Will building more homes bring down house prices?

Will the principle of supply and demand apply?

If we follow the basic principles of supply and demand, increasing the supply of something usually leads to a drop in its price.

So, does it follow that house prices will fall if the Government successfully builds its promised 1.5 million homes over the next five years?

Unfortunately, I suspect not, because as we’ve seen over the years, a range of factors – not just supply – drives fluctuations in the housing market.

House prices also tend to rise alongside housing transactions, and we’re seeing a bit of this at the moment. As mortgage rates have started to fall and confidence returned following the new Government, house prices have begun climbing again.

Halifax reported a 0.8% monthly increase in July, following three relatively flat months, and a 2.3% rise over the past year.

Likewise, other factors can have the opposite effect. High unemployment or rising inflation can dampen the demand for housing because it becomes less affordable – leading to slower growth or even falling house prices.

However, in today’s market, I think one of the biggest factors preventing prices from falling is the historical backlog we’re facing.

Years of under-building mean that adding 1.5 million homes over the next five years is likely to mean we are simply playing catch-up to where we should already be.

The Centre for Cities last year estimated Britain faced a backlog of 4.3 million homes and the housing deficit would take at least half a century to make up, even if the Government built 300,000 homes per year.

To tackle the problem sooner, it would require building 442,000 homes annually over the next 25 years or 654,000 homes per year over the next decade, in England alone.

Housing Secretary, Angela Rayner’s, housing target – even her increased one of 370,000 homes per year – will not boost supply enough to outstrip demand, given the current chronic shortage of homes.

It also won’t be in developers’ interests to increase housebuilding only to sell at reduced prices, which is another reason price drops are unlikely.

Fall in average prices

If, however, the promised affordable homes are built, we might see a decrease in overall house prices, as this could bring down the overall average.

There is growing scepticism about whether the affordable and social housing targets can be achieved without additional funding. However, let’s stay optimistic for now and assume they can.

Under the new National Planning Policy Framework (NPPF), the Government is proposing a target of 50% affordable housing on land released from the Green Belt for residential development – which will be redesigned as ‘grey belt’.

One of the first challenges will be starting construction on so-called ‘grey belt’ land. After reading the NPPF’s definition of grey belt, I must admit I’m still a bit unclear. Nevertheless, Labour seems confident in its plans and appears to have already identified its targeted sites.

An increase in affordable homes could also have a knock-on effect on the rental market and help ease pressure over time. However, just as with house prices, we are unlikely to see any reductions in rents as a result, due to the ongoing pressures on landlords.

A widening of the North-South divide

What we might also see are pockets of the UK experiencing more fluctuations in house prices. We already have a North-South divide in house prices.

According to Halifax, house prices in the North West have experienced annual growth of 4.1%, while the East of England have seen price falls of 0.4% year-on-year.

Looking at Labour’s housing plans, the North of England is set to be one of the biggest beneficiaries.

In Redcar and Cleveland for example, housing targets have increased by 1,338%, from 45 to 642. This compares to London, which will see some of the biggest reductions in housing targets, with 24 of the 33 boroughs seeing their targets lowered.

It could be the North is where Labour sees more potential for suitable land. There is still a lot of former industrial land available, which could be ideal for building on.

However, these locations may not be where demand is the highest.

If new towns are developed, they will need to be accompanied by infrastructure and job opportunities – something the High Speed 2 (HS2) rail network was supposed to help with. So, careful planning is needed if the Government is to encourage developers to build in such locations.

While the new homes are unlikely to cause wider drops in house prices or rents – aside from affordable housing within the schemes – they should, more importantly, help prevent the housing crisis from worsening.

The year to March 2024 saw the fewest new housing sites consented since 2006, according to the Home Builders Federation (HBF). Clearly, action is needed – let’s hope it can be achieved.

Simon Jackson is Managing Director of SDL Surveying

First Published with The Intermediary 

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