Completions of new homes have made a full recovery from their collapse in Q2 2020, but builders appear more hesitant to start new projects. Given we expect the housing market to endure a rough patch later this year, that is unlikely to change anytime soon.
- Completions of new homes have made a full recovery from their collapse in Q2 2020, but builders appear more hesitant to start new projects. Given we expect the housing market to endure a rough patch later this year, that is unlikely to change anytime soon.
- Completions of new dwellings have made a quick and full recovery from the April 2020 lockdown. New building control figures released by the MHCLG show that there were 45,000 completions in Q3 2020, in line with pre-virus levels. (See Chart 1.) More timely Energy Performance Certificate data indicate that completions remained at pre-virus levels in Q4 too.
- That probably reflects housebuilders trying to finish as many units as possible during the stamp duty holiday and while former owner occupiers can still benefit from the Help to Buy scheme.
- Unlike completions, new dwelling starts were still 6% below pre virus levels in Q3 last year. Given operational difficulties due to COVID-19 and the uncertain outlook for the housing market, it is unsurprising to see that builders were exercising caution.
- Admittedly, the ongoing recovery in construction might be an indication that new starts have since recovered further as housebuilders react to the recent surge in house prices and transactions. Housing construction output was just 3% below pre-virus levels in November, compared to 14% below in Q3
- Moreover, despite the change in the Help to Buy Equity Loan scheme, which will now be limited to first time buyers, it should continue to provide a substantial boost to demand for new homes. Only 17% of buyers that used the scheme in 2019 were former owner occupiers. Second, the government has set out to reform the planning system to boost the supply of land available for building on.
- However, if we are right to think that transactions will slump after the stamp duty cut ends in March and that house prices will fall back by 5%, new starts are likely to suffer a renewed dip. (See Chart 2.) In our view, the main driver of housing construction is the “absorption rate”. That is how quickly housebuilders can sell homes at prevailing market prices. (See here.) The slump in buyer demand and transactions we expect after the stamp duty holiday is likely to mean that housebuilders remain conservative.
- Indeed, the HBF survey of housebuilders suggests that they are already scaling back their pipeline of new projects. Despite reporting that work in progress was only just adequate to meet demand in Q3, a net balance of 31% of construction firms reported that they were reducing the number of planned starts.
- The upshot is that new home supply is likely to remain relatively low over the next two years. Due the collapse in construction during the first lockdown, the number of new starts probably fell from 152,000 in 2019 to about 122,000 last year. We think that it will only rise marginally, to 130,000, this year and will stay at that level in 2022.
Chart 1: New Dwelling Starts & Completions (000s per Quarter)
Chart 2: Transactions & New Dwelling Starts (000s per Quarter)
Sources: Refinitiv, MHCLG, Capital Economics
Andrew Wishart, Property Economist, +44 (0)7427 682 411, firstname.lastname@example.org