Assetz® News - Slump In New Houses Being Built Is Worse Than We Thought

Slump In New Houses Being Built Is Worse Than We Thought

2nd May 2008 |

There's pretty good news for buy to let investors in this rather terrible set of statistics.

We predicted in September last year that housebuilders would get in a terrible mess as high-volume presales to investors began to slow down due to the credit crunch and as discounts required by purchasers increased. We thought that it would be a pretty big slowdown in the new homes being built in 2008 and 2009 but it is beginning to look worse than we thought.

http://www.ft.com/cms/s/0/ddac21b0-17e4-11dd-b98a-0000779fd2ac.html

Housebuilders new home reservations are down around 65 per cent from this time last year. In a previous blog entry in January there was data showing that new housing starts were down forty percent but now most housebuilders are putting new sites completely on hold for the foreseeable future. With reservations collapsing so far it's not hard to see why.

So why is this bad news for housebuilders and their shareholders so good for buy to let investors and homeowners ?

Firstly the (soon-to-be-outgoing it would appear) government target of 240,000 net new homes a year was already being undershot at around 160,000 net new homes being built in 2006 and a little lower than this in 2007 with builders mothballing vast numbers of their sites. We will see a period of a few months where there are superb discounts to be had from developers before their overhang of stock is sold. After that there will be little new supply. The numbers of these properties being sold at these high discounts will not be statistically significant and therefore will not pull down house price indices particularly and the shortage afetr this will lead to significant support in house prices going forwards as we are going to be well over 100,000 new homes per annum short of the government target for at least the next two years.

Some people question whether there really is any excess demand for housing, questioning the supply versus demand argument for why house prices have risen so strongly in recent years. I would suggest these people open their eyes and look at the rental statistics. House price growth has taken a breather whilst many people are forced into rented property now. Huge demand for housing is now directed at the rental sector and is driving rents up and this wouldn't be happening if there was a significant oversupply of property rather than undersupply.

That's right, buy to let property is undersupplied right now hence rents are rising at historically very high levels - QED there is excess demand over supply and it just happens to be currently focused on the rental sector more than the purchase sector but it will be back in due course and not only support house prices but drive them forwards again.

We sometimes feel like we are the lone voice saying house prices are robust but also it would appear the only people looking at the data. Average house prices according to the Assetz House Price Watch (average data taken across all the main indices) were only down £211 in the first quarter of 2008, hardly a crash, just flatlining for now.