Sluggish economy spooks small housebuilders

Small and medium (SME) housebuilders are being put off from investing in new projects by the UK’s economy and housing market, according to a new report.

As many as 70 per cent of SME building firms said current market conditions are reducing their appetite for starting new sites and a quarter expect to cut back on land purchasing, the Home Builder’s Federation (HBF) has found.

SME builders have warned they are facing an “existential crisis” as their contribution to housing declines, which experts say poses a threat to Labour’s ambitions to build 1.5m homes before the next general election. 

Only 28 per cent of SMEs quizzed by HBF said they have a positive outlook of the UK’s housing market, and 37 per cent said they feel negatively about its prospects.

The smallest firms – those which build less than 75 homes a year – are the most pessimistic, with nearly a third (28 per cent) expecting housebuilding to decline in the next three months, as 18 per cent brace for a drastic reduction in housing starts. 

Among the 70 per cent of SME housebuilders who say the market is dampening their ambition to start new projects, they said higher deposits, stricter lending criteria and high interest rates are contributing to this hostile environment.

Housebuilding in capital lags behind

London is the region where SMEs are the most pessimistic, with 57 per cent of small and medium developers in the capital bracing for worsening conditions. 

Labour’s attempts to streamline planning regulations are yet to boost country-wide housebuilding, according to the Treasury watchdog, but it is in the capital where progress to Labour’s target is lagging behind the most.

London is expected to deliver 88,000 new homes every year but think tank the Centre for Policy Studies has warned the capital is facing the worst housebuilding challenge since the Second World War.

Only 4,550 homes will be built in the capital in 2027 and 2028, according to consultancy firm Molior.

Despite gloomy sentiment already, HBF said small housebuilders are bracing for further tax hikes, with the landfill tax – which is charged on waste disposed at unauthorised sites – set to increase by 500 per cent over the Parliament.

The trade body is calling on the government to impose a moratorium on regulatory costs, taxes and levies on SME housebuilders, and to commission a review into recent increases to the costs facing developers.

Neil Jefferson, HBF’s chief executive, said: “[SME housebuilders are] most impacted by the ongoing market conditions, lack of demand, and rising taxes and policy costs. 

“While planning changes have been positive, much more is needed to address the concerns of SMEs to enable them to play their part in delivering more homes.”

Jefferson said the lack of support for first-time buyers is constraining demand, and called for a new equity loan scheme to help young people onto the housing ladder.

Help to Buy, a previous equity loan scheme, offered first-time buyers a 40 per cent loan but was closed in 2023.

Figures in the housebuilding industry are calling for Labour to create a similar scheme to prop up construction, but some property experts claim the previous scheme artificially inflated house prices.

A third of first-time buyers rely on help from their families to buy their first house, as the average age of Brits buying homes for the first time has risen from 29 to 34 since the 1990s.