Prolonged Brexit uncertainty will damage the UK housing market
Prolonged Brexit uncertainty will likely further damage the UK housing market, according to the latest RICS UK Residential Market Survey.
13 MAR 2019
In terms of new policy measures affecting the built environment, we weren't expecting much from the chancellor in this Spring Statement; but he couldn't resist the temptation to throw in a curve ball or two.
However, we have to remember that a host of new measures are dependent on the outcome of the Brexit debate - which is frustrating given how much parliamentary time has been diverted to it at the expense of pressing domestic issues such as the housing crisis, construction skills shortage and infrastructure deficit.
Focussing on the new measures, we're encouraged to see that Housing Associations in England will be able to borrow up to £3bn to deliver 30,000 affordable homes, however if added to the 220,000 new homes last year, this does not reach the government-set target of 300,000 new homes per year. We will continue our call on the government to prioritise housing and address the shortages which pose real long term problems.
Whilst the infrastructure sector will receive a boost through new deals covering Borderlands, Mid-Wales and Derry/Londonderry, we have to ask why the government is only consulting on the future of infrastructure funding at a time when the UK is close to losing access to European Investment Bank (EIB) funding; a fund that was worth some €2.1bn in 2017 – half of which was directed at infrastructure. The UK government could, and should, have done more to find a suitable replacement for the EIB as a means to prepare the UK.
This is the second Spring Statement since parliament moved to one main fiscal event a year. Philip Hammond overhauled the process in 2016, moving the main budget statement from the spring to the autumn. In place of the previous slot, a new Spring Statement was established to take its place. Rather than introducing any major fiscal changes, this event will focus on responding to the Office of Budget Responsibility's (OBR) forecasts for the economy and public finances, and provide an update on measures announced in previous budgets.
There were no rabbits to speak of in the chancellor's Spring Statement to parliament today, so the said "non-event" focussed on the Office for Budget Responsibility's (OBR) updated forecasts on the economy and public finances. This was widely expected by markets as Philip Hammond had made quite clear in spring 2017 he would be reverting to a single fiscal event to be held each autumn.
The heightened uncertainty engendered by eleventh-hour Brexit negotiations, and a heated voting schedule by MPs this week, has probably made that decision all the wiser. Any announcements for changes to tax policy or public spending today would have been premature and unnecessary given the parlous state of political affairs. Best to keep the powder dry for when the clouds start to lift.
Whether or not his proclaimed "deal dividend" from a soft Brexit is real or imagined (the OBR estimates the chancellor has over £26bn in extra spending power if no-deal is taken off the table), the near-term outlook for economic growth is decidedly weak. While labour markets are resilient, with record high employment and an unemployment rate below what the Bank of England estimates to be inflationary, businesses have slashed capital investment spending in the face of sustained uncertainty which has supported weak gains in productivity. Inflation is stable and within the prescribed 2% target, but its future path depends in large part on the response of wages and the British pound that, to date, have made many of the Bank's own forecasts wide of the mark. The much over-due public spending review was announced to be ready for the Autumn but with so much uncertainty hinging on how Brexit eventuates, we expect a cautious approach that will be prone to sizable future revisions. Like it or not, it would be imprudent for government to put the cart before the horse during historically unprecedented (potential) change.
In terms of the OBR's updated assessment on the public finances released today, this contained a mixed bag of news for the chancellor. On the one hand, borrowing for the financial year just ending is expected to undershoot forecasts made in October by a significant £2.7bn margin. This has been driven by stronger than expected income tax receipts and national insurance contributions, while the recent easing in the Retail Price Index measure of inflation has meant accrued interest on index linked guilts was lower than predicted in October. As such, the latest figures suggest borrowing is on course to fall to £22.8bn in 2018/19, down sharply from £41.9bn in the previous year. Furthermore, although borrowing is still seen picking-up to £29.3bn next year, the new budget deficit projections have been reduced in each year of the forecast horizon, ending 2023/24 at £13.5bn (noticeably less than £19.8bn envisaged back in October).
Forecasts for the economy more generally, however, were adjusted in a less favourable direction. GDP is now expected to expand by 1.2% in 2019, 0.4% below the previous growth rate pencilled in by the OBR. Furthermore, there appears little prospect of this lost growth being recuperated, in the following year at least, with forecasts for 2020 remaining unchanged at 1.4%. That said, there were marginal upward revisions of 0.1% to economic growth projections in both 2021 and 2022.
The relevance of today's statement for the real estate sector is relatively limited and, in any event, likely to be overwhelmed in the near term by the ongoing challenges around securing agreement on a way forward on Brexit. RICS market surveys covering the commercial, residential and construction sectors continue to emphatically highlight uncertainty surrounding this issue as the critical factor holding back activity. Significantly, key indicators that we collate suggest that this is also already taking its toll on the development pipeline in general and, in particular, on the ambitions of housing developers notwithstanding the chancellor's comments today. The announcement of a further £3bn of loan guarantees to underpin borrowing to finance affordable homes is welcome in this context but unlikely to do very much to support the drive to meeting the target of delivering net additional homes of 300,000 per annum.
Coming less than 24 hours after MP's voted against the prime minister's latest Brexit deal, the Spring Statement has taken place at time when parliament's attention has been focused on the UK's withdrawal from the EU.
As anticipated, the political uncertainty resulted in the chancellor delivering a slimmed down event ahead of any wider action that might need to be taken as a result of Brexit disruption.
In keeping with the low-key nature of the event, Phillip Hammond viewed this year's Spring Statement very much as a "placeholder", given its proximity to the UK's expected departure from the EU on 29 March. The dominance of Brexit was confirmed when the prime minister announced on 26 February that MP's could expect a series of important Commons votes on Brexit in the same week. This includes a vote just a few hours after the Spring Statement on the possibility of the UK leaving the EU without a deal.
The chancellor attempted to sway MP's ahead of the second meaningful vote, by promising to increase public spending if they backed May's withdrawal deal and pave the way for a smooth Brexit. A multibillion-pound windfall for the public finances, as a result of strong income tax receipts, has boosted the chancellor's "insurance fund" built up to protect against a hard Brexit.
All eyes will now be looking towards the Comprehensive Spending Review later in the year. If a Brexit deal is agreed over the next few weeks, this will be published before the summer recess and conclude alongside the autumn budget. The chancellor will be under political pressure to match the claim made by the prime minister last autumn that the "end of austerity" is coming. He has already committed to spend an extra £20bn a year on the NHS by 2023, leaving other public services fighting for extra funding.
Housing is still one of the most pressing domestic issues within England and the devolved nations, yet with Brexit uncertainty still an economic threat there was only small mention of housing and addressing the residential needs of the nation.
The chancellor focused solely on housebuilding and buying with no mention or focus on the growing private rented sector or struggling public housing system. Government must not resort to previous administration's blinkered focus on just house building for sale.
The details around the £3billion 'Affordable Homes Guarantee Scheme' are sparse, except that it will be aimed at Housing Association who build across many differing tenures including social rent, affordable private rent, shared ownership and affordable sale. No details about whether all or just some of these tenures delivery will be acceptable for borrowing. Previous similar schemes allowed the government to underwrite housing association borrowing to lower its cost, though there is no confirmation that this announcement will follow this previous example.
The announcements by the chancellor today do little to truly address the affordability issues faced within the residential sector, and with the notion of 'affordable' still ambiguous and unclear it will not provide the help to the sector that is needed.
The housing delivery numbers are promising, and the re-announcement of the £1billion loan package for SME builders is still as welcome as it was when announced in October last year. The announcement of specific growth areas that will be targeted with already announced funds is also a welcome clarity, especially for those areas and those who develop and build within the identified areas.
Within the Ministerial Statement released in support of the Spring Statement is the announcement of an Accelerated Planning Green Paper and plans to introduce measures as part of replies to previous consultations or recommendations emerging from them. Planning reform is vital to healthy housing delivery which doesn't just deliver houses but delivers to housing need. We await the green paper, a subject of which we have been vocal in calling for, for many years and introduction of measures especially around diversification of large sites from the Sir Oliver Letwin report of which we were a part. and the domestic issue focus that they will provide.
The chancellor's identification of help to buy as a success story to help delivery of homes, belies the fact that this government will be ending that loan scheme in 2023, the same time period of which they aim to be building 300,000 homes a year. The policy helped to maintain the housing market and sustained a level of construction activity and could have a negative impact on new housing starts after the early 2020's when it ends.
Government must be more future focused in their aims for the housing industry and aim to deliver a sustainable system that continues delivery across all housing tenures and not just delivery to meet arbitrary targets for a certain period of time (or political administration).
In terms of growth deals and infrastructure investment, the chancellor announced very little that was not known or expected.
While this is the Spring Statement and a different deal to the autumn budget, the paucity of announcements mixed with recommitments to plans and spending already announced suggests the government's devolution programme, industrial strategy and plans to rebalance the economy have run out of steam in the face of Brexit.
This is perhaps understandable but RICS and the CBI have both been encouraging the government not to take their eye off the domestic agenda while Brexit is being negotiated.
Under the promise to 'slay twin evils of low productivity and low wages and build an economy that works for everyone', Hammond announced measures to boost productivity by investing in infrastructure, skills, technology and housing.
Much of this highlighted the existing funding already committed; the £37bn in national productivity and investment fund, the largest ever investment in England's strategic roads, the biggest rail investment programme since Victorian times, and a strategy for delivery a nationwide full fibre network by 2033.
The announcement of 'up to' £260m for the innovative Borderlands growth deal has been long expected and will be welcome in the North of England as a first step. The Border Partnership was launched in 2013 and brings together Northumberland, Cumbria, Carlisle, Dumfries and Galloway and the Scottish Borders covering a mainly rural area of 1m people. As the chancellor said, it is on top of the £100m funding already announced for Carlisle.
Other than that, there were few mentions of what remains of the government's devolution programme and he could only point to the progress of future deals for mid Wales and Derry/Londonderry and 'reiterate' commitment to the Northern Powerhouse Rail project.
Further details on the Transforming Cities Fund were not mentioned by the chancellor but were published separately online. This allocates £60m investment in 10 cities to fund 30 new schemes such as bus station upgrades, new cycle lanes and road improvements.
There was also a major announcement and commitment to Local Full Fibre networks with £53m allocated to nine local areas which have bid for the money since last year's budget. The money comes from the Local Full Fibre Networks Challenge Fund which enables next-generation full fibre connections to key public buildings, and nearby homes and businesses.
The chancellor committed to full fibre coverage by 2033 – which does seem some years off and well behind the curve compared to other modern post-industrial nations.
There were a number of specific investments mentioned that will be welcome in the areas they are situated. They include the £79m Archer 2 supercomputer in Edinburgh, £81m for the national Extreme Photonics Application Centre in Oxfordshire and £45m for the European Bioinformatics Institute in Cambridgeshire.
Hammond announced an updated National Infrastructure Strategy alongside the Spending Review which is due in the summer and a consultation launched on that day on supporting private infrastructure investment once the UK leaves the European Investment Bank.
A number of impending consultations were also highlighted that will be very relevant to the land, property and investment sectors. Three were launched today (13th March):
In the coming months the government will also publish:
RICS is pleased to see the announcement of a Review of the Economics of Biodiversity but would make the observation that the timeframe for such a significant piece of work is short.
RICS professionals engaged in land and resource management will play a key role in delivering biodiversity targets via land and resource management activities and engaging in brokering investment opportunities, all ultimately contributing to economic growth. RICS has undertaken some work on natural capital and its economic values – "Value of natural capital – the need for chartered surveyors" and has dedicated its most recent Land Journal publication to natural capital.
RICS is pleased to see the announcement of the further greening of the gas grid and is fully supportive of the need for a continuous focus on our climate change targets. RICS members will continue to play a role in providing advice to land owners in the renewable energy sector and is represented on Task 37 (UK) whose focus is the promotion of biogas.
RICS is also supportive of the need for focus on biodiversity beyond the UK and very much welcomes the call for evidence in the Overseas Territories who have a key role to play in maintaining and enhancing their unique natural capital assets.
This insight paper reviews the broad topic of environmental valuation from the perspective of a practising valuer, land manager or estate manager. This paper approaches the field of economic valuation of the environment from a professional valuation perspective.
RICS are the end point assessment organisation for two apprenticeships – Surveying Technician and Chartered Surveyor Degree – which both have high numbers of apprentices on them. Almost 400 apprentices are on or have achieved the Surveying Technician apprenticeship with a pass rate of 83%.
There are over 1700 apprentices studying the Chartered Surveyor Degree apprenticeship, making it one of the most popular degree apprenticeships, with more growth being planned by universities.
From discussions RICS have had with employers of apprentices on the surveying apprenticeships, the changes that have been confirmed today i.e. the co-investment rate cut to 5%, and maximum cap raised to 25% - are not going to make much, if any, difference to their recruitment plans going forward.
Despite the high numbers of starts on these apprenticeships, the cost to SMEs that these changes are aimed to help, is not a significant factor to recruitment of apprentices. Smaller employers are most concerned about the administrative burden of managing the payments and the challenges of using the government recruitment processes. All the employers that we have spoken to are expecting to grow the numbers of surveying apprentices that they recruit.
In stating that the government is "committed to returning technical and vocational skills to the heart of our education system", the chancellor refers to the planned roll-out of T-Levels in September 2020. Again, RICS has been involved in the design of one of the first T-Levels that will be available - Design, Surveying and Planning. T-Levels are new vocational, technical programmes designed with employers to give young people the skills that industry needs. They will give students aged 16 to 18 a technical alternative to A-Levels.