vand wrote:If supply of housing increases then, other things being equal, prices will fall. If you mean that the demand is highly inelastic, and price will only respond by a small amount - that is indeed possible.. so what, you build even more housing in that case.
Mike4 wrote:
But "other things" surely are not equal. For prices to fall new home building would, for a start, have to outpace the inexorable rise in the population. Both indigenous and from immigration. Also the gradual increase in wealth of the population as a whole leads to higher demand for accommodation, even if the population remained static. There are probably other upward pressures on the demand side too.
Land prices are a large driver of house prices. Land owners do not sell their land for less than the market value. Land probably accounts for 20% of the overall costs of a new home. Throw in the infrastructure needed for the new homes and [quick back of the pad working] you're probably starring down the barrel of 30-35% of the costs to build. Developers do need significant margins to stack up the risk reward ratio and as a generalisation they will want more than 25% margins to advance to construction phase just based on risk cover.
In the late 1980’s when I was preparing appraisals for the Yorkshire office of the third largest volume builder the benchmark’s to purchase land was a minimum of 18.5% margin (on house sale price) and a ROCE that exceeded 40%. All appraisals to purchase land had to be signed off by the CEO. It was the ROCE that was always the issue. It was set at this level to maximise cashflow and reduce work-in-progress. At the time Barratt were working to much lower margins.
When the total cost of building a new home is viewed there’s a veritable herd of “hangers-on”. Fees for building control, planning, desktop studies, NHBC (or the like) cover. Sales offices and show homes all neatly furnished. Insulation has increased significantly in the last 30 years. New homes, indeed, new buildings must also be well sealed to prevent draughts. They are pressure tested to prove they meet a standard.
All these costs are driven by the salaries of those who participate in taking a building site from conception to completion.
I have relied on construction to earn a living. My long-standing and somewhat frustrating mental health issues to one side I’ve earned a decent income (when working). But, and again the caveat of my intermittent work history due to health to one side, it’s a famine and feast industry. A roller coaster. Demand isn’t consistent. And there’s no reason for the industry itself to create this. The conclusion is simple, it must be driven by external forces.
Land prices may soften from time to time, but they aren’t going to come down in substantial chunks. Demand for most new homes is based on location. People are prepared to commute to obtain affordable homes, but I suspect most will pay more for a home within walking distance of their children’s school.
I focused this thread on insulation. Not I hasten to add that I’m precious about where it wanders off. Often when a thread diversifies the conversation remains interesting and thought provoking. Unless it’s me jabbering on
. Quick diversification. In the past I've apologised for this behaviour. Would you mind if I didn't anymore. Embarrassingly it's a classic symptom of my condition
. If we assume that, generalising, there’s a lack of insulation in the UK’s homes, and obviously setting aside Mike’s 18th Century converted pub (sorry for the poor joke – tongue in cheek), and other homes which can’t be insulated to a high standard, the UK has a problem. It has to heat it’s homes and to do that means significant investment in power infrastructure. And I would suggest we only have two sources for this. Nuclear and wind. That decision is made for us if we want to reduce our carbon footprint. Both will need more investment.
Someone somewhere will be looking at the costs of new infrastructure and comparing that to the costs of improving our housing stocks insulation.
Absolute pure speculation and perhaps total rubbish but I just wonder if ultimately we will have to start considering demolition of some homes, particularly the older stock. The back-to-back terraces which seem to survive in many of our cities as an example. As I’ve said I could be going down a brain fart cul-de-sac with my thoughts. At the very least we need to know about how our demand for heat will impact our carbon footprint and if it’s more cost effective to build new homes where old stood, instead of “more” very costly infrastructure. I suspect there’s a choice to be made but I can’t find any numbers to suggest which way we will have to take.
We have a two party first past the post democracy. I accept there are other parties which we can vote for to. But for the most and keeping my point simple our choice is Conservative or Labour.
Labour have said they will build if they get into power. I’ve not looked for the detail in that statement. I think Labour have said their target is 300,000 new homes per year. I saw a number of 1.5 million touted on one of their fliers so that seems to be their target. It’s the same as the Conservatives. I don’t think either party has any latitude on the numbers that are built and the UK’s choice for which energy infrastructure and energy independence we make.
We do need to build though. And I have no pigging idea how to make new homes any more affordable. I sort of wish I did. We will need more skills too. We haven't trained the skills we need. I think it's worth talking about this as I believe the lack of training within the industry has been causing major inflationary issues when building.
I use a simple barometer for measuring labour inflation. If the bricklayers are demanding and receiving 20-30% increases and working a four-day week the economy will be very close to a significant adjustment. Three years ago bricklayers pay rose by at least this amount. At this point the clock was ticking down to interest rate rises and a reduction in the number of new homes coming to the market.
For those who are more independent regarding their choice of investment I think there will be some medium-term gains in infrastructure and building stocks. I’ve just focused on build and build materials at the moment. And with heavy caveats and genuine humility energy infrastructure may be worth a review. A final caveat, if I may please, I am not trying to teach anyone how to suck eggs. I’m simply chatting. Or as those who are closest to me offer in feedback, I’m jabbering
. It’s how my little grey cell functions, or if you prefer doesn’t function
.
Take care Fools
AiY(D)