The Home Builders Federation has reported a sharp drop in confidence amongst SME developers, with expectations for land purchasing, housing starts and market conditions all weakening significantly over the year.
The second quarterly SME Developer Sentiment Survey, in partnership with Quantum Development Finance (QDF), which tracks changes in the confidence of smaller housebuilders, found that over nine in 10 SMEs said that the Iran conflict had made their business outlook for the next 12 months worse than expected, with just 1% disagreeing. Over a quarter said that concerns arising from the conflict had led their business to reconsider or pause the acquisition of new development sites.
The HBF says that the impact on confidence is reflected across all key housing delivery indicators, with nearly half (49%) of SME developers expecting to reduce land purchasing activity over the next three months, compared with just 18% who expect to increase it, representing a significant decline from the first quarter.
Expectations for housing starts have also weakened considerably, as 94% of participants said market conditions are causing caution when considering new site starts, up from 70% in the previous survey. Nearly half (48%) said conditions are causing significant caution or delaying starts altogether, while a further 45% reported moderate caution, compared with 21% who expect activity to increase.
The outlook for the housing market in general has deteriorated sharply, with three-quarters of SME developers now holding a negative view of market conditions over the next three months, while just 4% report a positive outlook. This compares with 37% reporting a negative outlook and 28% a positive outlook in the previous survey.
THE HBF’s survey found the housing market conditions were identified as the most significant constraint, cited by 69% of respondents, followed by low buyer confidence (63%) and mortgage interest rates (41%). Affordability pressures also remain widespread, with more than a third (34%) identifying affordability as a key barrier to housing delivery.
The findings also reveal a shift in the barriers most constraining housing delivery. Development viability has now overtaken planning delays as the most significant supply-side challenge facing SMEs. A report published by the HBF last month showed that the sharp increases in taxes and policy costs levied on new homes have increased the cost to build a new home by, on average £76,000.
Three-quarters of respondents identified development viability as one of the top three barriers limiting delivery, up from 57% in Q1. Planning delays remain a major obstacle, cited by 74% of respondents, while concerns over the cost and availability of materials increased sharply, rising from 10% to 30%.
The survey shows overwhelming support among SMEs for measures to improve development viability and stimulate demand. Almost all respondents (99%) said that government action to improve viability would make them more likely to bring forward new sites, including 83% who said it would make them very likely to do so, while 87% said additional support for first-time buyers would increase their likelihood of starting new sites.
The HBF is urging the government to tackle weak demand and worsening scheme viability, the two most significant barriers to housing delivery. The organisation says that supporting first-time buyers through measures such as a new equity loan scheme is essential to stimulate demand and give builders the confidence to invest. At the same time, it says that the government must address the growing viability pressures created by the cumulative burden of regulatory costs, taxes and developer contributions, which are increasingly preventing schemes from coming forward.
To support delivery, the HBF is also calling for a simpler and less costly planning system, increased availability of small sites through Local Plans, reforms to Section 106, exemptions for SMEs from the Building Safety Levy, and action to reduce delays and uncertainty around utilities and infrastructure connections.
Neil Jefferson, chief executive of the HBF, said: “The findings of the latest SME sentiment survey paint a very concerning picture. SME home builders are operating in an increasingly challenging market, whilst higher taxes and policy costs are making many sites unviable, reducing confidence and construction activity.”
“This decline in confidence has significant implications for housing delivery and the sector’s ability to meet national housing targets. Addressing both longstanding barriers, such as planning delays, and emerging challenges, including rising costs driven by global instability and proposed tax changes, will be critical if SMEs are to invest confidently and help increase housing supply.”
“While we welcome the government’s reforms to the planning system, if we are to increase housing supply broader interventions are urgently required. With a change in prime ministerial leadership on the horizon, there is a clear opportunity to reverse these concerning trends and unlock the full potential of smaller builders to help deliver the homes the country needs.”
Richard Hemmings, managing director of Quantum Development Finance, commented: “While it is not surprising that sentiment has weakened, the sheer scale of the decline revealed in this survey is truly alarming.”
There is no doubt the housing market is in the doldrums. However, the apparent ceasefire in the Gulf offers some grounds for cautious optimism – if it holds, it should help moderate inflationary pressures, ease fears over rising interest rates, and encourage greater numbers of buyers back to the market.”
“What remains abundantly clear is that more needs to be done to support demand, alongside action on planning and, crucially, viability, if SME developers are to be encouraged to push forward with new schemes. If improved demand-side sentiment coincides with the intervention needed to unlock supply, SMEs may finally get the chance to deliver the quality housing this country so desperately needs.”
