The housing market’s gap between supply and demand and how property investors can help

By Jo Bentham11th March 2022

It will likely come as no surprise that demand for homes in the UK is far outstripping supply – this has been the case for decades. But as demand soared 49% in January according to Zoopla’s latest House Price Index, the biggest New Year increase in five years, it’s clearer than ever that housebuilding must pick-up pace in order to close the gap.

Article main image

By now, the Coronavirus pandemic’s impact on the housing market is well known. A post-lockdown yearning for greenery and more space to facilitate increased home working made 2021 what is thought to be the market’s busiest year since pre-financial crisis over a decade ago, with a predicted 1.5 million house sales.

House prices have also continued to show strong, consistent growth over the past 12 months in particular, as the average price of a home in the UK increased by £16,000 in 2021 to £240,800. 

Though experts predict this growth will begin to slow throughout 2022, the outlook still remains promising, with Savill’s forecasting further growth of 3.5% across the UK and as high as 4% and 4.5% in the North East and North West respectively.

Whilst the increase in demand and overall exceptional performance of the market has been positive in many aspects – particularly when considering the importance of the housing market to the UK economy – it has also exacerbated the already prevalent gap between supply and demand.

This gap has been a topic of much discussion over the years. A 2017 white paper by the Ministry of Housing, Communities and Local Government – Fixing Our Broken Housing Market – stated “the housing market in this country is broken, and the cause is very simple: for too long, we haven’t built enough homes”.

Also in 2017, the Government set a housebuilding target of 300,000 new homes annually by the mid-2020s, but it’s predicted this target will be missed by close to a decade. 

What’s more, it has been reported that even this 300,000 figure wouldn’t be enough. Instead it would need to be circa 340,000 to get close to meeting the need for new housing after years of undersupply.

The number of new home completions in Q3 2021 was 31,908 according to NHBC, down from 33,600 in Q3 2020 – a stat that is somewhat surprising when considering the housebuilding sector was facing Coronavirus-related restrictions for much of 2020, whilst these had been significantly eased by 2021.

On the other hand, the number of new home registrations had risen by 14% in Q3 2021 compared to Q3 2020, from 29,566 to 33,779, which is further proof that the market remains buoyant in the aftermath of the disruption caused by Covid-19.

One of the problems facing the market, which was highlighted in the Fixing Our Broken Housing Market report, is “a construction industry that is too reliant on a small number of big players”. 

And this point has been repeated time and again, with the 2020 Planning for the Future white paper reiterating a need for small and medium-sized builders “looking to build a diverse range of types and tenure of housing, and those using innovative modern methods of construction” to enter – or rather re-enter – the market.

 

Supporting SME housebuilders through property bonds

The number of SME housebuilders began to dwindle in the aftermath of the 2008/09 financial crisis, as banks substantially decreased their SME lending

As a result, whilst over 12,000 smaller housebuilders were responsible for 40% of new housing in the 1980s, this has dropped to around 2,500 responsible for 12% in recent years. 

But working alongside their national counterparts, it’s clear just how imperative regional builders are in helping to tackle the UK’s chronic housing shortage. And property investors also have an opportunity to be part of the solution by supporting these SME builders with alternative finance through the likes of property bonds

This has the potential to be an impact-driven investment for experienced investors, as well as providing exposure to the ever-popular asset of property, and not only because it’s aiding in the delivery of much-needed housing – small and medium-sized housebuilders can also have a profound impact on local communities in many other ways.

From creating local jobs both within the construction sector and also the wider supply chain – such as architects, interior designers and more – through to revitalising areas by developing on brownfield land.

In addition, regional housebuilders who typically have an unrivalled understanding of the housing needs of the local area are able to deliver the right type of homes in the right locations at the time’s they’re needed most. 

This includes working alongside housing associations to provide mixed-tenure developments offering houses for sale, to rent, and boasting scheme’s such as rent-to-buy and shared ownership. 

This is particularly crucial at present, because as well as increased buyer demand, research from Capital Economics suggests the UK will need 230,000 new rental homes each year to avoid a shortfall. 

Importantly for experienced investors though, at a time when inflation is running at a three-decade high of 5.5%, they will likely be on the search for investment opportunities that can target inflation-beating returns as well as making a positive impact.

With potential returns often in excess of 7% –and sometimes Innovative Finance ISA (IFISA)-eligible, rendering them completely tax-free – property bonds can do this, making them a potentially valuable addition to an experienced investor’s portfolio. 

 

Investing for impact and targeting attractive returns

With the urgent need for more housing in the UK, and the subsequent requirement for an uptick in SME housebuilders to help boost delivery, the alternative finance provided through property bonds is crucial.

And by investing into property bonds, experienced investors are not just gaining access to an asset that has proven resilient throughout the pandemic – and had evidenced consistent demand even before the emergence of the post-lockdown housing boom – but also to an impact-driven investment opportunity with the potential to generate attractive returns.