Paul Atkins, Partner and Head of Property Tax at haysmacintyre analyses the need for changes in house-building delivery.

There have been plenty of housebuilding targets announced by both the Conservative and Labour Party in recent years. In fact, the need to build more houses, and even how many more, has been a rare area of agreement across the political spectrum. The Labour Party have pledged to build 1.5 million homes should they return to power at the next election, whilst in 2021 the Conservatives promised 300,000 new homes a year, though this target has since become ‘advisory’ rather than binding.

Nonetheless, these targets reflect the reality that the UK needs to build significantly more houses than it currently is. The population continues to grow, and the supply of housing has struggled to keep up. In fact, the number of new houses being built annually is dropping, with 12% fewer built in 2023 than in 2022.

There are a number of causes for this decline, the most significant being adverse conditions in the wider macroeconomic environment. The government support introduced to protect the economy from the twin blows of the Covid-19 pandemic and the war in Ukraine is being gradually withdrawn. But inflation began to rise rapidly at the end of 2022, with the Bank of England responding by raising interest rates 14 times in succession, from 0.25% to 5.25%.

For now at least, there is no sign of the rates being raised again, but housebuilders’ margins have been eroded and consumer confidence has been dented. The result of that is that it has become more expensive to build houses, whilst simultaneously an increasing number of potential purchasers are electing not to make significant investments such as buying a house, with the number of UK residential transactions in January 2024 12% lower than in January 2023 and over 23% lower than in 2022.

The predictable result of this has been that housebuilders have been reluctant to step up investments to the extent that would be required to reverse the decline in the volume of houses built, because there is no guarantee of a return on that investment.

This situation, if allowed to continue, will see the supply of new houses continue to dwindle, with significant consequences across the wider property sector, including for estate agents, conveyancers, and subcontractors, and for those hoping to buy a property.

Which raises the question: what can be done to provide housebuilders with the support they need?

A budget for the property sector?
The Chancellor’s Spring Budget presented an opportunity for the government to introduce fresh measures to support the property sector. In that respect, Jeremy Hunt’s announcements on 6th March represented a step in the right direction. The reduction in Capital Gains Tax (CGT) for residential properties is designed to encourage an increased volume of property transactions, whilst the planned abolition of Stamp Duty for multiple dwellings may well provide a more level playing field, even if it also came as an unwelcome surprise to those who were planning large scale purchases.

The abolition of the furnished holiday letting regime, which will increase operating costs for landlords renting short-term holiday homes, should also encourage an increased number of property transactions, particularly in combination with the reduction in CGT. Equally, however, the Budget was relatively light touch when it came to property, and did not introduce the sort of landmark policies that would have meaningfully moved the dial for the industry.

That is perhaps unsurprising given the Chancellor will almost certainly have had one eye on the General Election due later this year and the need to achieve more long-term sustained growth across the entire UK economy. But that may be a relatively cold comfort for housebuilders who remain subject to a range of external pressures.

Meaningful property tax reform
Effective management of tax liabilities has become a key concern for housebuilders, with discussions ongoing within the sector about possible VAT reform. Currently, housebuilders engaged in projects for private sale are able to recover the majority of VAT incurred as a cost component. But forward selling both affordable and rental properties introduces a number of additional complications to the VAT position, which can result in ‘VAT leakage’ if sufficiently detailed plans are not put in place.

In essence, the challenge stems from the fact that the VAT recovery position differs depending on whether a sale is to a private customer or a Housing/Local authority. With a number of housebuilders, notably including the FTSE-listed Vistry, increasingly turning their focus to affordable housing, reforming VAT recovery is a pressing concern for the industry. It would also align with the housebuilding targets of the next government following the General Election, suggesting that it will remain high on the agenda during discussions between industry and government.

Tackling the planning problem
Surely the most intractable (and longstanding) problem for housebuilders has been the planning system. Reform is overdue, but despite the best intentions of successive cabinets, meaningful change has not yet been accomplished. This has led to a virtual traffic jam, with housebuilders holding an increasing amount of land that remains undeveloped due to the difficulty in securing the necessary planning permission to get shovels into the ground.

A clear and consistent planning policy is essential, and would give housebuilders much-needed clarity on the sites to target for development. This would also help to tackle the issue of idle sites, which do not benefit anyone. Planning reform should also be accompanied by efforts to promote brownfield sites. Development cannot be allowed to proceed at the cost of the UK’s green spaces, but there is a better balance to be struck than the current system provides for, and given the UK’s growing population, it is increasingly urgent that we find that better balance. Could more reform on tax reliefs for land remediation be the answer?

Ultimately, the UK needs to build more houses, and without more support for the industry, that is exceedingly unlikely to happen. The ongoing economic and policy challenges have created an environment where the pressures on housebuilders are simply too great. Indeed, without action those challenges may well escalate into crises. However, there are steps that can be taken now to alleviate the pressure on the industry.

The Spring Budget represented a start, now it is essential that the job is finished.