River of Rent

In this week's blog, we delve into the latest housing market headlines, focusing on two key topics: the supply crunch and the increasing role of Private Equity in our sector. These are not just trends but potential game-changers that could significantly impact the housing market. To see if our previous predictions hold true and to separate the insightful analysis from mere speculation, read on.

Exhibit A this week comes from the latest Savills publication, 2024 Housing Supply Update Q1. It's crucial to note that the number of homes gaining consent is now below the completion levels, with only 222,000 homes gaining full planning consent between March 2023 and 2024. This metric, the number of dwellings gaining consent going below the number of completions, is not just alarming, but it's a red flag that hasn't been seen since the 2008/09 crisis.

The core issue Savills reports is that up to 10% of the schemes granted consent won't result in houses being built; many will stall or fold before footings even go in, so the number of completed properties for 24/25 may be as low as 160,000. Now, this kind of published analysis goes a long way in substantiating some of the house price appreciation figures we have seen advertised recently. Percentage asset price increases of 15%-20% have been published as the best 'guesstimate' over the next 36 months by many credible commentators.

For those of us who worked in banking and finance throughout the 2008 financial crisis, this notion of house prices going up forever doesn't always rest very easy; we know how that assumption ends if left unchecked, but is there a significant difference here? In the years before the crisis, cheaply available credit generated from an unquenchable demand for increasingly complex and high-yielding MBS products resulted in a high bid in the market for housing, one that swiftly retracted once that river of credit dried up. This is different; it's a much more simplified equation; there is no reliance on some derivative structure or artificial system to inflate the market, a balloon to be burst, so to speak; it's just a fundamental of economics; demand is outstripping supply, and almost always will be without any significant structural change to the economy.

One positive to be drawn from the report is the resilience of the housing industry. Despite the impending crunch, completions haven't dropped, showing a 1% increase in 23-24, with 232,500 homes being delivered, many by operators in our sector. This resilience in the wake of what's been a tough few years for the industry is a beacon of hope for the future that we can build on, figuratively speaking.

Moving on to Private Equity, exhibit B that hit the headlines at the time of writing was the Blackstone deal with Vistry to buy 1750 new homes straight off the production line for rent. This is the second transaction of this nature in eight months, totalling a £ 1.4 billion stake in the rental game. This is an important transaction as it indicates that institutional capital is seeing a multi-layered opportunity here; on the one hand, a supply crunch will bid up rents, increasing the rent roll they are essentially investing in; it will also bid up asset prices, increasing the value of their investment, and finally, in a low supply environment, taking thousands of homes for sale out of the market and straight into the private rental arena, will also increase demand value.

These kinds of investments, from these sizes of players, have the power to move markets, and we feel that more and more capital will flood in via these kinds of deals, enticed by the obvious nature of the opportunity. The challenge at a governmental level will be making sure that these investors are building a market, not owning a market, making a return from having a social impact, and not just becoming PLC landlords gorging on a national level river of rent. What we firmly believe is the hybrid nature of big business and small business, of state and private sectors, working together, all starts with new thinking and new ideas to ensure that these coming changes work for everyone.

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