Could cladding issues weigh on the housing market? - Capital Economics
UK Housing

Could cladding issues weigh on the housing market?

UK Housing Market Update
Written by Andrew Wishart

Cladding issues are a downside risk to our already weak housing transactions forecasts for next year. If there continues to be severe testing delays and no change in policy, transactions could end up significantly weaker than our expectations in 2021.

  • Cladding issues are a downside risk to our already weak housing transactions forecasts for next year. If there continues to be severe testing delays and no change in policy, transactions could end up significantly weaker than our expectations in 2021.
  • Since the end of 2019, the valuation of high-rise properties has been subject to a new process agreed between the RICS and mortgage lenders. Originally this was meant to only cover homes above 18m, but earlier this year, revised government advice expanded the requirements to some lower rise buildings too.
  • For those who need their cladding fixed, the costs can be high. But even where properties do not have cladding, or where problems are minor, the ability to buy or sell a home may be affected too. Mortgage lenders now often require EWS1 fire safety certificates for valuations on flats, but reports point to long delays in carrying these out. And the scope of homes covered by the testing requirement is large – buildings as low as 4 or 6 stories may be vulnerable. So there could be a wider impact on housing transactions.
  • To gauge the scale of this potential problem, we need to consider how many private homes may be hit. Data from the English Housing Survey show that there were 20.1 million privately owned or rented homes in 2018, of which 3.1m were flats. (See Chart 1.) Our estimates suggest that up to 900,000 private homes – or just under one third of all private flats – could require an EWS1 survey before being eligible for a mortgage. This is the number of private flats in blocks greater than three storeys.
  • Affected flats may directly see delays in transactions, and disrupted property chains could delay other sales. But putting a hard number on the potential effect is difficult. For one, what happens will depend on policy – if the government or lenders were to relax the rules, then any disruption could quickly disappear. Furthermore, a lack of reliable information on the duration and extent of testing delays makes it hard to know how many homes are really being affected.
  • In fact, the recent surge in housing demand means the impact, for now, may be small. (See Chart 2.) Our view is that mortgage lending is currently constrained by banks’ risk appetite and administrative capacity. (See our Update.) So lenders have less incentive to unblock stuck parts of the market than usual.
  • Rather, problems may become more important next year, as any cladding delays cool housing demand on top of the weakness arising from a fragile economy and the end of the stamp duty cut. As a result, our base case is that a policy fix will come sooner rather than later. After all, while the cost of inaction now may be reasonably low, with as many as 4.5% of private properties affected by delays, lenders’ incentive to fix any problems will rise sharply once wider housing demand starts to weaken next year.
  • As a result, our forecast is still for transactions to be 10% lower than its pre-virus level in 2021. But the downside risks are significant. If policy remains unchanged and testing capacity stays constrained, delayed and cancelled housing sales might cut transactions even further next year.

Chart 1: Number of Private Flats (000’s)

Chart 2: Newly Agreed Sales (% Balance.)

Sources: MHCLG, Capital Economics

Source: RICS


Andrew Wishart, Property Economist, +44 (0)7427 682 411, andrew.wishart@capitaleconomics.com

Sam Hall, Assistant Property Economist, sam.hall@capitaleconomics.com