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The cost of finance has dominated the lending markets over the last year but the last six months, in particular, have changed the outlook for residential development in 2025. Parik Chandra, Partner and Head of Specialist Lending looks back at 2024’s key moments for lending markets and their likely impact on the coming year.
2024 saw significant change in the prospects for the UK housing market. A new government has promised to get ‘Britain building again’ and on October 30th published more of the investment detail that stands behind this promise. But the housing market is not an island and the election of Donald Trump as well as views here on the government’s tax, spending and investment commitments mean there will be headwinds as well as opportunities ahead for the new build sector.
In her inaugural budget, Rachel Reeves, reinforced the government’s commitment to the new homes market with a £5 billion investment by 2026 to push Britain towards its 1.5m[1] new homes target. She also announced funding to the tune of £3 billion of additional support for SMEs and the build to rent sector in the form of housing guarantee schemes. This should be of particular benefit to smaller house builders. In addition, the government pledged £46 million of additional funding to support the recruitment and training of 300 new planning staff, to accelerate work on large sites that are stuck in the system, and increase local planning capacity. Whether this is significant remains to be seen given the backlogs already in place.
Aside from direct interventions, the budget will also have an indirect impact on the new homes and housing sector. The headline grabbing increase in employer National Insurance payments, as well as the rise in minimum wage, will impact on business in the housing sector as much as anywhere elsewhere, which could have an impact on the recruitment of the skills needed to get homes built. Smaller businesses may take heart that the employment allowance will be increased from £5,000 to £10,500, and the £100,000 cap removed so some small companies will be paying less. But in most respects the cost of doing business will have risen for many.
As a consequence of the budget, gilt yields rose as markets absorbed the sharp rises in investment, taxes and borrowing to the point where on November 8th, Bloomberg reported that the Chancellor is already at risk of breaking Labour’s manifesto pledge to hold just one fiscal event a year[2]. Rising borrowing costs and weaker growth both threaten to wipe out the £9.9 billion of headroom the Chancellor had decreed as part of her “stability rule”.
Clearly bond investors are concerned that the Chancellor’s plans to run up borrowing to boost investments will fuel inflation, probably limiting the Bank of England’s ability to cut interest rates much further than November’s quarter of one percent. The cut is useful for mortgage affordability but had little impact on swap rates which rose. The prospect of higher interest rates for longer is a very real one. As SONIA swaps rise so does mortgage pricing. The indirect consequences of the government’s plan and the reality of a Trump presidency continue to fuel the expectation of rising inflation and subsequent decisions in central banks to keep it under control by raising rates.
The housing market will have direct impacts of the budget to deal with like the second homeowners and landlords 2% increase in Stamp Duty Land Tax and existing and first-time buyers also seeing no extension granted to current relief thresholds which are due to expire from March of next year. There are numerous reports that chains involving landlords are already collapsing[3].
For the year ahead the issues of note beyond finance are readily visible. The Biodiversity Net Gain legislation introduced in February of 2024 is driving some landowners to set aside farmland and greenbelt to support developers having to offset the impacts on nature of their new build. This was not necessarily what the government had planned and may impact certain land prices. The Future Homes Standards are due to come into effect this year too but are still the subject of much lobbying as builders seek to water down the additional cost of construction.
The arguments about ‘grey belt’ are far from over. There is no legal definition of this term and many in the green lobby worry that a privately owned green belt will be left to ruin in order to reclassify and sell the land for development. Finally, there is inflation and its impact on the cost of materials and labour as well as how many developers will want to build vast numbers of affordable homes where the margins are so much less attractive than open market homes.
What we do know is that the government in its budget and legislative action is effectively asking the private sector to provide the cash support for developers and buyers of new homes and that brings opportunity. With so much impetus and focus, there is a real chance that the new homes sector will be the key player in the broader UK housing market over the coming five years and we should all be ready to support it.
