The UK Home Building Surge and How it Affects the Supply Chain

The UK Home Building Surge and How it Affects the Supply Chain

The UK Home Building Surge and How it Affects the Supply Chain

Home building in the United Kingdom has reached peak levels since the financial crisis starting in 2008. For several years, the number of houses built each year fell far short of demand. The pressure to supply the 250,000 homes each year experts say are necessary to keep housing prices spiraling out of control has promoted certain government actions to make it easier to build homes, and buy them. With upwards of 180,000 houses built in the past year, this dramatic increase in production is creating imbalances in the supply chain needed to provide qualified labor and materials needed to meet the region’s housing shortage.

High Demand for Housing

When looking at UK home building across the decades, even completing the building of 180,000 houses in a year (or the 200,000 suggested by the government) is considerably lower than at different times. Post-war construction reached a high over 300,000 per year in the 1960s, and gradually dropped to its lowest post-war measurement during the financial crisis. Although home building has risen significantly year over year since 2013, the numbers still fall notably below the 240,000 proposed by the government in 2006. In short, there are not enough homes to meet the needs of the UK’s current population.

Rising Housing Prices

The consistently limited quantity of available homes has a natural reaction, in the form of rising home prices. Buyers with moderate incomes are increasingly finding themselves squeezed out of the market as prices rise out of pace with the increase in average wages. At present, the average home price in the UK stands at about £224,000, which is 4.5 percent higher than the year before. Home prices also sustained a near 10 percent increase in 2015. With pay growth hovering about 2 percent, incomes are not keeping pace to allow buyers a better chance of being able to afford homes. Thus, the pressure to improve the number of available houses as a means to decrease prices continues to grow.

Incentives to Buy

As a way to simplify the buying process for moderate-income and first-time home buyers, the government put forth two specific programs that would allow people to buy homes without having to pay quite as much. The “Help to Buy” program, which was extended until 2021, allows buyers to obtain a low-interest loan backed by the government to help cover the cost of the deposit. The Starter Homes scheme permits buyers who meet certain requirements to purchase a home at 20 percent less than the area’s market price.

Planning Delays

Of course, planning to create a large number of new-build homes meets with some opposition in the form of government bureaucracy and local politics. Rapid new construction can cause people who already live in the area to question why it is necessary. However, the biggest obstacle in recent years has been the time required to obtain the proper permissions. Government attempts to streamline the approval process has increased the speed at which builders can start building. This clears the first hurdle in building, but given the fact that the number of planning approvals are much higher than the rate of completed homes, there are other problems causing a slowdown.

Demand for Skilled Laborers

Even if the government throws all its might and energy toward solving the problem, the issue of the skilled labor shortage remains. Experts note that for every worker starting in construction as an apprentice, four skilled laborers retire. This slow replacement is putting additional demand on the people who have the skills necessary to build homes and keep up with new developments in technology, but also increases their prices dramatically. Many builders cite the labor shortage as one of the biggest reasons they are unable to meet the government’s goal of 200,000 houses per year. The labor shortage has also increased builders’ costs per home, which translates into higher housing prices.

Pressure on Suppliers

With the expansion of home building rising 10-20 percent or more per year in the past few years, suppliers of materials for construction are facing a “do or die” proposition. Builders are pressed to shorten the distance between started and completed homes, and to increase both quantities each year. This places additional pressure on suppliers to provide quantities much larger than the year before, at prices that allow the rising market costs to ebb somewhat. Smaller suppliers may find that they cannot provide the volume, and lose out on the patronage of larger builders. Suppliers who can give the quantities of materials at bulk prices find their services overextended.

Delays in Construction

Each step in the supply chain causes delays that translate into a lower proportion of completed homes each year. When 240,000 plans are approved, but only perhaps two-thirds of the plans actual come into reality, the failures at various points in the supply chain become clear. Even if the government can make planning and approval easier, and increase the number of potential buyers, it has not yet solved the problem of minimal supply and shortage of experienced laborers. Companies are increasingly turning to prefabricated options, components of homes that are built largely outside of the UK and shipped in. This solution bypasses skilled labor to some degree, and allows builders to complete homes more quickly.

Effects of Brexit Unknown

The UK’s decision to leave the European Union still poses unknown effects on construction. To ease the labor shortage, the UK has relied largely on outsourcing its construction labor from overseas countries. Brexit may complicate these expectations, possibly leading to further increases in labor costs, or creating competition from EU countries for the same pool of labor. In addition, the UK has taken advantage of a comfortable importing and exporting arrangement with the EU to meet its construction obligations. it is not clear what kinds of duties or penalties might be levied, as the UK continues the process of cutting ties with the EU.

The United Kingdom is facing a housing crisis that is gradually improving, despite several broken links in the supply chain. While new-build construction continues to fall short of yearly demand, builders look to innovations to help them combat the labor shortage and rising prices.

Ryan Tollefsen REALTOR®
Unity Home Group at Keller Williams Realty Alaska Group

101 W. Benson Blvd. Suite 101

Anchorage, AK 99503

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S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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