Philip Barnes – Blog


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TRANSACTIONS VS PRICES VS BUILD RATES

Savills recently produced their annual housing market report and forecasts. Like all Savills stuff it contained both really useful data and food for thought. LINK HERE . Whilst the pessimistic London price forecasts dominated the subsequent media headlines the transactions data is actually more eye-catching.

Prices

Many commentators would perhaps expect Barratt to be disappointed at forecasts of stable rather than sharply rising house prices. Actually it’s not that simple. Whilst we are confident about the future market (given continuing low interest rates and continuing undersupply forecasts) two factors continue to exercise our minds – namely affordability and the cyclicality of the market.

In respect of the former we have a strategy. Controlled volume growth and an increased focus on getting back to the core Barratt customer of low/middle income first time buyers and second steppers should help us address affordability issues and grow volume. Stable house prices, stable employment, rising wages, H2B and further increases in the supply of consented land will also assist.

Market cyclicality is more complex. History tells us that the more rapid the price rises the quicker the bubble bursts and the sharper the fall. 2008 was catastrophic for housebuilders. Stable house prices, if they can be guaranteed, is definitely less of a concern than the tendency to be hit first and hardest after a boom.

Transactions

The Savills transactions forecasts are definitely the food for thought. In particular the unarguable historical correlation between new build rates and wider market transactions. It’s obvious when you think about it – for a large proportion of our customers, the new purchase is linked to another market transaction. Therefore it’s sobering to read the Savills data saying that transaction numbers:

  • Have fallen from 440,000 in Q1 2006, to 394,000 in Q1 2016 and 286,000 in Q3 2016.
  • Will fall further in 2018, including a 15% drop in FTBs and 10% drop in second steppers.

Like other housebuilders Barratt won’t be overreacting given that the second hand market is our biggest competitor and therefore less transactions means less competition, especially for first time buyers. But looking broader and longer the potential threat to volume increases caused by falling transactions is not something the Government can ignore.

Help to Buy has been effective in stimulating FTB transactions for new homes, indeed the best comment heard on H2B recently was from Nathalie Elphicke CX of the Housing and Finance Institute. Nathalie asked what would have actually happened to transactions and build rates had we NOT had H2B?

But away from FTBs the projected downshift in second stepper and downsizer transactions requires analysis and attention. Perhaps Government land could play a role? A joint public/private push is certainly needed.

The starting point should be a better understanding of the causes of low transactions. This would help develop policy responses. Commonly heard reasons include the increasing costs of a transaction, higher regulatory credit requirements for mortgages (MMR) and less distressed sellers. But good solid research evidence is hard to come by. Without that it is hard to develop effective policy responses.

Barratt is doing its bit. We have developed a downsizer range and looking hard for opportunities to build it. Similarly we know that with better mortgage availability we need to increase the pace of getting back to the below-prime locations where recent undersupply, low interest rates, and H2B can help release pent-up demand from our traditional customers.

But there is also a role for Government. H2B is working for FTBs and maybe Starter Homes will help further. But we need new smart policies which will really encourage young families to trade up and older householders to downsize. A big turn of the transactions dial will make it far easier to get those extra new homes built.

The subsequent Savills report on land prices report provided good cheer for housebuilders – greenfield housing land prices down 0.3% in Q3 2016!!