In this week's blog, we unpack some promising data about new home starts in the UK and ask ourselves: Are we beyond peak pain in the development market and heading into the upturn? Norman Vincent Peale once famously stated, “Shoot for the moon. Even if you miss, you'll land among the stars.” This sentiment, while not directly reflecting the nation's self-imposed housing targets, captures the potential for growth in the UK housing market. With a concerted push on all fronts to rectify the ever-critical housing situation, could we soon see the first steps towards increasing the numbers, at least enough to have a fighting chance to make a dent in the demand?
For that to occur, we need a multitude of things to happen; the central government can drive some things, some things are natural consequences of economic circumstances, and some elements are the results of chance, but when you get an alignment of all the above, dramatic change can happen at pace. The housing development sector, regardless of the efforts of businesses in the space, has been starved of sufficient liquidity throughout the past 24 months; as of March 2024, there were only 2,460 active residential property developers and housebuilders in the UK, according to the data, to increase that figure, cheaper capital needs to be injected into the system, to increase small business cashflows and encourage more actors to come into the sector.
Potentially coming out of the other side of the ‘hard yards’ element of the business cycle for liquidity, Andrew Bailey has stated that the Bank of England will begin to aggressively cut interest rates if the inflation data weakens, which is encouraging for the industry to hear. This move, if implemented, could significantly boost the housing market. Housing development is an industry with a particular penchant for the announcement effect, which is a tad ironic considering it's not something that trades quickly, brick and mortar assets built over multi-year horizons do not have the frenetic and reactive movement of equities with their perceived value buffeted by the daily news cycle. Still, this is because it is an industry where almost everything is considered 18-24 months out; it leans well into futurism since even small projects are costed and priced at such a distance, which is why, according to Reuters, the S&P Global/CIPS UK Construction Purchasing Managers' Index jumped to 57.2 in September - its highest since April 2022 - and well above economists' average expectations with one of the leading causalities being, anticipated lower borrowing costs.
There is further good news with housing new starts and completions, which, as a general indicator for the UK, has been flat throughout this period. However, the data from Q1 and Q2 of this year shows an uptick in both sets, indicating that we may have bottomed out in volume, a further positive to take. So, if all the noises we hear in the media are reformist, collaborative, and positive policy changes, where are the macro headwinds?
As referenced above, the significant challenge is the natural consequences of economic circumstances, and the industry will be watching closely for this in the inaugural budget statement on October 30th. Without unpacking all the widely publicised debate around this, the crux of the issue is the government's initial manifesto proposing fiscal rules around borrowing and reducing debt as a share of the overall economy. Those rules may now need to be re-written as the harsh reality of being the custodian of an underfunded state sinks in, and further borrowing above and beyond initial expectations, reportedly to the estimate of £57 billion, could trigger a bond market confidence situation, not so much reversing our fortunes on the road to national economic recovery, but slowing them down, and pushing these much needed further rate cuts down the road.
Tempering our overall opinion with the above concerns, we can't help but feel optimistic heading into Q4; the better-than-expected economic data and upward movement in transaction numbers mean more business is being done, and our market is growing exponentially again. Housing is front and centre in the debate and discourse, and our clients will only continue to benefit at this point in the rate cycle. As we mentioned earlier, when you are discussing the aspirations of your clients and the nuances of their projects, you are almost always looking to the future, and our team here at Invest&Fund will continue to help you with those conversations, underlying our commitment, not only to funding our client's projects, but providing our partners with our expertise and guidance in this rapidly evolving landscape.
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