Addition to Dwelling Stock- Homebuilding Starts and Completions
The last blog reviewed the current supply side conditions in terms of inventory levels. The focus of the discussion was on sales-to-inventory as an indicator of supply-side pressures. Our conclusions were that on average supply side pressures have slackened. There are more properties on the market, while buyers had taken a wait and see approach. Consequently, prices have declined. This blog will look at residential completions and building starts for the UK and overa ll impact on additions to the current stock of housing.
According to (Department of Communities & Local Govt (DCLG) the number of households are projected to grow to 27.5mil by 2033 or 232,000 per year. Since 1961 to 2008, the number of households has increased by 56%, while dwellings have risen by 62% over the same period. Chart.1 shows that housebuilding has outpaced household formation. Growth in households (population) influences the long-term demand for housing and overall house price trend.
Chart.1 Dwelling Stocks Exceeds Households
The addition to the current housing stock includes completions and starts. According to Barker (2004), new supply accounts for 1% of the housing stock. Additions to dwelling stock supply are unlikely to have a considerable impact on house prices. Chart.2 highlights the movement in house building completions and starts since 1990. In the current cycle, completions peaked in Q1 2007 while house prices peaked in Q3 2007. The credit crunch resulted in precipitous decline in starts, which peaked in Q3 2006. Since 2001, net additions to housing stock have been modest reports the Department of Communities and Land (DCLG). Net additions include completions less losses of stock due to conversion or demolitions. Since Q3 2009 starts have begun to improve, as house prices have bounced back. The Barker report (2004) identifies lack of supply of developable land as a key factor in limiting housebuilding rates and responsiveness.
Chart.2 Housebuilding Down to New Lows
However, there are cases where the supply of land may be limited by the high costs of development, possibly associated with contamination, other environmental concerns, or lack of infrastructure. Furthermore, actions of developers, such as land banking, and controlling the rate of of development rates reduces the flow of stock.
Chart.3 Supply Responds to House Prices
Chart.3 reports the ebbs and flow of the annual rate change in house prices and house building completions. House building growth lags or is coincident relative to house price inflation. In short rising house prices makes construction of new dwellings profitable, inducing builders to develop new dwellings.. The effect on house prices of increasing rates of housebuilding depends upon how sensitive house prices are to changes in the size of the housing stock (i.e. the price elasticity with respect to the stock). However, the nature of housebuilding means there is a time lag between house price change and new supply. This is due to the build time and planning regulations. Restrictive/tight planning policy may result in supply of housing being price inelasticity. Barker (2004) attributes the difference in the UK price trend of 2.4% to the EU house price trend of 1.1%, to the UK’s tight planning policy. The calculations of the price trends for the EU area and UK were for the last 30 years until 2004.
The coalition government, in its endeavors to implement structural reforms, is moving from a centrally planned planning regime to a more decentralized structure. The proposed localism bill will abolish the Labour Party’s regional bodies by devolving more powers to local authorities. It purported that a decentralized planning system will result in a more efficient allocation of land.
The current government believes this will lead to higher rates of housebuilding. Alternatively, the new policy may result in a more fractured housing market. Areas where MIMBYism is entrenched (i.e. communities with a history of opposition to planning projects), may have lower rates of housebuilding. The coalition government hopes to persuade NIMBYs with significant financial incentives, in the form of both the New Homes Bonus and the Business Increase Bonus. It should be interesting to see whether the financial incentives will outweigh resistance to new development.
Additions to dwelling stocks are a function of the decisions of homebuilders (private or public enterprises). Homebuilders will evaluate the decision to interest rates or cost of capital and the future direction of house prices. It is responsiveness of housebuilding to price signals that helps determine the rate of housebuilding. In addition, planning structure is a factor that influences supply elasticity. Rigid and strict planning regimes can result in lower housebuilding rate. Consequently, housing shortages may occur and elevated house prices. The coalition government has introduced a new planning legislaton, which empowers local authorities and the communities to lead development in their areas. The level of development of housbuilding and infrastructure may depend on the community’s attitude towards development.