The end of the supply side crisis in 2017? I don’t think so.

chris-wood-240x260A forecast for the coming year? What to look forward to? New year, new prospects? Will the supply side crisis finally come to an end?

On the basis that history tells you the future, my advice is we should expect more of the same in 2017. That is, promises about increasing supply, modern methods of construction, cheaper faster production and genuine affordability, will not materialise.

I was with the MD of a housing contractor just before the holiday and we were discussing the plight of modern methods of construction for the residential market. His position was “….when it is proven and risk free, we will be all over it”. He went on to say, “We like to consider ourselves to be at the cutting edge of tried and tested”, which I thought a neat statement which aptly summarised the state of the housing supply side industry – conservative, with a small “c” and risk averse, with a capital R.  And why wouldn’t they be?  Residential development and construction is an expensive and risky business, and the political and policy context in the UK became a good deal more uncertain with Brexit in 2016.

We are now 6 months post the Brexit vote and all the commentators appear to agree that the central problem is that no-one knows what it going to mean in 5 years’ time. Immediate impacts have seen the value of sterling decline and thereby the cost of construction materials increase. This reduction in the value of the pound brought an early “January sale” for overseas investors looking to pick up bargains in the high-end property market in central London and other high value areas.  Commentators always say that a weak pound is good for exports. Given we don’t export new homes, a weak pound is of little value to the development and house building industries.

Interest rates will remain low and mortgages will remain cheap. However, house prices are so high in all our urban centres, that they remain unaffordable to first-time buyers. Whilst new supply remains low, house prices will continue to be buoyant and rise, albeit more slowly.  Consequently, the market rented sector will continue to fill that gap. With growing institutional finance interest in housing, PRS looks set to be a significant area of growth. In London price increases will slow, but heated house price growth will be displaced to other major cities – Bristol, Oxford, Cambridge and even Birmingham and Manchester buoyed by the prospect of HS2.

This is not a time to be bold in development, but it is a time to be innovative.  Maybe even innovative with the “tried and tested”. Our work at Altair puts us in touch with innovation across the industry and we often act as conduits for best practice and sometimes we like to think we add to innovation.  If you are thinking you way through this difficult period, Altair may be able to help.

Chris Wood is a partner at Altair. You can contact him on 07932 693 292  | chris.wood@nullaltairltd.co.uk