In summary, while we can’t predict the exact figures, the market sentiment is for house prices to dip in 2023 and increase again later in 2024 and more robustly in 2025. Hold that thought if you would, as I’ll return to it later.
Let me now turn to the physical cost of doing the development work. One of the concerns facing the property development sector in 2022 was the cost of materials and labour. These can vary significantly over time and are influenced by numerous factors, including global events. Brexit, the COVID pandemic, the war in Ukraine, and the recession all impacted the cost of materials and labour. When the supply of materials is low (or demand high) for whatever reason, then prices increase. Similarly, when contractors, professionals, and tradespeople have lots of work, they can pick and choose their jobs. As a result, prices go up.
Major house builders are the biggest consumers of materials and labour in the construction industry. However, as soon as the housing market looks like it might cool or go backward, the housebuilders take their foot off the gas and apply the brakes. We’ve already seen this start to happen; in October 2022, house prices stuttered, and by November, several housebuilders had announced they’d cut back their new housing projections for 2023. This makes perfect sense, as they don’t want to sell new homes in a depressed market. Far better to slow things down and bring stock to the market once prices are rising and the demand is higher.
The ramifications of this for the construction industry are significant. The big players account for a large slice of the materials and labour market; when they’re not buying, prices come down as a result. So what could this mean for you as a developer? You’ll recall that the market predicts a reduction in house prices in 2023 and possibly into early 2024. Therefore it seems unlikely that the major players will be stepping back on the gas until the prospects of more buoyant house prices are in view. As a result, many contractors and tradespeople could be desperate for work in 2023. Likewise, the cost of materials will decrease since there is less demand. Assuming you bought your site in mid-2023, it’s likely to be late 2023 when you would be tendering for the contract (tendering involves having your cost consultant put together a detailed specification and having numerous contractors give you a price). If the major players are still not ramping up their production, you’ll likely secure some highly competitive labour and materials prices.
Ok, so you’ve bought a commercial property at the bottom of the market and secured the best possible prices for your materials and labour. But what about your selling prices? Assuming you started on-site in early 2024, you’d probably expect to be putting your finished units onto the market in late 2024 or early 2025. Most market commentators (including the OBR) predict that prices will rise again by that time. In other words, you’ve achieved an enviable hat trick that should allow you to make significant profits.