Posted by: Adam Roake | January 14, 2010

WHY HOUSEBUILDERS WON’T MEET DEMAND

So why won’t the house building industry increase supply to match demand (see “my post” below and Christine Whitehead’s piece in particular in CABE’s report “Who should build our homes?“)? I never really understood why nobody asked this question, when affordable housing policy switched almost wholly to relying on section 106 contributions. The interesting thing about the current housing market, where price inflation is pretty well flat and supply is close to meeting demand (surely a normal market in any other sector), is that all of the house builders are moaning that conditions are tough. As one, they blame the lack of easy mortgage finance for curtailing demand (see for example Bellway, Berkeley Group, Persimmon, Barrats, Miller Group) and Keith Miller, CEO of the Miller Group, put his finger on the button saying,

“Volumes are low but the demand has fallen a long way as the money to buy is not as readily available and the balance with supply is now much more in line. However, if we are to see any degree of long-term stability, it is crucial that the housing market gets a continuing supply of mortgages.”

Rather than long-term stability relying on supply being roughly in balance with demand, Keith, and I suggest most of his peers, see stability occurring only when readily available finance fires up demand to race ahead of supply.

Actually the open market now is pretty stable in real terms; there is modest demand, which the industry is matching in supply and prices are rising at close to RPI. In this market house builders have to work hard to maintain margin and competitive edge, much as happens in most other industries. What they would prefer is double digit price inflation because life becomes a whole lot easier. The inflation of end value over the life of a medium size project will account for a substantial proportion of the margin; basically you make money just by turning the handle.

So if demand increases, which it probably will when easy finance or some other trick to overcome the fundamental unaffordability of home ownership occurs (another blog here I think), why would house builders want to increase supply to match? Of course they will a bit, but “long-term stability” is predicated in their minds on demand racing ahead of supply. In any location there are only so many people prepared to buy a new house, so why flood the market? House price inflation becomes inevitable but that suits the house builder model just fine. The problem is that this kind of market has shown itself to be neither stable nor sustainable in the long term.

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Responses

  1. How true.

    It’s all about profit and why not wait until demand increases through natural causes and more avilable funding, before building more homes?

    There are good reasons other than financial to build new homes but they are not the driving force. Still that’s life!


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