Biggart Baillie Solicitors

Housing and the Recession

Wednesday, September 23, 2009

by Murray Shaw

It will not be news to anyone that the house building industry has been hit hard by the economic climate for the last 18 months or so.  Homes for Scotland, the body which represents the industry, has been vociferous in lobbying the Scottish Government hard to take action to help the industry.  Firm evidence of the impact of the economic climate can now be seen in the set of Government statistics produced in August entitled “Housing Statistics for Scotland 2009 – Key Trends Summary”. 

Before looking at that information, however, it is probably relevant just to take stock of where we might be.  The evidence in that regard is patchy.  There does appear to be more activity in the market and certainly more mortgages or loans are being taken out than was the position a year ago.  Equally there appears to be some evidence of prices stabilising and indeed increasing against previous trends which had seen significant decreases.  Those price increases may be due, however, to a lack of supply as much to any other factor. 

The volume private house builders now appear to be actually planning for the future and in particular to meet the “supply gap” which may exist over the next 2 years – this is a significant change of attitude in comparison to the last 18 months or so when survival for many has been the key objective.

On the other hand it does not appear that local authorities are receiving significant numbers of applications for planning permission, though the commencement of the new planning system may have some effect in this context given that major applications now require significant pre-application discussion.  This may cause a “time lag” at the moment in larger applications coming forward.  Many authorities however also are still receiving requests to reopen negotiations in relation to planning gain and even amend planning gain packages which had previously been entered into – on the basis that what was “promised” before can no longer be afforded.

As in many respects in relation to the economy the evidence is patchy and to some extent contradictory. 

The information contained in the “Key Trend Summary” is however objective and shows the impact that the financial climate has had in relation to house building. 

The trend in Scotland since the early 80’s has seen a significant change in housing tenure with home ownership increasing to over 60% from just about 40% in 1981.   While this trend has also occurred in other economies, the increase of home ownership in Scotland has been significantly greater.  Over the past 10 years or so the total supply of new housing in Scotland has also tended to increase, a trend which has now reversed.  In 2007/2008 the total number of new houses constructed in Scotland was 27,590 of which in excess of 21,600 were private new build.  The comparable figures for 2008/2009 are 22,569 and 16,471.  If conversions and rehabilitation projects are stripped out of the figures the overall decrease in new housing completions is of the order of 17% though the percentage decrease in private completions is greater than that - there having been an increase in the number of completions within the public sector (by local authorities or housing associations). 

At one level it is perhaps surprising that the decrease has not been greater.  However these figures cover a period to March 2009 and therefore possibly do not cover a full year when the brunt of the economic climate was fully felt.  Equally the figures deal with completions rather than sales and it is evident from looking around housing sites throughout the country that there are a number of units completed which remain unsold.  In previous years units were generally speaking sold or occupied as soon as they were completed. 

The net effect of this is that the level of completions within the private sector is at a level comparable to that in the mid 90’s.  If private sector starts are looked at, the position is worse.  The level (just in excess of 14,200) was comparable to the position in the mid 80’s.  The greater decrease in starts in comparison to completions over the period may well confirm that the full effect of the economic downturn (so far as completions) are concerned is not reflected in these figures.

These statistics do show continued activity in the public sector with in excess of 4,500 completions by housing associations.  Interestingly there were also 336 new houses completed by local authorities, a figure apparently greater than any time in the last 12 years.  The Scottish Government intends to protect private sector stock by amending the right to buy legislation in the Draft Housing Bill which will come before the Scottish Parliament this year.  

There was a huge growth in house building in Scotland in the 1950’s and 1960’s resulting from the post war need for reconstruction and some clearance.  After that “boom” new house building fell back significantly though the trend recently has been an upward one with the consequence that in the 7 or 8 years before 2008/2009 the average was somewhere around 25,000 completions (with some years having significantly more than that figure).   The aspiration of the Scottish Government had been to increase the trend so the number of new houses constructed in Scotland each year (across all sectors) was somewhere in the region of 35,000 completions a year.

While the recession may be virtually over in the sense the economy will return to positive growth, it appears likely for some time to come that positive growth will be at levels significantly below those experienced in the decade to date.  Against that background it is difficult to see how the target of 35,000 completions per year will be achieved and indeed it may be some time until completions return to the 25,000 a year figure that has been the “norm” recently.  This lack of supply is likely to cause pressure in the market for some time to come.