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25 August 2009
Is the housing market recovery sustainable?
We are beginning to see signs of stabilisation in the housing market, which is encouraging, but can this be sustained? The availability of finance for mortgages and development is key, but it is unknown when the supply of funds will improve.
As the Bank of England has stated earlier this month, “It will take time for banks to repair their balance sheets and they face considerable challenges in replacing those sources of funding that dried up in the financial crisis.”
Housing demand gets ever greater, but additions to housing stock levels are negligible at present which will have significant social and economic consequences in the future. Therefore if we don’t increase housing supply the need and demand will only ever increase for those seeking a home.
Caution required
The modest signs of improvement in terms of housing starts and prices are welcome not least to housebuilders and developers who have endured a very difficult period in the last 18 months or so.
However, I would still remain cautious with respect to the housing market. Housing starts remain 53% lower than their peak three years ago and lending is still 36% below a year ago. Indeed it is still the lowest July lending figure since 2001.
The positive news in the housing market comes from an unprecedented low earlier this year. Furthermore, there are three key risks to recovery in housing. With unemployment continuing its rise towards three million, this could result in a fall in demand for house purchases and an increase in supply from those forced to sell.
Secondly, recovery in the housing market is heavily dependent upon the availability of finance rising further and while it has increased over the course of this year, this has been from unprecedented lows. It will need to continue rising to meet the pent-up demand for housing in this country.
Finally, there are concerns that even when demand does pick up, then the industry has lost much of its capacity to deliver due to this recession.
Affordable housing
The supply of affordable housing has been nearly as hard hit as private housing due to the fact that much of it today is delivered through Section 106 agreements and cross subsidy from homes for sale. The upshot is that housing associations have been as badly affected by the recession as housebuilders have.
The latest thing that will add to the difficulties of the associations is rental levels being reduced by 2% next year which will affect their incomes further. It is predicted that this could lead to a reduction of 4,000 new affordable homes being built each year.
Dealing with the housing crisis
I don’t believe the Government is addressing the issues with anything like the vigour that they should be. What is the plan for the future? The nation has a housing crisis and we need a robust plan to deal with it.
The Government has introduced a number of short-term measures but whilst these have been welcome, many of them have been robbing Peter to pay Paul. The effect so far has been of increasing the uncertainty around such worthwhile programmes as the Decent Homes standard and the removal of funding to assist some new developments to move forward.
The Government also needs to address continuing shortages of permissioned land, and the impact of regulation and policy on development viability, both of which are major barriers to a sustained recovery in house building.
The time taken to receive planning consent is still not nearly as good as it needs to be. If everything else was right in the housing market, which of course we are a long way from at present, we are not going to be able to improve supply if planning remains as it is now.
The supply of new housing ought to recognise the demands for sustainability not least the Code for Sustainable Homes and the requirements to comply with it. This means we need increasing numbers of homes that are suitably efficient to meet the Code. This increases development costs significantly thereby reducing viability at time when increasing supply is a priority for the nation.
So, in summary, recent news in the housing sector has been positive, but there are downside risks and, as a consequence, I believe we need to be cautiously optimistic about a sustained recovery at this point.
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16 February 2009
The impact of recession on regeneration and sustainability - part two
I hope you enjoyed part one on this post below. Let me start part two by saying that financial viability is the biggest problem for private developers at present. Unless projects are financially feasible the private sector will simply not invest. Financial assistance from the public sector is particularly important at this time in supporting the viability of projects. Public funds can be safeguarded and through flexible arrangements financial support could reduce as the recovery occurs and ‘claw-back’ provided as markets improve and financial viability is restored.
The current difficulty is we don’t know how long the recession may last. I expect it’s going to with us for a year or two and when the recovery does occur it is likely to be more gradual than the sharp upturn we have seen after previous recessions. It is therefore important that we find ways and means of keeping the regeneration programme going be it at a slower pace than would have been expected in more buoyant times.
On the issue of sustainability there is a set back, due to the recession, in the amount of research and development that is being undertaken to reduce the environmental impact of buildings, in particular of material and component parts. Indeed, this is an area where more Government funding will be needed in the short-term to maintain research, as the cost of delivering the Government’s Code for Sustainable Homes is not economically viable at present. For the sake of our customers we must also ensure that the innovative materials and technologies that are required to satisfy the Code are reliable in the long-term.
The development industry faces a highly complex challenge of balancing the need for sustainable homes, buildings and places, whilst producing more new homes in response to the Government’s highly ambitious targets, particularly for affordable housing.
What we must hope is that the recession does not last too long and that the regeneration of our towns and cities can be progressed in a sustainable way.
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23 January 2009
The impact of policy and regulation on development viability
I spoke earlier today in London at a very enjoyable meeting of the Architects Journal ‘AJ 100’ Breakfast Club and amongst a number of things I talked about I highlighted that the development industry has become highly complex in recent years because of the very wide range of issues and technologies we are now dealing with.
As recently as the turn of the millennium it was an essentially simple industry. However, the upward pressures created by the cumulative impact of policy and regulation by Central, Regional and Local Government have intensified since 2000. Policy and regulation not only increase the complexity of development, but almost every new initiative adds to costs, whereas as yet few generate additional sales value sufficient to compensate for the extra cost.
These costs ultimately have to come out of land values.
As I have said, whilst I believe it is right to expect development to contribute to social and community infrastructure, increasingly we are also being asked to contribute to highways and public transport initiatives, education, flood mitigation strategies, and wider infrastructure issues.
The industry also faces an increasing number of local authority tariffs, and there is the prospect of the Community Infrastructure Levy which Government has said will be expected to raise more money than the current Section 106 agreements.
In addition, a study for English Partnerships has put achieving level 5 of the Code for Sustainable Homes at between £26,000 and £36,000 per dwelling. Zero carbon will require code level six, at even higher average costs. My Company is making progress towards meeting these recently published requirements, but they will be highly challenging and we need the supplier base for sustainable technologies to be much more robust than it is today.
Now I hope this does not come across as being negative, or that I am ‘crying wolf’, but we do need to keep in mind the costs of all that new development is expected to cover.
It would be most unfortunate if escalating demands on land values ultimately led to fewer projects being economically viable, and thereby reducing housing outputs further.
There has to be a balance in deciding upon the various demands because it may not be possible to satisfy everyone’s hopes and expectations.
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30 September 2008
Huge challenges for commercial property market
The woes in the housing market sometimes hide the fact that there are currently huge challenges for developers and investors across all the sectors of the commercial property market as well – whether it is offices, retail, industrial or leisure. The downturn is severe with falling property values and rents, increasing yield expectations and limited investment. Where is all this likely to lead?
• Can we expect more misery?
• When will markets stabilise and settle?
• And what about future prospects?
What we’re seeing at the moment, as a result of the credit crunch, is a complete lack of confidence. Unless people have to commit to taking a new property or buying a home they are waiting until they’re confident prices and rents have stopped falling. Well I am a realist, and despite current conditions I’m in no doubt that when the current turmoil has passed there will be a significant need and demand for both commercial property and housing.
The importance of sustainability
However when things change we will be entering a new world so to speak – a world that is becoming more demanding as a result of the sustainability agenda. The more severe the weather conditions that are being experienced around the world the more people are aware of the effects of climate change with the result that sustainability will play an increasing part in the future of commercial property and housing.
Sustainability is as important to commercial property as it is to residential development. Some may regard it as an extra cost burden but they will have to accept it is an integral part of today’s agenda that needs to be accommodated. It is not a short-term issue either – it is long-term. Sustainability should be embraced and seen as a virtue and a benefit. After all the more sustainable a building is the more attractive it is to buyers and investors.
Housing developers are already experiencing what is required. We now have to meet the requirements of the Code for Sustainable Homes with all newly built homes needing zero carbon standards by 2016. In my company’s case we have been moving in this direction for a number of years through our involvement in particular at the Greenwich Millennium Village in London. It is going to be important to have more energy efficient buildings in the future. We also need to make increasing efforts to ensure our commercial buildings are more efficient and cheaper to run. It is positive to note the development of the Code for Sustainable Buildings and the Government’s ambition that all new non-domestic buildings be zero carbon from 2019.
More mixed-uses
We will also need to look into other issues such as the way people travel to work. Somehow we are going to have to reduce our reliance on the car regardless of the sustainability agenda as we’re experiencing ever increasing congestion and our roads will not be able to cope with rush hour demand. Perhaps by making more provision for public transport, cycling and walking we could reduce the dependence on the car that many sectors of commercial property currently rely on.
For example can we turn new business parks into mixed-use locations where people live and work in close proximity? Certainly all major commercial property schemes will have to include good public transport provision as a minimum.
In summary, I believe the long-term prospects for commercial property and housing developers are very good for those who can survive the effects of the credit crunch.
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Information correct as at 22/06/2010