Housing Supply In 2024

In a recent blog, we looked at how demand for housing could change in 2024, and at key issues that could potentially affect affordability, price-growth and investment yields across the different regions. In this article, we continue that analysis by considering a closely related question – namely, how those changing patterns of demand might actually be met.

With a General Election looming, the subject of housing supply is likely to crop up more and more frequently in media debates. It has been a challenge for successive governments, of course, but in the midst of a cost-of-living crisis, it’s more of a concern than ever. In the coming months, political candidates will be hearing plenty of views from their constituents about the cost and availability of homes.

House-Building Targets

The Government has set an annual house-building target of 300,000 new homes every year. That’s an ambitious number and, in reality, such targets have consistently been missed. Year after year, the number of completions has fallen well short of governmental aspirations, and despite manifesto promises, no party has come to power and then made meaningful progress in reducing the housing supply deficit.

Looking back on 2023, for example, the National House Building Council announced that the total number of new homes completed in Britain was 12% lower than in 2022. Similarly, when writing about its campaign for better housing provision, the charity Shelter notes that “over 1 million households are waiting for social homes. Last year, 29,000 social homes were sold or demolished, and fewer than 7,000 were built.”

A recent article in Property Reporter magazine looks at supply and demand more generally. It quotes a 2023 report by the Centre for Cities, which suggested that the total shortfall in UK homes amounted to around 4.3 million. However, even that figure could be well short of the reality, skewed by the presence of what are described as ‘concealed households’ – i.e. people who want to buy or rent their own homes but cannot afford to do so; people who are then forced by necessity to share homes with friends, family or flatmates. The article states that there could be as many as 1.6 million such households across the country.

Whatever headline figure we accept, it’s clear that demand for homes exceeds the available supply by several million. Even working to the relatively conservative estimate of 4 million, the housing charity Crisis calculates that the UK would have to build 340,000 new homes every year to close the demand gap within 15 years. That’s substantially more than the 300,000-home aspiration set out by the UK Government and, historically, the country has consistently failed to produce even that.

Planning Constraints

One of the reasons for the continuing shortfall is the perennial challenge of finding sufficient and suitable land. There is clearly a problem with housing supply, but there don’t appear to be any easy answers. Very few people would wish to see vast swathes of Britain’s countryside being bulldozed without restraint. Some controls must be exerted to protect greenbelt, national parks and areas of outstanding national beauty – as well as more ordinary but important spaces such as farmland, parks and other public amenities. But this inevitably creates a tension: one the one hand, a need to house millions of people whose quality of life is currently being affected, and on the other, a need to protect the natural environment.

The planning system seeks to provide such controls and, as a result, it’s often criticised for preventing more rapid housing development. But while people will have different views about its priorities and methodologies, no one can doubt the scale of the problem that it’s seeking to tackle.

In the previously mentioned Property Reporter article, the co-founder of PropertyCEO, Ritchie Clapson seeks to put the 300,000-home target into perspective. He writes: “The city of Leeds has about 350,000 households, so we would be building (pretty much) a new Leeds every year. Given that Leeds is the UK’s seventh most populous city, you can see that delivering 300,000 new homes a year is no small feat.”

Property Development Solutions

Britain is not a large country, and squeezing a new city-sized development into open countryside is clearly not a realistic option. To do it even once would radically alter the face of Britain; to repeat the same trick for each of the next 15 years would be inconceivable.

In practice, of course, individual developments tend to be relatively small and widely scattered across the UK. Nevertheless, the Leeds comparison is useful for visualising the scale of what needs to be done. In effect, if we are to meet market demand, that notional ‘new city’ will have to be broken into small parts that must then be fitted in and amongst existing conurbations like jigsaw pieces. And, of course, the same thing would have to be done again in each of the following years.

Doing that on greenbelt is no one’s favourite solution, and any attempt to do so typically results in strong local opposition and planning delays. Thankfully, however, building on virgin land is not the only option.

In December 2022, the Campaign for the Protection of Rural England (CPRE) conducted research based upon local councils’ registers of brownfield sites. It found that “over 1.2 million homes could be built on 23,000 sites covering more than 27,000 hectares of previously developed land.” That wouldn’t solve the problem overnight, but it could potentially provide enough land to meet governmental targets for the next four years.

Building on previously developed sites doesn’t only offer benefits in terms of sustainability, although those are obviously important. It also affords the chance to help tackle the housing shortage more quickly, more cheaply and with much less local opposition. So too does the conversion of existing commercial and industrial buildings into residential units. In either case, such building work is much less likely to offend local authority planners or local residents’ groups; indeed, many will welcome any scheme that turns a derelict site into something more secure, presentable and economically productive.

For developers, another benefit of converting an existing building into apartments is that it normally costs significantly less than building from scratch. Funding by lenders is sometimes more readily accessible, too, because the loan has something tangible to be secured against. And importantly, planning consents are often easier to obtain, if they are needed at all.

In many cases, former offices, mills and other such buildings may be turned into modern apartments under Permitted Development rules. That leapfrogs a potentially complex planning stage and can therefore translate into a considerable saving on both time and costs. And even when planning consent is required, it is often more easily obtained when the project will occupy a previously developed site.

The Investment Case for Brownfield

Residential conversions and brownfield redevelopments offer benefits to investors, too. Perhaps the most important of these is location. Previously developed sites will commonly be found close to existing urban centres and communities, and so too will many industrial and commercial buildings with the potential to be converted. In other words, many of the sites with the greatest potential for redevelopment will already be positioned close to markets where demand is especially high.

There is demand for new housing in rural markets, of course, but the greatest shortfalls in supply are usually found in and around established towns and cities; places that are seeing economic growth and investment, new job creation and an inward migration of workers. Those are also often the locations where available land is hardest to find, so the gap between supply and demand may be especially pronounced.

High demand and restricted supply is generally a formula for price growth. It’s therefore no surprise that investors are often keen to find well-located residential developments that are set close to centres of economic growth and employment.

For ethical investors, there is also the obvious appeal of buying an asset that has far less environmental impact than a new-build project on a greenfield site. Repurposing existing buildings has a considerably smaller carbon footprint and does not entail the erosion of Britain’s countryside.

Environmental concerns are also important to many would-be homeowners and tenants. A sensitive and energy-efficient restoration of an existing building may well attract considerable interest and demand. New-builds and modern conversions also tend to be built to much higher standards of energy efficiency than older properties. Most will achieve EPC ratings of A or B, while the average for Britain’s existing housing stock is an unimpressive rating of D. Over time, that difference can produce considerable savings for residents.

In 2022 and 2023, Russia’s invasion of Ukraine prompted a massive surge in domestic energy costs and that, in turn, transformed popular attitudes towards energy efficiency. Now, EPC ratings are of great interest not only to an environmentally conscious minority but to anyone with concerns about everyday living costs. Consequently, those who invest in more energy efficient properties should have a competitive advantage in the market – one that translates into stronger demand, faster capital appreciation, fewer void periods and better yields overall.

Meeting Demand – A Summary

UK-based housing developers are not going to be able to close the gap between supply and demand any time soon. The shortfall may well take decades to address – if indeed, it can ever be fully addressed at all.

For investors, that surplus demand has helped to drive capital and rental values higher for decades. It has exerted upward price pressures even when affordability concerns have been pushing in the opposite direction. Given the scarcity of available land, and in the face of continuing demographic changes, it seems unlikely that housing supply will ever entirely catch up.

As a result, investors can be confident that those same upward pressures will persist for many years. They may not always be enough to produce inflation-beating growth, as the previous two years have proved, but they will always be working in the investor’s favour.

Politicians, local authorities and developers will, of course, continue to try to provide more housing to meet a very evident need. Building on greenbelt will continue to be part of those efforts, even in the face of vocal opposition. However, towns and cities cannot expand indefinitely, and planning concerns will only intensify as the country’s natural environment becomes increasingly eroded. Inevitably, then, brownfield redevelopment and residential conversions must play an increasingly important role in meeting housing demand over the coming years.

Fortunately, this is an approach that offers numerous benefits to developers, residents and investors alike. It creates new housing in areas where demand is often at its highest, and it typically represents a cheaper and more sustainable solution than new-build schemes on greenbelt land.

For investors, residential conversions are a particularly attractive option. They generally produce smaller, more affordable and energy-efficient units, which are exactly the kinds of properties that are now in most demand. As a result, they can present lower void risks than older, more traditional housing types, and better prospects for long-term growth in both capital and rental values.

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For information or advice about any aspect of property investment in 2024, please call our advisory team on 01244 343 355.