As interest rates have risen, the obvious and desired effect is to make borrowing more expensive, reducing the money people and businesses have available, reducing spending and (hopefully) curbing inflation.
But what are the longer-term, perhaps unintended, consequences of interest rate rises in development? How does it change the developments we produce?
Everyone is affected by the current interest rate rises when it comes to where they live. If you rent the cost of renting is going up.
When house prices are predicted to decrease, fewer people look to buy a house, leaving more to rent. That creates an increase in demand for rental property which, combined with rising borrowing costs for landlords, new regulations for rental property and inflation on maintenance costs, pushes rental prices up.
If you own a property, the cost to pay for it via a mortgage increases which, combined with increasing costs elsewhere, brings property prices down as less people can afford the prices they were at before.
This also means that if you own your home outright, lucky you, then it’s also costing you as your house price decreases – and to cap it off, no one is in the least bit sympathetic, sorry.
All this we know. What isn’t so widely mentioned is that some 86 per cent of homeowners with a mortgage are on fixed-rate deals of two to five years in length.
Of course, it depends when they took out their deals, but a substantial number of homeowners are still paying well under the Bank of England rate – and all hoping interest rates will come back down before their fixed rate period expires.
That in itself has unintended consequences because those people are definitely not moving house right now, which leads to a lack of housing on the market, which also helps prop up prices to some degree.
In the same way that mortgages are available as fixed rate or variable, so are development loans, which are the main way non-plc house-builders fund their developments.
Back when the interest rate was sub 1 per cent, there were very few fixed-rate loans on the market, so most developers took on variable loans, blind to the interest rate rises ahead.
Clearly it would have been better to seek out those fixed-rate deals but hindsight is a wonderful thing as they say.
There is another piece in the puzzle – rising build costs. Inflation in every aspect of the job. Materials prices, transport costs, borrowing costs, building regulation standards, sustainability measures – these all cost a lot of money and so the cost to build is also continuing to rise.
And don’t get me started on the costs of surveyors, solicitors, valuers, etc. Anyone issuing paperwork (probably while “working” from home) has been increasing their prices too. Got to pay for that Netflix subscription on in the background as you work, I guess.
Where am I going with all this? In short – if the value of the homes that developers produce decrease and the cost of all the borrowing, parts and labour to build them goes up, what happens?
In the short term, with developments under way, profits decrease (cue the violins) – but in the long term, new developments are allowing for all these factors and still factoring in the minimum return the banks require as a margin to cover a continuation of these problems
How is that possible when house prices and most of these costs our outside our control? In my first article, I described the viability method that local authorities use to calculate how much social housing developers can provide. Find out more here.
Briefly, you take the estimated end value, deduct all the costs including the land and what’s left can be put towards it.
So, if all the costs are rising and house prices are decreasing, the only two things that can be adjusted are the price of the land and the amount of social housing.
In rural areas, where developers are buying a field, the land price can go down to accommodate the rising costs and lower house prises because agricultural land is worth so little compared to its value with planning.
Therefore, social housing still gets built but farmers and landowners get less money when they sell. That’s why I’ve always argued those developments could and should provide a higher percentage of social housing and a higher standard of build than they frequently do.
In urban areas, it’s not so simple. The cost of building is substantially more than in rural areas, with complex problems to solve to get buildings built – and every development is a one-off.
Even more crucially, the land required is always very expensive in the first place as the existing buildings you will be demolishing already have value.
You can’t pay less for the land than it’s already worth without planning permission because the vendor won’t sell it for less – so the only thing that gives to make building possible is the amount of social housing.
This is not a good result, for anyone.
I frequently get asked about being a developer and there is often this idea that comes up that we developers hate providing social housing and do our best to avoid it. This is, for the most part, is wrong.
This week, the National Planning Barometer was published. It makes for stark reading with a conclusion that “the planning system is set up to fail”.
Also, the number one priority local authority committee members had was “providing affordable homes for future generations” (68 per cent).
We recently had a scheme refused in Adur, with the refusal stating quite clearly that our failure to offer as much social housing as their local policy requests was the reason.
If we could have offered more, we would have. The idea of selling a large number of units off plan, reducing our interest costs and risk is very appealing financially. And avoiding it doesn’t help us – we are still restricted to making 18 per cent maximum anyway.
Refusing schemes for not providing enough social housing in the eyes of the committee is common. It’s not just Adur.
The ironic, unintended consequence is that by refusing these schemes, even less housing gets built, social or otherwise, because developers can’t just magic 40 per cent social housing into schemes with all the other rising costs and decreasing house prices.
What’s left is fewer and fewer schemes getting built at all – nationally this year less than half of the country’s 300,000 target will be built, down from 205,000 built last year.
As the Planning Barometer succinctly says: “While councillors note that provision of affordable housing is a top priority, meeting their housing targets (the primary route for delivery of those affordable homes) is seen as a low priority.”
So as regulation increases, costs and interest rates rise and house prices decline, once again social housing takes a hit and developers are being prevented from delivering what they can by the committees who claim to want social housing more than anything.
Everyone blames everyone else and the only thing we agree on is that literally no one is happy with the system we have. Meanwhile, it gets harder and harder to deliver and prices and interest rate rises increase. What a mess.
Ed Deedman is a director of Cayuga Homes.