Major challenges for developers ahead

By Amanda Crichton of Savills, Ipswich

The market for new homes has changed considerably in the last few years.

Constraints on mortgage lending, a weak economy and lacklustre house price growth has restricted the market and left the sector smaller, leaner and more targeted in its activity.

Developers have responded to this by focusing firmly on the family housing market and high specification schemes in established locations, aimed at owner occupiers and downsizers.

Even before changes to the National Planning Framework, which now encourages new development to respond to ‘demand’ rather than ‘need’, market forces came to the fore.

Understanding the nature of buyers in the new homes market is therefore critical to successful development and delivery today.

The equity rich owner occupier markets are likely to be the primary focus of housebuilders and developers over the short to medium term.

However, if revised housing targets are to be met, the first time buyer and investor markets cannot be ignored.

Difficulties in accessing mortgage finance continue to limit first time buyers.

Today’s owner occupier demand is dominated by buyers with cash and equity.

However, first time buyers remain an important market for new homes, and the industry will have to adjust and innovate to overcome the constraints this group of buyers now face.

For today’s first time buyers the primary concern is being able to afford a deposit rather than meeting mortgage repayments.

Only the fortunate ones are able to call on the ‘bank of mum and dad’ and have been able to get on the housing ladder in recent years.

HCA’s HomeBuy Direct was successful in assisting first time buyers, something the recently launched FirstBuy’ aims to continue.

The equity loan scheme provides first time buyers with up to 20% of a property’s value, and aims to assist an estimated 10,500 first time buyers over the next two years, simultaneously bolstering the market for new build product.

Domestic investors are returning to the market, albeit in a different form to those active in 2007. With lending to buy to let investors down -67% on the 2007 peak, today’s investors are experienced and equity rich, looking to add quality investment property to established portfolios.

Their focus is on core markets with proven tenant demand.

Investors accounted for 34% of Savills new homes sales in the first half of 2011, up from a low of 7% in the second half of 2009.

In a restricted market, new development is increasingly targeted at areas that have identifiable housing shortages and proven demand, something set to continue as the National Planning Policy Framework comes into effect, underpinning the influence of market forces.

The major challenge for developers in future will be identifying and delivering viable schemes that meet the new demand profile. Only in this way will levels of pricing and rates of sale be achieved that can balance housebuilders’ growing cost and debt constraints.

Going forward, the industry will have to do more and tackle some of the big unanswered issues in order to supply property to the private rented sector and assist first time buyers.

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