The housing shortage is one of the biggest issues facing the UK today. The 2004 Barker Review found that the country would need to build 240,000 new houses each year in order to satisfy demand.
However, successive governments have failed to support the UK housing industry, which has resulted in the number of new homes being constructed continually falling below the target set out in the Barker Review. For example, in 2016, just 153,370 new homes were built across the country, leaving a shortfall of almost 100,000.
One of the reasons for the fall in house building is the continued decline of small and medium sized house building firms. Over the past quarter of a century, the number of house builders constructing between 1 and 100 properties per year has fallen from over 12,000 to just 3,000. There are a number of factors which have squeezed so many small and medium-sized building firms out of the market.
Access to Land
The continued protection of greenfield sites, and the failure to clean up brownfield sites, means that access to land has become increasingly difficult for small and medium sized house builders. Unlike large commercial house builders, who can afford to use land banking strategies to secure land for future development, small and medium sized firms can often only afford to purchase the plot of land they have earmarked for immediate development. This puts them at the mercy of supply coming on to the market, and as the competition for land has increased, so has its price.
Drop in number of building firms registering 1-100 units per year, 2008-2014:
Source: FMB Written evidence (EHM0140), Federation of Master Builders, 2015
Access to Traditional Finance
However, the lack of access to land isn’t the only problem that small and medium sized developers face. Since the financial crash of 2008, accessing the finance required to help purchase the land has become much tougher. New capital requirements introduced after the economic turmoil began meant that traditional lenders, such as banks and building societies, have only been willing to finance major building and property developers, and no longer ready to support small and medium sized builders.
Without access to adequate finance, the smaller house builder could not move their projects forward. Between 2008 and 2015, delivery of new housing stock from small builders fell from 44,000 homes per year to just 18,000, placing further pressure on the UK housing market.
The lacuna left when traditional lenders stopped offering finance to smaller building firms initiated a boom in alternative finance from emerging, nascent lenders. Alternative lending solutions – such as peer-to-peer and asset based finance – do not face the burden of restrictive capital adequacy constraints, which means they are responding with great speed and fluidity in order to provide the financing required by these firms. These solutions should allow existing building companies access to the finance they need, and could encourage a recovery in the number of new properties being completed.
As the alternative finance market has continued to grow, it is becoming increasingly clear that alternative lenders have an ever more important role to play in fixing the UK housing crisis.