Paul Collins, Jen Lemen and Darren Poole look at the major legal and policy changes that impact on the provision of new homes, and the state of the market in challenging economic times.
There are a raft of issues relating to the current housing market, as well as both immediate and longer-term challenges in endeavouring to meet 2050 net zero carbon targets. On top of that, new housing is expected to be beautiful (or at least not “ugly”), so hope government ministers.
Beauty in the eye of the beholder
Along with the continuing commitment to increase the supply of new housing – albeit with some arguable confusion over target numbers – the government wants all new housing to be better designed.
This began back in 2018 with a government-initiated independent body of commissioners, the Building Better, Building Beautiful Commission, tasked with working out how design quality could be improved. Its work culminated in its final report in January 2020, Living with beauty.
The government published its response in 2021 and followed that up with a range of announcements supporting a commitment to beautiful housing. Michael Gove, secretary of state for levelling up, housing and communities, underlined this in November 2022, saying that “people do not want ugliness imposed on them” and that he will use his powers to call in proposals that are not of high aesthetic quality.
The real question, however, is what can be considered as beautiful and what is not – and can there ever be a general consensus of what a so-called beautiful building looks like? Partly driving this is the view held by some in government that, if new housing was designed better, there might be more acceptance of additional new development where there might typically be a nimby response to more housebuilding.
Sustainability and biodiversity
Another requirement of all new housing development will be the requirement to replace and add back more vegetation and wildlife than existed before a site was developed. This measure, formally referred to as biodiversity net gain, is included in the Environment Act 2021 and will come into force in November this year. This will require developers to put back 10% more biodiversity, either on site or, where appropriate, in another location. If that is not possible, a form of payment will be charged for biodiversity improvement elsewhere.
So, what else is coming down the environmental line?
• Gas boilers – Currently some 78% of the UK’s total energy used to heat buildings comes from gas, according to EDF. This means heating is a major contributor towards carbon emissions. As a result, the government intends to ban the installation of gas (and oil) boilers in all new homes by 2025. However, this will not apply to replacement boilers in existing homes.
There are, of course, alternatives to gas boilers – such as electric storage heaters and heat pumps. There are two types of heat pump: air source and ground source.
Solar panels and battery storage can also be used to power electric heating systems, simultaneously allowing homeowners to sell surplus electricity generated back to the grid and store power in batteries. And, if solar panels are mounted on green vegetated roofs, they work marginally more efficiently.
In addition to these, arguably a more efficient way forward – where possible in the future – is to have some form of district heating system. Nottingham, for example, has the largest system in the UK powered by a waste incinerator, piping heat to more than 5,000 houses.
• Minimum Energy Efficiency Standards – It is currently illegal under MEES to let a residential property with an EPC rating of F or G. Existing residential tenancies are already covered by MEES, but it is intended to further increase the minimum EPC ratings required in future.
• Building Regulations – Amendments made in 2022 are aimed at making new homes produce 30% less carbon dioxide than under the existing regulations.
Part L: Conservation of Fuel and Power requires that new homes are assessed under the standard assessment procedure (SAP) 10. This requires higher thermal transmittance values (U-values) to be achieved for various building elements, such as windows and doors. There are also new glazing requirements for extensions, changes in lighting design, and lower flow temperature requirements for heating systems.
Part F: Ventilation requires that ventilation must not be made any worse when energy efficiency work is carried out in existing homes. Replacement windows must also include trickle vents unless specific circumstances apply.
Part O: Overheating was introduced to minimise excess solar gain and remove excess heat. Minimum amounts of glazing are also specified in relation to single rooms.
Part S: Electric Vehicles, as a result of the increasing popularity of EVs, requires all new developments and redevelopments of more than 10 dwellings to have charging facilities on site.
• Sustainable drainage systems (SuDS) – Finally on the environmental front, the government has just announced that it intends to implement Schedule 3 to the Flood and Water Management Act 2010. This will require all developers to design in sustainable drainage systems , which are flood water management solutions, in all new housing schemes. This is expected to be brought into force some time in 2024.
The UK housing market
Of course, all of the above changes in law and policy take place within the context of the housing market. Let us now examine that market over the past couple of years, as well as prospects for 2023.
Strong growth in demand from July 2020 had three aspects. After the easing of restrictions in July 2020, following the first Covid lockdown, the housing market experienced a period of strong demand growth, driving house price inflation. There were three facets to this:
1. During the first Covid lockdown viewings were not permitted and the market was effectively frozen. This allowed a degree of pent-up demand to develop over the period.
2. Linked to this, households were reassessing their housing needs in the light of Covid restrictions and working from home, with an increased desire for both indoor and outdoor space.
3. The government feared a collapse in house prices producing a negative wealth effect, which could hamper economic recovery. Consequently, the government introduced a stamp duty holiday on housing transactions, which helped to fuel housing demand further.
House prices changes, interest rates, mortgage payments and housing demand
Any analysis of the housing market is concerned with the demand for, and the supply of, housing. In the short run, generally, the housing market is demand-driven and, from July 2020 to August 2022, it experienced strong demand. This, in turn, drove growth in prices.
The beginning of 2022 saw average house prices 11% higher compared with 2021 (Halifax HPI). January to August 2022 saw a strong sellers’ market, with average house prices rising by more than £17,000 to reach a record high.
Mortgage interest rates are a key metric for households since they affect monthly mortgage payments and therefore their affordability. In December 2021, the Bank of England’s rate was at an historic low of 0.1%. Subsequently there have been nine increases in the rate, which now stands at 3.5%, as the bank tries to bear down on inflationary pressure. The bank has signalled that further increases are possible during 2023.
Cooling market
Bank rate changes have already had an effect on buying intentions. The latest data for England reveals a decrease in new mortgage approvals of 20.4% in November 2022 compared with September, with a year-on-year fall of 33.1% compared to November 2021. This is a strong indication of weaker forecasted demand for 2023, with fewer potential buyers seeking finance, which will lead to fewer transactions reaching completion.
Further indications of declining demand were revealed in the RICS’ Residential Market Survey (November 2022), which showed market sales weakening and new buyer enquiries falling.
The Halifax HPI also revealed that average prices fell by 2.4% in November 2022, and by a further 1.5% in December 2022.
Higher interest rates, increased levels of inflation and rising household energy and food costs, together with negative gross domestic product growth and falling economic confidence, all are feeding through to a decline in housing demand and what looks to be a softening of house prices in 2023. Most analysts are predicting falling prices in 2023 in the range of 8% (Halifax) and 12% (Oxford Economics).
Seminar question
The impact of the unsteady overall housing market, as well as the new demands for design quality and sustainability, will inevitably all have an impact on the supply of new housing. Housebuilders in part would always be looking for strong growth in prices to help pay for those challenges. At the same time, construction costs have also risen and are expected to continue to do so through 2023. The question always is: will it come off the land acquisition price, or will it be passed on to the house buyer? So – there’s a question for your next seminar.
This short review of current and future challenges of the residential sector has attempted to identify some of the myriad factors and drivers that make up and affect the market, its quality and supply. As students and future prospective practitioners, you are encouraged to continue to follow and understand this crucially important sector of the property market, as it struggles to be become more accessible, more sustainable and (if possible) more beautiful.
Further reading
Living with beauty, the Building Better, Building Beautiful Commission
The Environment Act 2021, schedule 14
Early introduction of biodiversity to local plans in England, Carter Jonas
Air source heat pumps vs ground source heat pumps, the Energy Saving Trust:
Paul Collins is the editor of Mainly for Students and teaches at Nottingham Trent University, with Darren Poole, who is a real estate economist. Jen Lemen is a partner at Property Elite
