In the UK, private enterprise delivers 60% of new housing, with SME developers playing a fundamental role in that delivery.
One of the key advantages of being an SME developer is the ability to react quickly to shifts in the market. However, they need support and guidance, which is why Atelier recently produced a report with Dr Nicole Lux outlining how past performance points to future potential to help SMEs plan for the medium and long term.
We started with a simple question: can we use past property market data to predict the future? We compiled a detailed analysis of property prices, inflation, interest rates, demand, supply, mortgage rates, unemployment and population growth with a view to better understanding the market conditions we can expect to see in the short to medium term.
The data indicates that we are close to the trough, which will be followed by a sustained period of recovery during which we will see a recovery in house prices, stabilisation in interest rates and rise in demand. For developers, the message is: act now if you want to capitalise on the coming upswing in the market.
Drivers of demand
Looking at demand, the report examines three key areas: population change, changing household formations and unemployment.
In terms of unemployment, UK unemployment is stable at circa 4%. Indeed, trends recorded over the last 55 years indicate unemployment is at close to historic lows, leading to strong structural demand for residential property.
In terms of demographic changes, population growth is levelling off after a sustained increase from the early 1980s and going forwards, demand for housing will still grow, driven increasingly by the changing formation of households. We are seeing more fluidity in household makeup and the ONS predicts that between 2018 and 2028, the number of households in England will have grown from 23.2 million to 24.8 million, an increase of 7.1% (1.6 million). This equates to an average of 164,000 additional households per year. What’s more, with the number of people older than 85 expected to double over the next 25 years, we are also going to see demand for later-life accommodation spiking.
Lessons from house price data
However, demand factors can only tell us so much. There are a number of other data points that indicate that we are about to see the market turn.
Take house prices. The UK is currently experiencing a period of decelerating growth in house prices, which began in July/August 2023. ONS figures dating back to 1969 indicate that this is the sixth period of decelerating growth in the last 55 years and in the same time frame, there have been just two periods of absolute decline. Tracking the data in more detail, we can see that periods of price decline last an average of 16 months and following each fall, there has been significant and typically prolonged recovery.
Tracking property values over the long term, we can see that the total value of UK property has grown at an annual average rate of 6.1% over 30 years, close to double the rate of inflation – with most of that overall rate driven by residential property. Property is a long-term asset class, and with the data now available to us, we are positive about the future.
Time is of the essence
As this snapshot of historic trends indicates, though recent market conditions have been a challenge, they do not amount to a structural shift. The property sector will remain profitable over the long term.
Savvy developers need to begin positioning themselves if they hope to capitalise from the upswing when it comes. Time is, as ever, of the essence. With pipelines likely to take 12 to 18 months to restock and the nature of the planning system, ambitious SME developers should be bidding now.