House Building Facing Fewer Risks

BMI View: We remain positive on the UK residential construction sector and highlight that there is potential for us to upgrade our forecasts following strong growth in the number of housing starts over the last year. There are concerns that the housing market is being overheated by the introduction of the second element of the government's Help To Buy Scheme, however this is not the case, and the demand picture is such that developers will look to increase their output in the coming years.

We have been increasingly positive on the UK's residential construction sector since we noted the upside potential for the market created by the government's Help To Buy scheme, which in combination with a turnaround in the UK's economic performance, boosted confidence in the UK housing market ( see 'Scheme To Boost Housing Confirms View', 25 June 2013). Looking at the level of new build housing starts across the UK, it is clear that over the second half of 2013 and in particular over Q1 2014 there has been impressive growth in the number of new houses being started (see chart below).

While this is positive news for our forecasts, which see 1.6% real growth in the residential and non-residential sector over 2014, it must be noted that housing starts are still 26% below their Q1 2007 peak. Indeed, house building is lagging hugely behind the necessary levels to satisfy demand and as such house price increases - especially in London - have become a major political issue; the Office for National Statistics said UK house prices rose by 8% in the year to the end of March 2014 and Land Registry noted a 17% increase in London house prices over the same period.

House Building Turnaround
Number of Housing Starts (LHS) and Year-on-year Growth (RHS)

House Building Facing Fewer Risks

BMI View: We remain positive on the UK residential construction sector and highlight that there is potential for us to upgrade our forecasts following strong growth in the number of housing starts over the last year. There are concerns that the housing market is being overheated by the introduction of the second element of the government's Help To Buy Scheme, however this is not the case, and the demand picture is such that developers will look to increase their output in the coming years.

We have been increasingly positive on the UK's residential construction sector since we noted the upside potential for the market created by the government's Help To Buy scheme, which in combination with a turnaround in the UK's economic performance, boosted confidence in the UK housing market ( see 'Scheme To Boost Housing Confirms View', 25 June 2013). Looking at the level of new build housing starts across the UK, it is clear that over the second half of 2013 and in particular over Q1 2014 there has been impressive growth in the number of new houses being started (see chart below).

House Building Turnaround
Number of Housing Starts (LHS) and Year-on-year Growth (RHS)

While this is positive news for our forecasts, which see 1.6% real growth in the residential and non-residential sector over 2014, it must be noted that housing starts are still 26% below their Q1 2007 peak. Indeed, house building is lagging hugely behind the necessary levels to satisfy demand and as such house price increases - especially in London - have become a major political issue; the Office for National Statistics said UK house prices rose by 8% in the year to the end of March 2014 and Land Registry noted a 17% increase in London house prices over the same period.

There has been much debate over whether the government's Help to Buy scheme, specifically the second part of the scheme which guarantee's mortgages on old and new properties under GBP600,000, has been a driving factor in inflating prices and as such threatens the creation of a housing bubble. However, following the release of the scheme's performance data, it is clear that it has had minimal impact across the housing market other than boosting confidence. The mortgage guarantee programme accounted for just 1.3% of all mortgages issued in the UK since it was launched in October 2013. At the same time, new figures on the first part of Help to Buy - the equity loan scheme for just new build properties- show that 20,548 new homes have been sold through the scheme in the 13 months since it began. That is a small proportion of the total number of homes sold over the same period.

Helping To Buy, Not Inflating Prices
Help To Buy Scheme Element and Start Date, Number of Approvals (LHC)/Mortgage Guarantee Approvals, By House Price (RHC)

Looking at the chart above, we note that the vast majority of approved Help To Buy agreements have been used to buy new build properties through equity loans and the NewBuy scheme (grouped with Help To Buy in April 2013). That said, the mortgage guarantee scheme has only been running since October 2013 and already accounts for a quarter of total Help To Buy transactions - a potential sign that it may have played some part in the acceleration of house prices more broadly.

However, looking deeper into the scheme, we see that of the mortgage guarantees, the majority of houses for which it has been used are under GBP125,000 and are located outside of London - particularly in the North West of England, where we have seen much less severe house price increases. Help To Buy then, is not the driving factor behind the resurgent UK housing market, only a supporting element.

Recovery On Track
Residential and Non-Residential Construction Industry Value (GBPbn) and Real Growth (% Change y-o-y)

Considering that Help To Buy is not the threat that has been suggested in the media and political debate, we believe the UK's long-term residential construction picture is a positive one, with the potential to upgrade our forecasts in the coming quarters. Three key issues we highlight for the sector are;

  • Help To Buy Risks. Questions have been raised over the risks involved in lending and guaranteeing large sums of money to households without adequate incomes. Should households be unable to pay, not only will that risk confidence in the housing market, but also burden the government with the debt, as we saw in the US. Bank of England Governor Mark Carney has also noted the potentially broader impact of Help to Buy if it encourages riskier mortgage lending by banks outside the programme as they attempt to compete. However, we note that credit conditions are still particularly tough and banks are wary of lending so we are unlikely to see a dangerous level of defaults.

  • Demand. Demand for housing was high before the market crash and following years of little building activity and increased population growth it is stronger than ever. An improved UK economy has increased the confidence of developers to start building again, with a survey of leading home builders by Knight Frank estate agents revealing that 180,000 units a year is realistic under current market conditions. This figure is drastically below the 320,000 the Home Builders Federation says is needed to "improve" the housing market, which highlights that there will continue to be demand for new build properties, supporting our view for positive growth over our 10-year forecasts.

  • Interest Rates. Concerns have been raised over interest rate rises and its impact on the housing market. BMI believes that rates are likely to be increased in early 2016, while the market consensus is 2015. We believe that the main impact will be the stymieing of the price appreciation rate we have seen over the last year and some demand for houses will be reduced, especially at the lower end of the market where low-wage growth will reduce the affordability of mortgages. This is factored into our forecasts, although we expect rate increases will be minimal to avoid choking the rest of the economy and will still be affordable for the majority.

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