In a report, Morningstar DBRS said it was “hopeful” about a recovery in the housing market due to the stabilisation of rates and building costs. However, it said builders faced a “myriad of ongoing challenges” that made meeting housing targets in the near term an “uphill battle”.
Both the Conservative and Labour parties have set housing targets of 300,000 homes built per year, but builders have constantly failed to meet this.
Morningstar DBRS said builders were contending with “upcoming regulatory changes, considerable red tape, a shortage of small builders, a tight labour market, and incentives required to attract new homebuyers”. The firm said all these factors affected builders’ profitability and, consequently, the number of homes built.
The report said: “Notwithstanding the government’s plan for increased housing, we anticipate builders will continue to tread cautiously and manage housing delivery with an eye toward maintaining their own profitability, while continuing to invest for the future.”
Obstacles remain
Morningstar DBRS said it was yet to be seen whether the government would manage to speed up the planning system as proposed.
Changes to housebuilding regulations to make homes more energy efficient through the Future Homes Standard plan would also require builders to improve their skills and adopt new technologies. The report said this would lead to higher costs for companies, as well as other challenges, such as design changes, a lack of expertise and dealing with new supply chains.
Morningstar DBRS said smaller housebuilders may struggle with this more.
“Over the years, SME builders have been disproportionately affected by bureaucracy and challenges accessing suitable land,” it added.
The report continued: “Unless there is significant government reform encouraging SME builders, we believe the problem will only get worse as large builders gain market share and continue to benefit from their economies of scale as it relates to land acquisition, preferential subtrade scheduling, and materials pricing.”
The firm said uncertainty around housing affordability also impacted housebuilders and meant they needed to introduce incentives to boost demand, which ultimately affects profitability.
It also said builders were less motivated to develop homes for low-income buyers, as the demand for step-up or luxury homes was less cyclical and generated more profit.
Keeping up with demand
The report said government schemes tended to drive demand for homes for political reasons, which sometimes worsened the housing problem as there was no adequate supply to meet this.
Referring to data from Resolution Foundation suggesting a tenth of people lived in poor-quality housing, as well as population growth figures from the Office for National Statistics (ONS), Morningstar DBRS said house prices would remain high until supply and demand were more balanced.
The report said: “We expect housing plans for both political parties will continue to fall under intense scrutiny until election day. It remains to be seen whether either party’s planned reforms will be enough to move the needle and finally deliver on their promises.”
