Among the biggest losers in the stock market turmoil that has followed last week’s Brexit vote have been Britain’s housebuilders. Persimmon fell by a staggering 40 per cent on Friday morning, and closed the day 27.6 per cent down.
The scale of the selling reflects the building industry’s acute sensitivity to market sentiment, and the fragility of its business model, which is dependent on already-high demand being maintained indefinitely.
— Matthew Gardiner (@matwg) June 27, 2016
With a period of house price stagnation and even decline now highly likely, builders are in trouble. Having purchased several years’ supply of land in a rising market, they are now going to struggle to turn as big a profit on new home sales as buyers revise down what they are prepared to pay – or hold off buying altogether.
That is going to happen almost immediately – there is already anecdotal evidence of buyers reducing their offer price or pulling out of sales – in response to the sudden sense of economic uncertainty. But it will be very much intensified if there is an economic downturn, wages are squeezed and, eventually, interest rates go up to combat inflation.
That house prices may fall is not in itself a bad thing: many people, including myself, have been willing this for quite some time. House prices have been racing away from wages for much too long now, benefiting existing homeowners at the expense of future generations, and a correction is well overdue.
The difficulty is what comes next, which by now we know well: housebuilding output will fall as developers turn off the taps. This has been the construction cycle that has repeated over and over since the 1970s. Builders only build on any scale in a rising market. As soon as demand falls, and prices drop, build-out rates plummet while developers wait for confidence (meaning: prices) to return. The long-run trajectory of house prices is only ever upwards.
It is this cycle that has led us into the housing disaster that we find ourselves in 2016, with a shortage of homes, high housing costs, declining levels of home ownership and the rise of the rentier landlord.
Now is the moment, if ever there was one, for this cycle to be broken, finally and completely. For the government to introduce a package of counter-cyclical support for housebuilding that floods the market and holds prices down in perpetuity. Without it, the government’s ambition of building a million new homes by 2020 – which was always improbable and in any case insufficient – is now dead in the water.
The new policy should consist of a public sector building programme which, as a minimum, guarantees the building of 100,000 homes a year over and above the output of private builders. It will probably need to involve local authorities taking over the sites that developers have in the pipeline but may now become economically unviable.
The big housebuilders will have to reset their expectations of future price growth and probably take a hit on the landbanks they have already built. This will be hard on them, but no investment is risk free and the public interest must come first.
The public sector homes could be either made available for social housing, and the building costs recouped over the coming decades in rent (Capital Economics has modelled such a scenario). A cheaper, and therefore more politically palatable approach, could be to sell them into owner-occupation, with most of the costs recouped immediately and reinvested year after year; I calculated in a recent report that this could be achieved with a single upfront investment of £15-20bn. Realistically, we need a combination of social rent and owner-occupied housing – and so some hybrid of these two scenarios would probably be most appropriate.
This approach would not only begin to make inroads into the country’s housing shortage; it would also provide what should be a welcome fiscal stimulus as the economy enters a rocky period. There are expectations of a further cut in interest rates in the short term and possibly a new round of quantitative easing. But the levers of monetary policy have been worked almost to their limits already and the cost of borrowing is at a record low – 10-year gilts hitting less than 1 per cent this morning. The Treasury should take advantage while it can.
The government has a lot to contemplate right now. A housebuilding programme should not be seen as peripheral to the challenge of the coming months, but central to it.
Daniel Bentley is editorial director at the think tank Civitas. He tweets @danielbentley.