The consensus view of the housing market is that stability is good, cyclicality is bad.
In some ways, stability restricts the ability to buy cheap and sell dear. But to ease the construction crisis and get modular construction off the ground, stability is key.
Were the housing market to do away with its boom-and-bust cycle, there would be a continuous demand for labour and modular components each year, as a steady number of homes would be built. And labourers would not abandon the sector for other employment when there is a housing crash, as happened in 2009.
Stability would create a viable, long-term market, thus removing the problems surrounding the construction sector. But how do we create stability, and can either government or the private sector do it?
Alternative tenures
At the moment, the housing market is linked closely to economic performance. When the economy goes up, house prices increase, and more are built. The reverse happens in a crash.
Residential analyst Neal Hudson says it would be too big a task to break the link between the economy and the housing market. Instead, he says, we need to isolate the construction sector from that cyclicality.
One way to do this would be to encourage demand from other, countercyclical tenures, such as PRS and affordable housing. When the housing-for-sale market slows, PRS and affordable developers can continue building, levelling out demand.
“The current government does seem to recognise that, and London will be a big test of the idea of keeping private sector delivery going while the market falters,” says Hudson.
He adds that it is not quite that simple – housing associations rely on a percentage of build-for-sale units to finance their affordable construction – but says that it is a workable principle.
Estate regeneration on a large scale could also encourage housing construction throughout a downturn, as councils and residents of the estate help to guarantee a steady flow of rent and demand.
Housebuilders such as Taylor Wimpey and Redrow are taking on longer estate regeneration pipelines and boosting confidence in the long-term attractiveness of the sector.
Also needed: a different type of investor
Kate Ives, development director at Wates Residential, says that encouraging a different type of investor, perhaps working as a funding partner with government, could also help to stabilise the residential market.
“Is private equity really supporting the UK’s housing infrastructure? Short-term investment mandates make delivering through property cycles difficult to achieve,” she says.
She adds: “Long-term sovereign wealth or institutions looking for stable returns over ten-, 20- or even 30-year periods are natural place makers and would make good partners for government.”
The government is already starting to do this by creating long-term financing through the Homes and Communities Agency, which is using its money to both increase demand for modular construction and stabilise demand throughout the economic cycle.
“What the HCA can be is firstly a purchaser of land, but also an agent to supply land to take the output of modular home factories. The agency can make it clear that modular construction is going to take place,” said a spokesman.
The HCA is using the government’s £3bn home building fund to unlock land, accelerate delivery, and encourage new methods of construction.
“It is about helping and encouraging modular construction that works economically for people, because at the end of the day factories have a big financial commitment to make, and part of that is based on the size of the pipeline for their products. That is where the HCA comes in,” the spokesman added.
The HCA is also, to a lesser extent, acting as a guarantor for the delivery for schemes by underwriting them, and allowing construction to continue during a downturn.
Decoupling the land market
By creating a steady level of demand, the construction and skills shortages could be contained, and the UK could begin to ease the housing crisis steadily.
In the long run, stability would benefit housebuilders, at least those in the listed sector, who have often said it would be beneficial to their models to do away with the cyclicality of the land market.
The current government’s switch to multiple tenures, and the HCA’s freedom to spend money that it seems to be allowing, could start to push the UK housing market in this direction.
The question is whether it continues.
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