the lowest they’ve been in a decade. Inflation has led to rising build costs and developers questioning the present economic viability of housebuilding, pigeonholing projects until they see inflation under control. Greenbelt restrictions also have a part to play, preventing potential development sites from getting the go ahead and on top of this, a convoluted planning system preventing further approvals that many in the industry says need overhauled.
What happens when demand significantly outstrips supply?
So far, higher interest rates have prevented a sharp increase in house prices – instead people have turned to the rental market, but competition for supply will likely hit its peak in two to three years, by which times interest rates will have come firmly down and homebuyers will be flooding back onto the market because it’s more financially viable for them.
For the astute investor, this makes now THE PERFECT TIME TO BUY – before we see chronic competition for a small pool of new build homes sending prices rocketing. Thus, we’ll see a sharp increase in house prices regardless of whoever comes to power in the UK – Conservative or Labour – because housing supply is not an easy short-term fix. This is a problem that is not going to go away, more likely worsen in the next two to three years when the shortage of homes significantly begins to effect house prices.
Urban regeneration
Birmingham and Manchester have both invested heavily in their city centres, transforming them once again, into places people actually want to live in. Manchester’s Spinningfields is now dubbed ‘the Canary Wharf of the North’, NOMA has seen the redevelopment of Manchester’s most neglected areas, MediaCityUK has dramatically transformed Salford Quays, St John’s, Ardwick…the list is long. Whilst Birmingham has successfully spearheaded the regeneration of former industrial buildings in Digbeth and The Jewellery Quarter to make these areas the coolest places to live in the city. It’s not always the case that if you build it they will come, but Manchester and Birmingham have made their planning visions a firm reality. They built and people rented. Build Rent Repeat.
Increased cost of living
This is a simple one. Renting a property is a business. If it costs more to run that property then you pass the costs on to the tenant, ergo rents go up, and my god haven’t we all felt the pinch this last two years with prices rises?
Is now a good time to buy UK property?
Yes, emphatically, YES. Increased passive income from rising rents can net investors a tidy sum each month, but also the capital gains from only a 15-20% outlay when buying off-plan look particularly good with the current supply crisis. Come three years when the dearth in supply hits home (no pun intended here) new housing will be a hot commodity, eminently tradeable and so for investors looking for a play, the time is NOW NOW NOW!
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george radford
MANAGING DIRECTOR
about the AUTHOR
George is the co-founder of RPA Group and Managing Director of the business in the UK and Africa. A qualified Chartered Surveyor (MRICS) with almost 20 years of property investment experience, George has helped his clients to successfully grow and strengthen residential property portfolios over multiple markets and territories. Active in building and advising upon his client’s investments, George is now focusing on procuring UK investments exclusively for RPA Group clients and investors, providing insightful and strategic advice and opportunities.