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‘The long-term fundamentals of the new build housing sector remain sound’

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Paragon Bank Development Finance Managing Director Neal Moy comments that despite the gloom surrounding the new build property sector, there are reasons to be optimistic.

There has been a prevailing feeling of doom and gloom in the residential property sector in recent months, and there is no doubt that it has been a challenging time for many.

But amidst the pessimism, I still believe there are reasons to be optimistic about the long-term prospects of the new build sector.

New Government figures show there were 210,000 new build homes completed in the year to March 2022 in England, a 10% increase on the previous year. We certainly saw strong demand and Paragon Development Finance increased lending to SME housebuilders by 24% to £623 million in the year to the end of September.

That is a huge number of new homes across the country added to the housing stock. And yet, it is not enough.

Supply/demand imbalance

The supply/demand imbalance that exists in the UK property market shows no signs of abating. Whether it’s to buy or rent, there aren’t enough good quality homes to satisfy demand.

Whilst the Government has abandoned the 300,000 new homes target set out in 2017, there is a new housing team at the Department for Levelling Up, Housing and Communities and I am keen to see what their plans are to stimulate the market.  

There is no doubt that the recent rise in the Bank of England Base Rate and broader mortgage rates generally following the mini-budget have taken the edge off buyer demand, and we have seen data from the likes of Hometrack and RICS confirming as much. House prices have also come off and we expect prices to remain subdued throughout 2023.

But this is a sector that is well-versed in economic cycles; it’s a sector that knows how to hanker down and navigate choppy waters. During quieter times, we may see schemes mothballed for a period, developers being more selective over which schemes to proceed with or waiting for land prices to reduce, but housebuilding will still take place.

In addition, this is a different kind of recession than previous downturns we have experienced.

Different type of recession 

Employment is at record levels and the number of unfilled vacancies remains high, unlike the high unemployment that has marked previous recessions. The cost-of-living crisis is hitting all our pockets but none of the banks have reported that the credit performance of their customers has started to deteriorate significantly.

As supply chains normalise and the after-effects of Covid wash through the economy, we would hope to see inflation come down in 2023, releasing some of the pressure on our household finances.

The Swap markets have certainly lowered their expectations of where the Base Rate will peak from those volatile days of early October, which should start to translate into more affordable mortgage rates for homebuyers. We have already seen rates come off those highs, and borrowers have started to consider variable rate options again after a long period of fixed rates dominating.  

Debt is unlikely to be as cheap as during the pandemic, Help to Buy is going, and, of course, there are no Government stimulus schemes such as the Stamp Duty Holiday, but the Armageddon scenarios many feared as the markets responded to the mini-budget have calmed.

Of course, nobody has a crystal ball and it’s impossible to forecast the outcome for the short term, but the long-term fundamentals of this market remain sound, and I am confident that the sector can weather the storm.

Visit our Development Finance webpage to learn more about how we support SME housebuilders and developers. 

Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551