After a dismal year for UK housebuilding in 2024, Chris Gardner, CEO of residential finance specialist Atelier, looks at the key factors that will shape the market in the year ahead.
As we near the end of 2024, it is fair to say that the housing market hasn’t quite delivered the recovery we were hoping for at the beginning of 2024. We are, however, starting to see the dust settle and the market return to more favourable conditions.
2024 has seen low numbers of new starts and a lacklustre sales performance for new, finished properties. The latest ONS data suggests that Q2 saw a 60.3% reduction in new starts for all dwellings in 2024 compared to Q2 2023.
These figures, against a mounting requirement for new homes and a Labour Government target of 1.5 million homes over the next parliament (5 years), has seen a degree of uncertainty pervade the market.
Market sentiment – the key to success
Despite this backdrop, a new year gives us licence to be optimistic about the year ahead. Interest rates are on a downward trajectory, albeit shallower than anticipated due to the measures announced in the Autumn Budget (currently at 4.75%, meaning interest charges on loans are lowering), property values have held and the new Labour government has laid down strong housebuilding ambitions.
Generally, the market has priced in where they stand on spending and taxation, however there are fears that the government’s policy is inflationary and could slow down rate cuts, and impact the cost of borrowing, in particular mortgages.
The economic backdrop
We can expect to see continued reductions in interest rates – the BoE Governor has stated he expects four cuts next year. This should translate into more activity in the housing market – new loans, new starts, and an increase in transaction volumes. In tandem with this, we anticipate a return to stability in the long-term lending market. A recovery of this market is essential when building long term, strong investments such as care homes and purpose-built student accommodation, assets that are foundational to the life cycle and ecosystem of our housing stock.
We are beginning to see equity return to the market and we should see more sites break ground in 2025. Supporting this is a growing appetite at the top of the capital stack from senior mezzanine, equity and debt providers likely to bridge the equity gap and boost financing activity.
What should borrowers expect?
There will be increased competition and good terms available in the coming year and we should see sites being traded more frequently. However, there is still a fair amount of bad news in people’s loan portfolios, and there have been extraordinary levels of forbearance around the market.
We’re likely to see 2025 as the year of the crystallisation of these losses and so some uncertainty and caution will endure. If you are a borrower in difficulty, it is likely to get a whole lot worse in 2025, as lenders look to bring problems to a conclusion.
The UK planning system persists as one of the biggest obstacles to getting new projects off the ground. This year, Atelier brought together industry stakeholders to launch a manifesto of eight urgent calls to reform our planning system and accelerate the delivery of housing. These included instilling greater transparency, accountability and commerciality in planning departments and abolishing or reforming bureaucratic mechanisms, such as S106, CIL regime and elements of biodiversity and nutrient neutrality requirements, that drive up costs and delays.
With the Labour government’s proposals to introduce the Planning and Infrastructure Bill and evident housebuilding ambition, hopefully we will begin to see the tide turn on planning.
A new regulatory landscape
2025 will also usher in a number of new regulations, however, the one of most significance to housing developers, that we think is flying under the radar is the Future Homes Standard (FHS). This is the biggest shake up in building regulations in a generation. The FHS is a new set of rules to change building standards and reduce carbon emissions of new homes built in England, in line with new sustainability goals.
At Atelier, we launched our own set of guidance for residential developers navigating these changes, which are predicted to add an additional cost of between £15,000-18,000 per new residential unit to ensure compliance. It is essential that developers begin to factor in the FHS and its associated costs into their planning for the year ahead. It feels like the whole supply chain are behind the curve on this one.
Looking ahead
As the market begins to shift, we hope to see a reduction in pessimism about the housing market, noting that we are unlikely to see a return of optimism just yet. What the market needs is a return to velocity and momentum, where the whole supply chain speeds up, deals get done and product gets sold.
It makes me think of that old saying – if you want something done, ask a busy person. Get this industry on its feet, working towards 1.5 million new homes and it will be full of busy people getting things done.
