FTSE350: Housebuilders need to embrace modern practices

So, there must be other contributing factors. The government wants to see 300,000 new homes built each year, but this is an entirely academic exercise if no-one is prepared to buy them. This all points to the affordability factor as another key influence.

Brexit will remain a dominant issue, but only because potential buyers are holding back because they are worried about mortgage rates and house price trends. The popular media latched on to and distorted the idea that a hard landing would see prices fall by 30 per cent. That wasn’t the suggestion made by the Bank of England; it was more a case of being prepared for such a movement, one that most people agree is unlikely.

Building more houses therefore is not the answer unless the political situation becomes less clouded and makes potential buyers more confident. However, confidence may not be the answer either.

With just one year to go, the 2010s will see new home construction sink to its lowest level of any decade since World War II. In fact, output in each successive decade has been in steady decline. New research from the Centre for Policy Studies also highlights the fact that because of a rise in the population, new-build construction in the ratio of one completion for every 14 people in the 1960s has slumped to one in 43. Housebuilding in the 1960s totalled 3.6m new units, which by the 1990s had fallen to 1.9m.

Then again, publicly quoted housebuilders have been steadily increasing output in the past decade since the financial crash; so, where is the shortfall? The answer is, ironically, where the need is most; at the affordable end. After the Right to Buy scheme was introduced in the 1980s, construction by local authorities dried up, with just 1,550 housing starts in 2018. However, borrowing constraints have now been lifted, although it would be unwise to expect a sudden increase in council homes because there are many hurdles to overcome.

So, where does this leave the housebuilders? Outside the vastly inflated London and home counties markets, the outlook is quite good. That’s because new houses are being sold at prices that people can afford. The affordability challenge makes it a lot harder to sell expensive houses in the south-east of the UK, and part of the solution will be to build homes with lower selling prices. The most immediate side effect will be margin pressure, and builders must find a way of addressing this.

The first is to adopt the partnership style of construction, where homes are built on land owned by a local authority, and in conjunction with the local authority. This means that output would comprise a cocktail of affordable homes, private dwellings for sale and a proportion for the private rented sector.

But there are other ways of reducing costs. The major attraction comes with modular construction, but this is currently fragmented, lacking in volume and as a result, expensive. These problems can be overcome as can be seen in Scandinavia, where a majority of components are manufactured offsite. This brings several key benefits, not least of which is lessening the need for skilled labour. This is especially important when considering that around 400,000 skilled workers are expected to leave the UK industry in the next decade. These changes won’t happen overnight, and it will take a huge effort to encourage new workers into a market that requires a root and branch restructuring if costs are to be kept down at the same time as output is increased.