Economic uncertainty and rising costs see SME builder confidence collapse
New findings from the Home Builders Federation’s (HBF) second quarterly SME Developer Sentiment Survey, in partnership with Quantum Development Finance (QDF), show a sharp deterioration in confidence among small and medium-sized home builders, with expectations for land purchasing, housing starts and housing market conditions all weakening significantly since the previous survey published earlier this year in March.
The survey tracks changes in the confidence of smaller home builders – those building up to 500 homes – and the barriers preventing them from expanding.
Over nine in 10 of SME home builders said the Iran conflict had made their business outlook for the next 12 months worse than expected, with just 1% disagreeing. Over a quarter of said that concerns arising from the conflict had led their business to reconsider or pause the acquisition of new development sites.
While the Iran conflict has amplified existing pressures, it has also exposed how fragile the operating environment for SME developers already was – with viability, planning and buyer confidence all under strain well before the current uncertainty took hold. The challenge of the conflict is especially acute for SME developers, as they have a limited ability to continue absorbing rising costs, planning delays and weaker buyer demand.
The impact on confidence is reflected across all key housing delivery indicators, with nearly half (49%) of SME developers expecting to reduce land purchasing activity over the next three months, compared with just 18% who expect to increase it, representing a significant decline from the first quarter.
Expectations for housing starts have also weakened considerably, as almost all respondents (94%) said market conditions are causing caution when considering new site starts, up from 70% in the previous survey. Nearly half (48%) said conditions are causing significant caution or delaying starts altogether, while a further 45% reported moderate caution, compared with 21% who expect activity to increase.
The outlook for the housing market in general has deteriorated sharply, with three-quarters of SME developers now holding a negative view of market conditions over the next three months, while just 4% report a positive outlook. This compares with 37% reporting a negative outlook and 28% a positive outlook in the previous survey.
Housing market conditions were identified as the most significant constraint, cited by 69% of respondents, followed by low buyer confidence (63%) and mortgage interest rates (41%). Affordability pressures also remain widespread, with more than a third (34%) identifying affordability as a key barrier to housing delivery.
The findings also reveal a shift in the barriers most constraining housing delivery. For the first time, development viability has overtaken planning delays as the most significant supply-side challenge facing SME home builders, A report published by HBF last month showed that the huge increases in taxes and policy costs levied on new homes have increased the cost to build a new home by on average £76k,
Three-quarters of respondents identified development viability as one of the top three barriers limiting delivery, up from 57% in the first quarter. Planning delays remain a major obstacle, cited by 74% of respondents, while concerns over the cost and availability of materials increased sharply, rising from 10% to 30%.
The survey shows overwhelming support among SME home builders for measures to improve development viability and stimulate demand. Almost all respondents (99%) said government action to improve viability would make them more likely to bring forward new sites, including 83% who said it would make them very likely to do so, while 87% said additional support for first-time buyers would increase their likelihood of starting new sites. It is the first time in 60 years that there is no government support in place for buyers.
HBF is urging government, and a new prime minister, to tackle weak demand and worsening scheme viability, the two most significant barriers to housing delivery. Supporting first-time buyers through measures such as a new equity loan scheme is essential to stimulate demand and give builders the confidence to invest. At the same time, government must address the growing viability pressures created by the cumulative burden of regulatory costs, taxes and developer contributions, which are increasingly preventing schemes from coming forward.
To support delivery, HBF is also calling for a simpler and less costly planning system, increased availability of small sites through Local Plans, reforms to Section 106, exemptions for SMEs from the Building Safety Levy, and action to reduce delays and uncertainty around utilities and infrastructure connections. Together, these measures would help unlock investment, improve viability and accelerate housing delivery.
Neil Jefferson, chief executive at the Home Builders Federation, says: “The findings of the latest SME sentiment survey paint a very concerning picture. SME home builders are operating in an increasingly challenging market, whilst higher taxes and policy costs are making many sites unviable, reducing confidence and construction activity.
“This decline in confidence has significant implications for housing delivery and the sector’s ability to meet national housing targets. Addressing both longstanding barriers, such as planning delays, and emerging challenges, including rising costs driven by global instability and proposed tax changes, will be critical if SMEs are to invest confidently and help increase housing supply.
“While we welcome government reforms to the planning system, if we are to increase housing supply broader interventions are urgently required. With a change in Prime Ministerial leadership on the horizon, there is a clear opportunity to reverse these concerning trends and unlock the full potential of smaller builders to help deliver the homes the country needs.”
Richard Hemmings, managing director, Quantum Development Finance: “While it is not surprising that sentiment has weakened, the sheer scale of the decline revealed in this survey is truly alarming.
There is no doubt the housing market is in the doldrums. However, the apparent ceasefire in the Gulf offers some grounds for cautious optimism – if it holds, it should help moderate inflationary pressures, ease fears over rising interest rates, and encourage greater numbers of buyers back to the market.
What remains abundantly clear is that more needs to be done to support demand, alongside action on planning and, crucially, viability, if SME developers are to be encouraged to push forward with new schemes. If improved demand-side sentiment coincides with the intervention needed to unlock supply, SMEs may finally get the chance to deliver the quality housing this country so desperately needs.”