Off-plan property sales at lowest levels in a decade

Only 34% of new build of new homes across England and Wales are estimated to have been sold in advance of being built last year. This figure is substantially down from its peak in 2016 when 46% of housebuilding activity was funded by off-plan investors.

The leading estate agent Hamptons provides yearly information about how developments are funded across England and Wales. Their information shows that homes being sold off-plan across England and Wales is at its lowest level since 2013. In this article we look into the prime reasons for this decline and then ask whether off-plan property sales are likely rebound in future years.

Changing trends

Hamptons’ off-plan index used new home sales data from some 550 estate agency branches which form part of its parent company, the Connells Group. They have identified two keys trends.

1. A move towards owner-occupiers. In recent years the majority of off-plan property buyers have been owner-occupiers. With close to 80% of purchases funded by this group last year. This is a significant change compared to 2015 where 70% of off-plan purchases were funded by property investors.
2. Property is being bought closer to completion. 67% of off-plan property was bought by first-time buyers last year. This group are looking for property that is almost completed as it will be their first home. This differs from property investors who often opt for a build that is a couple of years away in an attempt to secure a bigger discount.

Market view

David Fell, lead analyst at Hamptons, has stated: “Off-plan demand has steadily moved away from investors buying two or three years in advance towards first-time buyers who are typically looking to move home within six to 12 months. The majority, however, still want to wait to see a finished product.

“Slowing rates of price growth have also reduced the incentive for some buyers to get in early.

“A decade ago, investors buying well in advance of completion often saw the value of their new home rise 20% to 40% between exchange and completion.

“But as price growth has slowed, buyers have in general become less willing to commit to purchases years in advance of completion.”

Economic uncertainty

For the past twelve months there has been a big talk of a housing market collapse. This negative sentiment has deterred would be property investors from buying off-plan. The rational behind this is simple. If investors feel that the property market will fall, then it makes no sense for them to commit to buying a property at a price today when the property may be worth less at completion.

Inflation

Inflation has impacted off-plan property sales for four key reasons:

1. Increased building costs. Rising costs for materials and labour have eaten into developers profit margins. As a result many developers have slowed their development activities.
2. Increased borrowing costs. In an attempt to curb inflation the Bank of England has raised interest rates. This makes borrowing more expensive.
3. Less lending. Development finance has been more difficult to source as lenders are warry about lower margins for developers which means more risk for them.
4. Investor sentiment. Investors have concerns about off-plan property sales due to the economy with many adopting a wait and see strategy.

Governmental action

Several governmental decisions have reduced off-plan sales. The two most important decisions are:

1. The government ended help-to-buy which was a facilitator of renters to become owners by helping them get on the property ladder. This scheme helped them get new build property as the government effectively helped with a 20% interest free loan to fist time buyers. This had the effect of making it more affordable to borrow whilst giving the lender increased security as the government effectively gives the borrower 20% deposit.
2. The government decision to increase stamp duty for buy-to-let investors, and change rules on mortgage interest rate relief had reduced property investors appetite.

Demand is expected to rise

Last month Nationwide announced that house prices have returned back to positive. This will motivate housebuilders to build, and property investors to invest. Furthermore, there have been several other indicators whcich should stimulate off-plan sales.

Return of the 100% mortgage

Skipton has recently announced that it will be introducing a 100% mortgage. This is the first time this product has become available since the last property crash. This news is likely to stimulate the housing market by motivating renters to become buyers and giving property investors courage that the housing market will continue to improve.

Increasing rental yields

Whilst the property marketed has stagnated in the past 6 months as first-time buyers and property developers have adopted a wait and see strategy; news that rents have continued to outperform inflation has demonstrated that both types of buyers are losing money waiting to time the market. Consequently we anticipate demand to rise significiantly.

Stabilising inflation

Inflation on the global economy has fallen slightly and it is expected to return to lowers levels as monetary policy takes effects. This will bring added confidence to property investors as the cost of living crisis fades.

Bigger supply and demand imbalances

The imbalance between supply and demand is growing as development has slowed. This means even more new properties are needed. This should drive demand for new build property.