By Alessandro Pasetti, 30 June 2018.
Ever heard of ‘housing starts’?
As defined by Investopedia, this key economic indicator (which is roaring in the US) of the property market represents the number of new residential construction projects that have begun during a particular month. It is a simple concept, and the related mid/long-term trends confirm that while the press continues to make a big fuss about supply of new houses in the UK, there are several trends that warrant further investigation.
Recently there have been a series of reports on growing supply in the housing market based on the first policy paper launched by Neil O’Brien’s new think tank, Onward.
Fake or lagging news?
Now, there is some news we have to take seriously, and other news that is just part of the daily nuisance of separating fake reports and market noise from importation information that could trigger investors’ action.
In this post I flag different angles concerning housing supply in the UK, which we briefly anticipated as being a critical element in our mid-June coverage, when we noted that we were at a crossroads as recent data showed that the number of houses coming on to the market was showing signs of positive growth for first time in more than two years.
Thanks to Neil O’Brien, the press got really excited in the past week, but what should you make of his remarks and the real estate outlook?
As with all sell-side research and recommendations on price targets for stock, I suggest you pay attention to the supply data and its composition, which is the most critical value-driver for investors who are looking to deploy capital in the UK property market.
I seldom read The Sun, but hot on the heels of the political and social debate surrounding supply dynamics, I found some valuable stats in its coverage on 24 June, headlined: “A million new houses should be built just for workers under 40, which sums up the landscape”.
These are the important bits:
-> The number owning their own home in Britain has plunged in the last fifteen years, from 71% to 63%.
-> Soaring prices have seen younger people hit the hardest, with the number of 16-34 year-olds on the property ladder dropping from a half to a third.
-> Once known as the nation of homeowners, Britain is now fourth from bottom in a list of the 28 EU member states’ rates of homeownership.
-> In 10 of them, the rate is more than 80% home ownership.
25 June: All hell breaks loose
One day later, The Guardian noted that a report written by Neil O’Brien, a former aide to George Osborne who also worked for Theresa May at No 10, “calls for government intervention in the housing market, including giving London councils the power to limit foreign ownership”.
Well, perhaps, given the UK’s dependence on foreign capital (net FDI has swiftly fallen, and, similarly construction output is down), but the interesting bit for investors looking to buy is that the UK is “one of the cheapest countries for investors involved in residential rental investments”.
Emphasising the link between shortage of supply and rising house prices, the report offered radical – rather than realistic? – ideas in order to boost the number of new homes in the country.
On the same day, the UK government published a report in which it argued that a review of house building “has called for changes to the current system to ensure new homes are built faster”.
By the way, lots of interesting data and charts can be found here. The study, published on 25 June 2018, warns “developers are slowing the system down by limiting the number of new built homes that are released for sale at any one time”.
The practice, clearly, is designed to prevent a glut of new built homes driving down prices in the local market and is known as the ‘absorption rate’. However, the report also suggests that developers could increase the choice of design, size and tenure of new homes without impacting the local market and therefore speed up the rate at which houses are built and sold, concluding that “to obtain more rapid building out of the largest sites we need more variety within those sites”.
The analysis also says that a shortage of British bricklayers will have a “significant biting constraint” on government plans to boost the number of new homes built from 220,000 a year to 300,000.
Landlord News pointed out that increased property prices are preventing the equivalent of 1.4m last-time buyers from downsizing, in addition to a lack of appropriate housing stock.
Finally, The Financial Times argued that the radical proposal comes as the conservative think-tank seeks an end of the buy-to-let tax break, while noting other relevant trends for real estate investors. Separately on Monday last week, the FT noted that former minister Oliver Letwin published a draft report on developers’ “buildout” rates, after the government commissioned a study into ways to speed up housebuilding.
“Sir Oliver found developers are limiting the number of new homes released for sale at any one time to prevent a glut from driving down prices in the local market. The report also warned that a shortage of British bricklayers will have a “significant biting constraint” on the government’s plans (to build 300,000 homes a year), and called for an extra 15,000 bricklayers to be trained during the next five years.”
Should this debate surprise us at all?
And what relevant trends are visible in a market where more houses are surely needed?
According to Trading Economics, housing starts in the UK decreased to 35,590 in the fourth quarter of 2017 from 41,820 in the third quarter of 2017, having averaged 38,274.69 from 1978 until 2017, reaching an all-time high of 69,520 in the second quarter of 1978 and a record low of 16,420 in the fourth quarter of 2008.
Look at the charts below from Trading Economics.
Aside from the latest drop, shown in the chart above, this could be just a simple adjustment, based on long-term trends. Housing starts have risen steeply since the credit crunch in 2008…
… and are now trending around mean.
Need we say more? Lots of noise and shouty headlines but, very possibly, little that we actually need to pay attention to.
Good luck with your investments!
(This post was written by Alessandro Pasetti. Ale is the founder of Hedging Beta Ltd. He writes about investment strategy and assets valuation for European clients as well as Seeking Alpha, The Loadstar, Transport Intelligence and others. Based in London, he previously worked for about five years at Dow Jones/The Wall Street Journal, producing analysis for the IB community. Prior to that, he contributed to the launch of London-based Loan Radar, where he worked for three years. He had stints in equity research at Bear Stearns in London, HVB in Munich, and Unicredit in Milan.
It was edited by Gavin van Marle, managing editor of London-based The Loadstar. Gavin is also the author of the book Around the World in Freighty Ways: Adventures in Globalisation. He has won numerous awards, including the Seahorse Journalist of the Year 2011 and 2009, and Supply Chain Journalist of the Year 2010 and 2014.)