Custom build revolution needed to tackle UK housing crisis

A new report from Mortgage Advice Bureau reveals that custom build could be the key to getting UK housebuilding back on track, as radical change is required to deliver the number of new homes needed to meet population demand.

The report concludes that custom build homes are cheaper to construct, allow for greater consumer involvement, present less risk to mortgage lenders and could introduce a large number of new plots into the new homes market very quickly.

However, for custom build to fulfil its potential, local authorities must make better use of Section 106 planning agreements to ensure custom and self build is given favourable planning permission.

Custom build favours consumers, lenders and builders

For consumers, one of the major advantages of custom build is the opportunity to have a high involvement in the design and layout of their home, allowing them to tailor this to their individual lifestyles and future family needs. It can also provide the customer with positive equity on completion.

Mortgage lenders provide finance by making staged payments which can be made in arrears or even in advance using an Accelerator Mortgage Scheme. This means borrowers can get the cash to pay for labour and materials before work begins. The scheme also allows consumers to borrow up to 85% of land and build costs.

Crucially, custom build properties are cheaper to build. Exclusive analysis for MAB shows custom build houses are 15% cheaper to construct on average as builders do not have the additional marketing costs – used by speculative builders to shift stock – and their overheads are greatly reduced.

Builders also need far less working capital as they no longer hold a land bank and are paid in staged payments as they build the property. Reducing builder costs and margins provides instant equity to the homeowner. This in turn substantially reduces risks for lenders, which should increase their willingness to lend.

Favourable planning permission needed for custom build to flourish

The Mortgage Advice Bureau report shows the current planning system is geared towards speculative new builds: larger builders have the resources to spend heavily on land and battle the planning system to secure planning permissions.

To level the playing field, government and industry must educate local authorities to make better use of Section 106 planning agreements and compel them to provide favourable planning consent for custom build to boost new housing stock. For example, overall planning for large schemes could depend on elements of custom build being present throughout the site. In some cases, whole sites could be given permission exclusively for custom/self build.

This should be seen by developers as an opportunity rather than an obligation. For builders, it speeds up the planning process and allows for the construction of homes that are associated with lower costs and fewer risks than the speculative building model. It also allows for SME builders to play a greater role alongside larger developers to increase the UK housing output.

Andy Frankish, New Homes Director at Mortgage Advice Bureau, comments:

“The custom build market has a relatively low profile in the UK, but its potential is huge. The myth that custom build is only for high-income families needs to be put to rest. The low risk associated with custom build makes it attractive to mortgage lenders, so it is critical that more lenders show their support for this type of housing.

“However, the planning system is not being used to its full potential. The resources and time needed to successfully gain planning permission all but bars many smaller builders from the process, and perpetuates the speculative model of house building. The Section 106 agreement must be put to better use in a more concerted effort to improve access to custom build land if the new build sector is to have any hope of meeting demand.”

Why new build isn’t delivering

The UK’s housing shortage is growing more acute with housing completions below 150,000 a year since 2010. Despite the government’s latest pledge to support 100,000 new builds in total by 2020 through its ‘starter homes’ scheme, official projections suggest that the number of households will grow by 220,000 every year until 2022.

One reason new build has been failing to meet government targets in recent years is a lack of mortgage finance. Historically, lenders have been more cautious when lending on new build homes because buyers of new properties typically pay a premium over similar properties in the second hand market. This is a concern because if lenders have to take possession of the property the new build premium may have disappeared, eating into their loan-to-value (LTV) cushion.

Andy Frankish, New Homes Director at Mortgage Advice Bureau, comments:

“New build is seen as a niche sector by many lenders and most are wary of high exposure to lending in this area. High LTV loans on new build properties are particularly hard to find and come at a premium. This puts first-time buyers – particularly those with limited deposits – at a distinct disadvantage.

“The Help to Buy equity loan scheme has helped to move lending conditions in the right direction, but the scheme has propped up new build lending and construction rather than facilitating a fundamental change in lender attitudes. If the scheme were to be removed there is a real concern that first-time buyers will find their options for high LTV mortgages greatly reduced.

“Custom build should be seen as an integral part of a solution to the housing crisis. Working alongside traditional build, custom build gives customers more choice, reduces their costs and improves consumer equity. This helps to lower lender risk and gives land owners more options when disposing of land, introducing a high number of new plots to the market in a short space of time.”