25 June 2016 – by Alexander Peace

The uncertainty created by the EU referendum has provided a welcome distraction from many of the problems facing the UK residential market.

But slowing global demand, tax changes, liquidity and affordability issues have not gone away. It is time to get back to worrying about the regular problems.

Pricing and affordability

The pricing and affordability of assets lies at the heart of many of the housing market woes. From rising land costs to mortgage regulation, slowing demand for UK housing from across the world and stretched affordability, different aspects are affecting individual markets around the country.

In London, weakening sales to international buyers and buy-to-let investors are taking a toll on new-builds.

“One of the greatest threats to investment and development stems from the sustainability of prices being paid in some markets and how much further there is to run on sustainable yield compression,” says Richard Donnell, director of research at analysts Hometrack.

Outside of London, while house prices are more reasonable, slow wage growth and mortgage regulation are still stretching the bounds of affordability, which Susan Emmett, residential research director at Savills, sees as a risk to future growth.

“What we need is to wait and see whether the interventions announced, like starter homes or the beefing up of shared ownership and Help To Buy in London, will help address that,” she says.

Meanwhile, land prices and construction costs are pushing up the price of building – for all modes of development. While build-to-rent might be booming, viability is not just a concern in London.

“Land supply remains a huge challenge, not least because, as build-to-rent developers, viability is modelled differently from housebuilders,” said Tony Brooks, co-managing director at developer Moda Living.

Policy

Amid wavering demand, policy changes, rather than inspiring the market, have added to the uncertainty.

“There is a lot of policy that has a big effect on the market, regardless of what happens with the vote,” says Emmett. “Changes affecting buy-to-let investors are significant. If we see that part of the market calming, the question is will other parts of the market surge to replace it?”

Concerns are not restricted to tax changes. Housing association regulatory changes announced over a year ago are now starting to bite in housebuilder models.

According to Donnell, the knock-on effect of the 1% rent cut for housing associations and its impact on demand for Section 106 on schemes is a big issue.

Similarly, how starter homes will affect viability is open to interpretation.

By replacing all affordable housing with homes for sale, schemes are more vulnerable to shifting market sentiment and lose out on upfront contributions from housing associations for affordable units.

“Government has not helped by putting all of its incentive eggs in one basket: for the for-sale model,” says Simon Rawlinson, head of research and insight at design consultancy Arcadis.

He says the lack of diversity in the UK’s delivery model and the resultant cyclicality in the market is the source of many of the UK’s housing woes.

“The fact we have only one housing development model for direct sale to owners is the biggest weakness, as it gives no other forms of delivery,” he says.

Affordable housing

Of course, concerns are not just centred around economics: other social issues are emerging as affordable housebuilding totals take a tumble.

“Due to the widening of the definition of the term ‘affordable’, in recent years there has been a significant element of displacement activity with a major drop in the development of social rented houses, being replaced by the new ‘affordable rent’ housing,” says Tim Shaw, head of London development at Carter Jonas.

In London, Sadiq Khan won the mayoral race with a ticket that put a heavy emphasis on the provision of real affordable housing. Other councils could start to do the same, as starter homes encroach further on affordable build numbers.

Back to reality

While the supply imbalance in the residential market remains, political, regulatory and financial factors can all still take their toll on the UK residential market. None are new threats, but they have been quietly pushed to the back burner ahead of the referendum.

Now it is time to get back to reality.

• To read more about the property industry and the EU referendum, click here.