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The economic cycle


By Paul Smith

News from the building sector is becoming increasingly gloomy. The bad tidings started last October when Capital Economics predicted a 40% drop in UK housing starts from 178,000 in 2022 to 110,00 this year. This month the major housebuilders are breaking cover, Barratt are forecasting 6-9% fewer homes than they planned in the summer, Persimmon has announced a halving of advanced sales and Taylor Wimpey are responding to reduced demand by becoming ‘highly selective’ in purchasing new plots.

A decline in housebuilding has a knock-on into the wider economy, from people buying goods to furnish their new homes to the supply chain of sub-contractors, vehicle & tool hire and materials.. Every recession leads to more building firms folding, as many survive on turnover with small margins.

In the past when this occurred the housing association sector could be called upon to fill the gap. As the social housing sector has tended to be counter cyclical it was ideally placed to take the strain and keep housebuilding on track. The Government’s response to the housing crash in the late 80s/early 90s was a Housing Market Package which encouraged housing associations both to take over the ownership of homes being repossessed providing the owners with a tenancy, and also to take over stalled building sites and get them going again. In 2009 the Government also injected resources into the social housing sector to stimulate the economy.

This time things look more difficult. Housing associations have sought to fill the gap in government funding with private housing development, making them at least partly dependent upon the traditional housing market. There is also no sign that the Government is poised to push more money the way of housing associations. As mentioned in a previous blog social housing providers have their own crisis focussed on the condition of existing homes. The impact of this is starting to be seen in Global Accounts of the sector recently published by the Regulator of Social Housing. The accounts for 2021/22 show the beginning of a move to increased investment in existing homes, repairs, improvements, decarbonisation and building safety.

The regulator states “Deteriorating margins, lower levels of interest cover and reduced capacity to manage downside risks are indicative of the challenges we expect providers to face in the future.” Despite this, the regulator concludes “the latest financial forecasts consolidate the recent picture which sees providers maintaining consistent levels of development in addition to committing additional expenditure on their existing stock.” However, this financial year has seen further need to invest yet more on existing homes and next year rents are capped at below the inflation level and certainly below the rises in materials and contract costs for repairing and improving homes.

The ability of housing associations to pick up the slack in the housing market and perform that counter cyclical economic boost, seems much weaker than in previous recessions. Without additional government support we could see several years of reduced housing output and no end in sight to the affordable housing supply crisis.


The economic cycle