Welcome to the November 2018 edition of Property Trends – the monthly bulletin that focusses on property trends for residential property investors, landlords and tenants.
This month we focus on:
- Micro flats – the cure for our housing shortage or a gimmick?
- Developers are starting fewer homes in London – what does that mean?
- Help to Buy – all good or a meal-ticket for developers?
- The revolution is coming – the modular house building revolution.
Don’t forget to let us know what you think of the trends covered each month. Are we identifying the right trends and giving them sufficient weight? Are there important trends we are not covering and should cover?
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ARE MICRO FLATS THE FUTURE?
Micro flats are increasingly being talked about as one of the multiple solutions needed to address housing shortages up and down the country.
With the UK being one of the most densely populated countries in Europe, UK homes are among the smallest in Europe.
Increasingly, developers are looking to provide even smaller housing units – micro flats – as a way to boost housing production and help the government and local authorities meet their ambitious targets for new housing over the coming years.
London Mayor Sadiq Khan seems onboard with the idea of micro flats. City Hall is providing £25 million to niche developer Pocket Living which has the goal of 1,000 affordable homes by 2021.
Property regeneration company U+i wants to persuade London councils to authorise building of 19sq m “compact living flats” with communal space on brown field sites. The GLA’s recommended minimum size for small units is 37sq m.
Inspired Homes has micro flats on the market in various parts of the south including Clapham, Croydon, Chelmsford, Crawley and Sutton. At its development in Luton one bed flats cost from £155,000.
Pocket Living has micro flats in Deptford and Ealing. The Ealing units are priced from £297,000.
The benefits of micro flats are self-evident. Lower building costs for smaller units should hold down prices and make purchase costs more affordable.
Smaller units should mean more units and a big dent in government and local authority targets for new homes.
Micro units should be easier and cheaper for their owners to run in terms of overheads and bills
One obvious concern is that smaller units, with their lack of space, may not be popular with the public – although where communal facilities are provided that should improve the position, and communal living may be seen as an upgrade on traditional domestic lifestyles for certain age or economic groups.
Perhaps the biggest concern is that micro units will be micro in size but not micro in price. The micro units in Ealing available from Inspired Homes and priced at £297,000 do not seem especially affordable, even for London.
The fundamental objective of developers is to make a profit and there is every chance that developers will seek to boost profits by cutting on size but cutting less on price.
A bit like small bottles of water in a convenience store, we may end up with the inexplicable position where a small bottle is pretty much the same price as a large bottle.
Where there are communal facilities, there is the danger that the cost of such “services” will add to running costs, undermining the fundamental goal of improving affordability.
However, micro flats are very much in their infancy. Time will tell whether there is an appetite for them from would be homeowners.
If they are well-designed, fairly priced and genuinely affordable, there is every reason to expect demand to grow and supply to increase.
They should not be condemned out of hand and automatically branded as some form of inferior, temporary or second class accommodation.
If smaller units can help to solve the housing problems of local authorities, they should give developers the chance to provide innovative, high quality micro units and ease up on their signatory control freakery.
As to the appropriate minimum size, the market will ultimately decide. If for instance the 37sq m units being proposed by U+i are too small for buyers, they will vote with their feet and the market will provide bigger units.
Micro flats are definitely part of the solution to the much talked about housing deficit; the sooner backward thinking councils realise that the better.
Rebel Property Coach
FEWER LONDON HOUSE STARTS
In the quarter ending September 2018, the number of private house starts in the capital fell by around 50% – 3,655 compared to 7,153 in the previous quarter.
The steep slowdown was revealed by researchers Molior and the starts total was the lowest since 2012.
Private house starts account for about three-quarters of the total number of house starts with housing associations and councils accounting for the rest.
It is expected that next year City Hall will set a house start target of 65,000 units per year for the next 10 years. However, according to Molior the private sector started just 23,507 units in the 4 quarters to September 2018.
Molior attributed the low number of starts to uncertainty brought about by the EU Referendum and the subsequent General Election.
The fact of lower house starts points to falling confidence among private developers. The word on the street is that the margins of developers have been eaten away in recent years as London prices have at best flat-lined.
In many cases it is simply not sufficiently profitable for developers to build new homes.
Higher stamp duty, stricter borrowing requirements and a harsher tax regime for BTL landlords have all reduced demand. Foreign buyers have exited the London market in large numbers.
In the short term, the slowdown signals greater falls in London house prices, rippling out to the South East and beyond.
With their ears close to the ground, developers benefit from early notice of a fall-off in prices and are minimising their risk by building fewer units which they may be forced to discount to unprofitable levels in order to achieve sales.
On the other hand, the low number of starts is a sign of future shortages and lack of supply is expected to stop prices from going too far into negative territory.
In the longer term, two or three years from now, the shortage could be fuel for the next property upturn leading to a boom before an inevitable bust, as last occurred in 2008.
For those that subscribe to the highly persuasive 18 year property cycle, we are in London very much at the mid-cycle wobble point – the stage before the period of robust growth leading to a crash, which seems likely to be in 2025 to 2027.
London always leads the way and the fact that prices in most parts of the country are in growth mode needs to be viewed with extreme caution.
Those areas currently enjoying robust growth will face their mid cycle wobble just like London at some point.
The difficulty for property watchers is to work out when the mid-cycle wobble is over or is about to end. One thing however seems clear at the present time – the wobble which is currently affecting London is not yet in full swing.
Close scrutiny of various stats, the pronouncements of numerous experts and persuasive historical lessons suggest that London prices will continue their fall for the next year or two – but at a modest level – probably no more than 5% in total.
Given the ripple effect, investors buying in parts of the UK where house prices are still rising need to proceed with full due diligence.
In some regions of the country, prices may have already reached their peak and the mid-cycle wobble which was first seen in London may be on its way north.
Buyers in places like Birmingham, Manchester and Liverpool…beware!
The steep fall in new homes being started in London may well be an early warning sign that the mid cycle wobble is on its way northwards, at some speed.
Rebel Property Coach
SHOULD WE WORRY ABOUT HELP TO BUY?
What’s not to like about the Help to Buy equity loan scheme?
Help to Buy is a government initiative which applies to certain new homes up to £600,000 in value.
With a 5% deposit, home buyers can get a government loan of up to 20% of the purchase price – 40% in the case of buyers in the London area – borrowing the balance from a regular mortgage lender.
The loans are cost-free for the first 5 years and the government gains in the event of any increase in the property’s value in proportion to its loan.
On the face of it, Help to Buy is a great success. In London alone over 12,000 buyers have reportedly been helped to buy their own home.
It has been championed as a practical way for hard pressed first time buyers to push back against growing unaffordability and climb the property ladder.
The scheme was originally due to end in 2016 but was extended to 2021. In his recent budget Chancellor Hammond announced the launch of a new scheme to run for 2 years from March 2021.
Developers of course love the scheme and it has undoubtedly maintained demand for their units and helped to sustain their healthy profits.
Buyers using the scheme to become homeowners are unlikely to say a word against it.
Go online and there is no shortage of cheerleaders extolling the virtues of Help to Buy – including lenders, mortgage brokers, estate agents and property journalists. Yes, very much the usual suspects.
The scheme does have an important part to play in converting hard-pressed tenants into home owners.
However is the scheme all it is cracked up to be?. Far from being an apparently unqualified success, could it in fact be an expensive and dangerous timebomb?
It would be churlish to deny the real, practical achievements of Help to Buy.
Figures released by the Ministry of Housing, Communities and Local Government, covering the period from the start of the scheme in April 2013 to December 2017 showed that 158,883 properties were bought with the aid of Help to Buy, costing the tax payer £8.27 billion.
About 80% of purchases were made by first time buyers. The average price of a property purchased under the scheme was £247,230 with the average Help to Buy loan being £52,026.
However anecdotal evidence suggests that new build properties available through Help to Buy may be more costly than equivalent property not available through Help to Buy.
If that is so, Help to Buy purchasers are likely to be hit by bigger falls and greater losses when the next property crash inevitably arrives. It is not hard to imagine tens of thousands of buyers feeling that they have been misled or conned.
The obvious flaw with Help to Buy is that by applying to new homes with their chunky inbuilt developer’s profit, they are fuelling the purchase of the very properties which traditionally fall fastest and further when the housing market goes into reverse.
Certainly Help to Buy has fuelled or propped up house sales. Over 158,000 buyers have bought with a Help to Buy loan since April 2013 and it is safe to conclude that the vast majority of them would not have been able to buy without assistance.
Buyers have certainly benefited – but perhaps the biggest gainers have been developers.
Generally they have enjoyed healthy profits since the start of the scheme and it is only recently that some of them have started to feel the chill winds of a flat-lining new homes sector (as evidenced by the profit warning issued by developer Crest Nicholson last month).
The biggest criticism is that Help to Buy has not sufficiently helped the “right sort of buyers” – the buyers least able to get on the housing ladder and for whom the scheme was presumably intended.
According to the government’s figures mentioned earlier, the average purchase price under the scheme is £247,230 with an average equity loan of £52,026.
As at August 2018 the average price of a UK house was £232,797 (Land Registry)
By way of illustration, a person buying an average priced property at £232,797 with a deposit of 5% (£11,639.85) and a 20% outside London loan (£46,559.40) would need a chunky mortgage of £174,597.75.
With the average salary being £27,200 (financial year ending 2017: Office for National Statistics) and lenders not usually lending more than 4 times salary, a buyer on an average salary with a 5% deposit is not going to get the size of mortgage they would need to buy.
In fact a person on £27,200 obtaining a mortgage of £108,800 (£27,200 x 4) is not going to afford anything much above £145,000 (even without taking purchase costs into account) if they are only entitled to a 20% equity loan and can manage only a 5% deposit.
Therefore an average earner cannot afford properties priced anywhere near the national average of £232,797 (August 2018).
Of course the position would be better if such a person can find a co-buyer to purchase with.
The scheme is clearly more accessible to higher earners – who are well placed to get on the housing ladder without the helping hand of Help to Buy.
By way of illustration, a buyer with a salary of £60,000 is able to borrow £240,000 without Help to Buy (four times salary). That is enough for them to buy a property in excess of the national average price of £232,797 (August 2018).
If they claim the 20% equity loan and put down a 5% deposit, they will be able to buy at £320,000 – making a larger capital gain on any house price growth.
Higher earners, having potentially high levels of disposable income, are well placed to save for a deposit and critics argue that providing them with cheap loans of up to 40% of the purchase price is fundamentally misguided – simply enabling many of them to buy bigger houses with greater profit potential.
Only the richest buyers (and co-buyers earning above average earnings) are likely to be able to take advantage of the scheme in the most expensive parts of the country – where housing unaffordability is most severe – where there is a problem most in need of fixing.
There is a lot to be worried about Help to Buy.
As the scheme is now set to continue beyond 2021, it is going to cost yet more public money. If there is a crash in property prices the tax payer will take a massive hit
Ultimately the scheme is a device to buck the market and such attempts rarely end well.
Without Help to Buy (and other initiatives) propping up the market, arguably prices would have fallen – especially in London and the South East – and that would have improved affordability, enabling more buyers to climb the housing ladder unaided by the government and tax payers’ money.
The £8.27 billion spent on the scheme could have been leveraged by councils and housing associations to build tens of thousands of affordable homes at prices within reach of people of average and below average earnings.
Is it the role of government to subsidise homeowners to buy what is an asset, and one which historically doubles in value every 10 years?
The government seems to have recognised limitations of the scheme by introducing regional price caps in the scheme to begin in 2021; that should reduce buyers buying more expensive homes at the expense of the tax payer. However the other objections to the scheme will remain.
When the final report as to the impact of Help to Buy is written, don’t be surprised to learn that its greatest achievement was to shift millions of pounds of tax payers money into the coffers of big developers and to hand out cheap loans to higher earners who really didn’t need them to get onto the housing ladder.
Rebel Property Coach
THE REVOLUTION IS COMING!
There is justifiable talk that builders and developers are getting closer to their “Uber moment” – with the threat being modular or factory built homes.
Traditional methods of house building are expected to be 25-30% more expensive when modular methods of production reach optimum levels.
Other big advantages of modular building include speed of availability and consistency of quality. Once built, modular buildings can be installed and ready to occupy within a week or two, or even quicker.
With the UK apparently needing 3 million new homes over the next decade, fast-built modular homes could play a leading role in meeting housing targets.
Modular building methods are a clear and obvious danger to traditional builders and developers. If modular building continues its upward popularity, builders and developers may go the same way as high street taxi firms.
The modular building revolution has made a fairly unspectacular start, but those ignoring it do so at their peril.
Modular house builder Comfortable Living say the average UK detached house costs:
- £1,230 per square meter to build
- £68,394 for building the average 67.8 sq m size
- £126,592 grand total once external works, 15% risk allowance and 10% builder’s fee are added.
Comfortable Living state that they can supply an equivalent home for 20% below that cost.
An increasing number of house providers – especially providers of social housing – are taking a good long look at modular building.
The Birmingham Municipal Housing Trust (BMHT) – owned by Birmingham City Council – is set to trial a modular building initiative based on 50 pre-designed homes, with the scheme going into full operation in 2020 if successful.
The council is looking to contractors to offer “a turnkey approach” with homes “commissioned and ready to occupy”
Wolverhampton council has constructed modular housing units which are in use by its tenants.
Swan Housing Association in Essex has built its own modular factory and is set to deliver some 400 units per year going forward.
In a bid to tackle its chronic homelessness problem fast, Bristol City Council is to trial several innovative solutions including two storey modular homes from Totally Modular, modular apartments from Tempo Housing and “Zed Pods” – which are energy self-sufficient, can be built over and in conjunction with carparks and require no building land or foundations.
It seems inevitable that modular construction will provide ever growing competition for traditional builders and developers in years to come – especially in the social housing sector and in cities with an acute housing shortage and where quick radical initiatives are needed to address the problem.
The speed and affordability of modular house building are advantages no council hard-pressed to provide social housing can ignore.
The recent decision of the government to give councils full power to borrow to build council housing could give a massive boost to modular house builders.
Councils need more housing fast and modular house building could turn out to be the fast relatively cheap solution they need.
Modular production opens up the way for investors without building skills to become housing providers. This could greatly boost the amount of investment in housing.
However the speed at which modular building eats into the market share of traditional builders will depend on the ability of the newcomers to overcome various challenges including:
- Not all modular units currently meet the standards of the National House Building Council
- Time alone will tell whether modular units will stand the test of time and age well
- It is not a given that buyers will prefer modular units given a choice even if they are cheaper
- Time will tell whether modular units will hold their value and prove a good investment
- Lenders will be cautious to lend on modular units until they are proven
- Modular units need to comply with building regulations and new systems and perhaps legislation will be needed to ensure efficient and adequate building regulations compliance.
Like with anything new, teething problems can be expected with modular housing.
However the need to meet housing shortages is such that many interested parties – not to mention the government, councils and housing associations – are likely to throw their weight behind the new kid on the block.
If housing targets can be met, that will operate to keep down house prices making housing more affordable to first time buyers, who have seen only modest wage rises since the credit crunch.
Factory-based mass house building also has the virtue of creating tens of thousands of jobs and giving a boost to the country’s long declining manufacturing sector.
Expertise gained will in time offer export opportunities to help meet world-wide housing shortages.
Builders displaced from traditional jobs should be able to find work, albeit of a different kind, in the modular homes factories which are springing up across the country.
Modular house building is set to be a game-changer for house building in the UK and across the world. That can only be a good thing with a UN report last month predicting that the world’s population will increase by 2.2 billion by 2050.
Rebel Property Coach
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DISCLAIMER: This bulletin, which is provided for information purposes only, is fully intended to be accurate but no representation as to its accuracy is intended. It does not provide legal or any other advice to be relied upon. All liability to all persons acting or not acting on anything in this bulletin is disclaimed. NOTE: Where you require advice to rely on in any matter, it is best practice to consult and retain a suitably qualified expert in the relevant field.