Executive summary

• One of the key pledges of the incoming Labour government in 2024 was to build 1.5m new homes over the course of its expected five years in office. Given recent figures, it seems inconceivable that this target can be met – even the government itself now concedes that the chances of doing so are slim.
• At the macroeconomic level, the latest inflation figures are disappointing, with the current rate being above 3% per year, and expected to rise: it is sharply above the Bank of England’s target of 2%. As such, the next moves in interest rates are likely to be upwards.
• The correlation between higher interest rates and higher mortgage rates is long-established. Many potential buyers, especially first-time buyers, will be put off by rising interest rates – not a welcome message for the UK’s leading housebuilders. However, recently, the Government announced its Your First Home scheme, with an indicative minimum 2.5% deposit for first-time buyers, which has buoyed the sector in the past few days.
• In fact, the sector generally boasts strong finances; in many cases, there are healthy net cash balances. Such a scenario was perhaps encouraged by the near collapse of Taylor Wimpey – its shares fell to below 10p in November 2008. Sector caution remains an enduring priority, especially with respect to land-bank policy, despite rising house prices over the longer term.
• During the past decade, the housebuilding sector’s share price performance ‒ after a boom during the lead-up to the credit crunch ‒ has generally been dire. Of the leading three volume housebuilders, Barratt Redrow – the latter was acquired by the former in 2024 – has seen a 29% fall since 2016. The figures are equally unimpressive for both Persimmon and Taylor Wimpey – down by 27% and 42%, respectively.
• However, shares in the Berkeley Group, operating primarily in London and the South East, have bucked this depressing trend by performing resiliently – the shares are up by 14% compared with their 2016 rating. However, other smaller sector members, including Vistry, have struggled, while the share price fall in Crest Nicholson has been 86% over the decade.

Background

Prior to the worst part of the UK credit crisis, which saw the collapse of Northern Rock and the combined near £66bn taxpayer-funded capital injections into RBS and Lloyds, the housebuilding sector had enjoyed a solid era of growth – reflected in decent share price growth. Thereafter, confidence in the sector dipped although it did recover very strongly in the lead-up to the COVID-19 epidemic in 2020 – and indeed briefly thereafter. However, higher interest rates subsequently – and the ending of the Help to Buy scheme in 2023 – have curbed sector growth, a fact amply reflected in the recent poor sector share price performance.

The high-profile, five-year 1.5m new-build target of the Labour government has now become more of an aspiration than an achievable target. For various reasons, the number of new house-build units has remained well below the 300,000 figure that is required to achieve this end. Historically, too, this target is distinctly ambitious – you need to go back more than 50 years or so for such numbers to be delivered regularly.

The bar chart, below, published by the Ministry of Housing, Communities and Local Government, highlights the number of housing start-ups and completions in England since 2006: the volatility of the numbers is also pertinent for potential investors.

 

Despite the demand for new homes, driven in part by immigration, macroeconomic factors remain a potent deterrent for new house buyers. With abiding concerns about the UK economy, notably regarding the £3tr net debt figure and probable tax rises in next month’s Budget, many potential buyers remain cautious. Indeed, many may prefer to rent properties – and forgo the chance, at least for the present, of home ownership.

Of course, future trends in UK interest rates are pivotal in driving sales of new-build houses. Until relatively recently, it was widely expected that interest rates would fall from their current 3.75% level. Instead, at least one and probably more rises are expected unless the Hormuz oil access issue is satisfactorily resolved – or, indeed, oil prices fall. Rising inflation, irrespective of the oil price driver, is also a highly relevant interest rate factor.

More specifically, the two charts below, published by Barratt Redrow, show the sector Mortgage Availability Index (MAI) data, along with comparable pricing information. Undoubtedly, considerable volatility is in evidence, especially in the sharp increase in the average 2-year fixed mortgage rate from the spring of 2022 to the autumn of 2023 – up from just 2% to more than 6.5% in only 18 months. The MAI calculation is based on i) assessing standardised average housing prices; ii) incorporating average disposable earnings for full-time employees; and iii) using the Bank of England’s monthly average data for new mortgage advances to householders.

 

Within the sector, housebuilding inflation remains an issue. The latest figures published by Barratt Redrow are projecting a Building Construction Index (BCI) figure of between 3% and 4% for materials and a 2% to 3% for labour: the cost base is split broadly 60%:40%, with the higher percentage being materials-related.

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