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3 min read

Time to build: Will the UK's housing shortage get worse before it gets better?

The United Kingdom is grappling with a housing crisis, facing a shortfall of 4.3 million homes compared to the average European country. The government's target of constructing 340,000 new homes annually, half of which should be affordable, remains unmet. The impacts of this failure are evident in the soaring average house prices, with affordability pushed to the limit for the average worker. Various factors, including the COVID-19 pandemic, shifting household size, population growth, and the obsolescence of existing buildings, contribute to this crisis. However, amid challenges, opportunities emerge for developers and investors who can make positive impact on the housing market.


Household size and formation trends


Over recent decades, a trend toward smaller household sizes has emerged due to changing demographics, economic factors, and evolving family structures. Policymakers and industry players must understand these trends to address the evolving needs of the population, particularly in terms of housing and infrastructure considerations.


According to data from the latest Census (2021), the average household size in England and Wales was 2.4 people per household, the same as 2011, but higher than the EU average of 2.3 people per household. Germany, Denmark and Sweden are all at the lower end, with an average of 2.0 people per household; it’s not unreasonable to suggest that the UK could continue to trend in this direction in the future.


Investors should be aware of these trends and consider the benefits of private rented sector (PRS) schemes and build to rent (BTR) projects. We are also seeing a rise in developments with greater proportion of 1- and 2-bed units. 


Population increase and immigration dynamics


Steady population growth in the UK, fuelled by natural increase and net migration, presents both challenges and opportunities. Economic migration, particularly in sectors like healthcare, hospitality, and infrastructure, plays a significant role and is in part a response to the workforce requirements of the UK’s aging population. The country's appeal as a global education hub also attracts international students, who have specific housing requirements; these trends impact the attractiveness of investing in purpose built student accommodation (PBSA). 


The latest ONS population projection has the UK population growing by 6.6 million people (9.9%) by 2036, with 541,000 more births than deaths and net international migration of 6.1 million people. This rate of population growth is faster than previous projections and should be taken into account when considering future house building targets.


Obsolescence of existing buildings


The gradual obsolescence of buildings in the UK—when they become outdated or less functional over time—is driven by technological advances, changing workplace trends, and new regulations, and creates opportunities for developers and investors. Retrofitting or constructing modern, energy-efficient structures can meet the rising demand for contemporary living spaces. Challenges such as historical listings and planning permission restrictions should be navigated strategically.


The UK experienced a house building boom in the post-World War II period, particularly during the 1950s and 1960s. If these homes haven’t been properly maintained or if the construction was below standard, then there is an increased risk that these buildings are now approaching obsolescence. Rather than narrow, the gap between housing suppling and demand could widen further.


Land costs and planning regulation


The drive to increase the rate of property development faces challenges, including the cost of land. Factors like the Green Belt policy and the designation of conservation areas impact land supply and pricing; greenfield and urban land values peaked in Q3 2022 before dropping by 8.7% and 9.9% to the last quarter of 2023. Outside of natural factors, constraints on existing infrastructure can impact the number and scale of sites that are suitable for additional housing—if there are no schools or hospitals nearby (or if they are already overburdened), then why build new homes?


The resulting scarcity of homes, combined with a growing population, continually drives up house prices. Developers and investors can capitalize on this trend by focusing on projects aligned with government priorities, such as environmental, social, and governance (ESG) considerations.


ESG and emerging trends


With the government's emphasis on achieving net-zero (limiting greenhouse gas emissions) by 2050, opportunities arise for developers and investors to committed to address the demand for environmentally efficient homes. Nearly half of the UK's homes are estimated to fall below the environmental efficiency limit required by 2035, creating an £18 billion bill for landlords. If these costs drive out more and more private landlords, there will be an increased need and incentive for build-to-rent developments but also a further depletion in the housing stock available to renters.


Get Britain building


While challenges persist, there are positives moves afoot to boost residential development in the UK. The growth of the alternative finance sector—including lenders such as Shojin—is supporting the small and medium-sized housebuilders who are best positioned to respond with agility to market forces, and boost supply in areas where demand is highest, such as in London and the commuter belt.


The sector will benefit from clarity around household and population projection data; sooner or later the government will have to be honest about the pressures we face and develop a cohesive, long-term strategy to boost house building.



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