Housing demand is in danger of hitting a brick wall

After years of falling housebuilding, the number of new homes coming on to the market is finally picking up. But as property supply gradually starts to improve, it seems another problem could be brewing.

Property experts are warning that skewed supply, and too many of the wrong types of properties, could result in certain pockets of the housing market becoming saturated, while other areas will remain severely under-supplied. This could result in significant differences in price rises and falls regionally, but also between neighbouring markets.

Jim Ward, director of research at Savills, says: “We still have the biggest discrepancy between property supply and demand for the last 50 years. On top of this, the supply starting to come through is skewed. Some parts of the market are moving from having a scarcity of housing to excess supply.”

The government has been under enormous pressure to increase the number of new homes being built since the Barker Report exposed the extent of the shortage.

During the 1960s and 1970s there was a rapid period of housebuilding, but then the rate fell away to levels substantially below annual requirements. It has only recently started to recover. Figures from the Department of Communities and Local Government (DCLG), show that more than 30,000 more homes will become available this year – through new builds and conversions – than there were 10 years ago.

The government has committed to building at a rate of 200,000 new homes a year by 2016. It is pressing local authorities to free up more land for building. It is also making the planning system more flexible to meet local demand and increasing affordable housing for ownership and rent.

But a conflict is emerging between the type of property being built and that which is needed. Experts say developers are typically building high-density accommodation on brownfield sites as planning permission on virgin greenfield sites has become increasingly rare. The result is a large number of new flats, and very few new family houses. Richard Donnell, director of research at Hometrack, the housing information company, says that while flats currently account for around 20 per cent of the property market, in the last year 45 per cent of new homes built have been flats. Only around 10 per cent of these were one-bedroom; most had two or three bedrooms, making them less affordable. Also, many flats have been snapped up by buy-to-let investors who may not even rent out the property but just want to benefit from the capital growth.

Roger Humber, spokesman for the House Builders Association, part of the National Federation of Builders, says the government’s drive to build more affordable housing has brought its own problems.

“The government is trying to tackle the supply issue by building more affordable housing but this is not the answer. There is a need for a greater range of housing including family houses at affordable prices.”

According to Hometrack, the price of five-bedroom houses rose 11.5 per cent last year, compared with new-build flats, which rose 0.5 per cent. Donnell says he has heard of developers building large properties, which could accommodate families, but then only putting in two bedrooms in an attempt to attract young couples wanting spacious homes.

Supply is also skewed towards certain locations. The government has identified four principal growth areas – the Thames Gateway; Milton Keynes and the South Midlands; Ashford; and an area spanning London, Stansted, Cambridge and Peterborough. Last year it confirmed new growth points - places with high housing demand - from cities such as Derby, Leicester, Nottingham, Birmingham and Bristol to towns such as Swindon, Reading, Ipswich and Maidstone. But Ward says: “We are not necessarily seeing the right supply in the right place to meet demand.”

In the East Midlands, for example, future supply is expected to outpace growth of households, according to Savills. In London, building plans are concentrated in specific areas, which could bring price pressure.

Savills says the lack of land supply in the highest value central markets – such as Kensington and Chelsea – means that property supply there will only increase by 15 per cent over the next five years. Meanwhile building in east London areas such as Woolwich, Stratford, Hackney, Bow and the Thames Gateway, is set to increase 86 per cent.

Savills expects that in five years’ time the supply of new properties in east London will hit almost three times the level of property completions seen over the last five years. This is likely to increasingly polarise price growth, with high-supply areas lagging behind those areas with greater constraints.

Ward says: “New flats in areas with as yet little sense of place but greatest competition may well show little or no price growth, which over a number of years would be a significant repricing relative to other markets, in particular, family housing.”

In other cities, such as Manchester, Leeds and Liverpool, a similar problem is emerging as housebuilding has been geared towards new city centre flats. Ward says: “Supply has moved from the suburbs into the centres and created price pressures there.”

Donnell says the supply of new homes as a proportion of existing homes was 0.9 per cent in the East Midlands last year and 0.6 per cent in London. Comparatively, in central Manchester and Leeds, new supply reached 4 per cent of existing properties.

The extent of development in these urban areas has exacerbated affordability problems in peripheral areas. “Development in desirable parts of Stratford and Cheshire, for example, has effectively been closed down,” says Humber. “Prices there have become as expensive as parts of the south-east.”

The other crucial issue is that, even with the recent, faster building rates, property commentators believe it could be many years before equilibrium is reached between property supply and demand.

Humber says: “Faster housebuilding now will only undo 20 years of undersupply.”

Also, the gap between the rate of household formation and the rate of building is still widening despite the pick-up in building. Latest figures from the DCLG show that the number of households is growing by 223,300 per year in England – way ahead of the government’s ambitious growth targets.

Yvette Cooper, housing minister, says: “New housing is now at its highest rate for about 20 years but demand for housing is rising much faster. Unfortunately there is still strong opposition to more housing in many areas but the fact is that if we don’t build more homes it would be deeply unfair to the next generation of first-time buyers.”

Household formation is growing fastest in London, the south-east, south-west and east, says the DCLG, but Yorkshire & Humber and the north-west are not far behind. “The general perception is that the shortage is worse in the south-east. The reality is that it is severe everywhere,” says Humber.

David Stubbs, senior economist at the Royal Institution of Chartered Surveyors, says this household growth is just one factor underpinning the rising demand for property. “Demand is the side effect of economic success,” he says. “We have had a stable economy and low interest rates, which has triggered growth in buy-to-let and more people who can afford second homes.”

He believes the government has realised the only way out is a larger, more sustained increase in housebuilding. “People are accepting what needs to be done. They are saying there should be more building on the green belt, for example,” Stubbs says.

If things do not change, the consequences could be dramatic. The National Housing and Planning Advice Unit, which launched last week to help make homes more affordable, predicts that unless more houses are built, prices by 2026 could be 10 times the average buyer’s salary, up from current multiples of around seven. Stephen Nickell, chairman, says: “Existing building projections indicate that affordability will continue to worsen. While we could see a short-term fluctuation in prices, in the longer term all areas of the housing market are going to get yet more expensive unless more homes are built.”