Development Outlook Summer 2023: Residential

We look at levels of housebuilding, private rental market conditions, and house price trends to understand the outlook for residential construction.

Development activity

Figure 12:

Sources: Department for Levelling Up, Housing and Communities; Ministry of Housing, Communities & Local Government; Carter Jonas. 

Housebuilding, both for the private and public sectors, recovered quickly from its pandemic slump in 2020 (see figure 12). In 2022, housing starts were largely flat compared with 2021, but 21.7% higher than the 20-year average. Against a shorter-term 5-year average, 2022 was a robust 10.3% higher.  

However, there was a notable drop in Q4 2022 and Q1 2023. In the first quarter of 2023, housebuilding starts were 11.9% lower than the same quarter in 2022. Data from Glenigan suggests that project starts in Q2 2023 (new developments with 4+ units) have fallen further, with 22.5% fewer than Q2 2022.

On a positive note, the slowdown in housebuilding may benefit the rest of the construction sector by easing supply pressures for materials and labour. In particular, it is feeding through to lower demand for bricks, with the Department for Business & Trade reporting a 31.7% decrease in brick deliveries in the three months to May 2023 compared to the same period in 2022. In the coming months, this slowdown may cause tender prices for commercial projects to increase more slowly. 

 

Occupier market conditions 

Figure 13:

Sources: ONS; HM Land Registry; HM Treasury; Carter Jonas 

In the UK residential market, falling supply in private rental properties and accelerating rental growth indicate that new construction will be met with strong demand. The number of properties on estate agents’ books is near historic lows (RICS Residential Market Survey, June 2023), which has served to push up rental values to record highs. Data from the ONS shows that private rental prices in the UK increased by 5.1% in the 12 months to June 2023 (see figure 13). Both May and June have seen the largest annual percentage change since this UK series began in January 2015. Tight supply conditions are expected to remain in the near-term, creating opportunities for those in the build-to-rent market. 

Capital value trends 

The residential sales market has calmed from the frenetic activity seen from mid-2020 to mid-2022. Data from HM Land Registry show that, after peaking in Q4 2022, average house prices have started to decline (see figure 13). Although figures from the Bank of England show a 3.1% increase in mortgage approvals from April to May, the latest reading is below trend. Likewise, residential property transactions rose marginally in May but remain below their pre-pandemic levels (HMRC, non-seasonally adjusted). We now expect a reduction in demand owing to further increases in mortgage costs.

Once capital values have bottomed out, we can expect confidence to improve and help rebuild momentum in activity. This is likely to aid the construction industry as risks decrease, particularly for projects requiring finance that are likely to have more certainty in their loan-to-value ratio.