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The UK housebuilding industry is slowing down. In the first quarter of 2005, starts on site fell 5% compared with the same period in 2004.

When this happens, suspicion usually falls on the bad weather or bad planners, but this time it鈥檚 different. For once, nobody is blaming the weather. It wasn鈥檛 snow, ice or rain that cut output. Planning is a perennial gripe, and it鈥檚 true that housebuilders have been adapting to last year鈥檚 Planning & Compulsory Purchase Act. But a closer look at the ODPM鈥檚 housebuilding statistics is revealing: the year-on-year drop in private sector housing starts in the first quarter was greater than the average across the industry. Starts in this sector fell 9%.

This suggests that there is a problem specifically afflicting private developers, and it could have serious implications for the government鈥檚 aspirations to increase housebuilding, particularly in South-eastern growth areas such as the Thames Gateway. The prime suspect is the cooling housing market.

鈥淎s well as planning problems, market conditions are working against higher housing output,鈥� says Richard Donnell, head of residential research at Savills. 鈥淪lower growth in end sales value and rising development costs are having a growing effect on the dynamics of development. Margins are being squeezed and it seems almost inevitable that developers will cut output.鈥�

A survey by property specialist Hometrack last month showed that house prices fell for the 11th consecutive month. Since May last year, Hometrack calculated that prices had fallen 2.3% to an average 拢161,900 from a 2004 peak of 拢167,700. There has also been a downturn in retail spending. The Office of National Statistics reported that retail sales slipped 0.1% to 拢18.3bn in April compared with the same time the previous year.

Slowing growth in end sales value and rising costs of development are having a growing effect on the dynamics of development

Richard Donnell, Savills

Even before the 2005 drop in starts, housebuilders鈥� output had not exactly been soaring to meet government demand. Figures for 2004 show that housing starts rose by about 10,000 relative to the previous year (see chart, page 47), well short of the 20,000 extra homes a year that the government said were needed. The chart also shows that after business acquisitions are factored out, only half of the top 10 housebuilders increased output last year. At George Wimpey, output dropped from 13,720 homes in 2002 to 12,232 last year. Chief executive Peter Johnson explained the industry鈥檚 thinking with admirable simplicity: he said the company 鈥渨ill focus on margins and not aim to grow at all costs鈥�.

The government鈥檚 latest strategy to stimulate output and create a million more homeowners is to release more public land for development and to offer new forms of low-cost home ownership. Donnell says this is unlikely to change the picture dramatically in the short term 鈥淭he low cost home ownership options will keep house prices up at the bottom end of the market. But nobody knows yet how quickly the land being released will enter the development pipeline. This is unlikely to change the market picture in the next five years.鈥�

Indications that conditions were getting tougher have been around for some time. By mid-2004, London housebuilders were feeling the effects of a slowing market in the 拢350,000鈥損lus price bracket. They responded by adopting a different approach to configuration: out were going two-bedroom, two-bathroom apartments, and in were coming lower priced one-bedroom and studio units. For example, Ontario Tower, Ballymore鈥檚 latest scheme in London Docklands, comprises 70% one-bedroom and studio apartments. It stands next to the developer鈥檚 previous scheme, New Providence Wharf, 70% of which is made up of two-bedroom, two-bathroom units.

Housebuilders now routinely use an assortment of marketing ploys to achieve sales, from lavish showhomes to part-exchange deals. Savills reported that the use of sales incentives reached a 10-year high last November.

Many housebuilders noted in their annual reports that they had increased the number of selling sites, a tactic that maintains sales targets but increases overheads. Persimmon said it was selling from 15% more developments, Bellway had increased sales outlets by 10%, and Redrow had increased active developments to more than 100. Bellway chairman Howard Dawe also said, in the euphemistic language that accompanies downturns in sales, that 鈥渢he more challenging marketplace鈥� has led his company to take an 鈥渋ncreasingly selective鈥� approach to land acquisition.

Quite a lot of sites have been delayed in terms of launching. The market is doing what the market does.

Geoff Marsh, London Property Research

Housebuilders will not admit it but, as the slowdown has continued, some are resorting to other drastic action. Wilson Bowden, the parent company of top 10 housebuilder David Wilson Homes, has cut about 70 jobs since September. The company closed a regional office and has made other redundancies in its 2500-strong workforce. Housebuilding recruitment is dipping. Robert Fry, regional director for the south at Hays Construction & Property, says: 鈥淛ob registration levels are 50% of what they were this time last year. Good candidates will still find jobs. But where they would have had three or four offers they will now have one or two.鈥� Geoff Marsh, director of London Property Research, adds that 鈥渜uite a lot of sites have certainly been delayed in terms of launching. The market is doing what the market does.鈥�

The slowdown could pose a serious threat to the housing growth areas, where the new planning framework and higher housebuilding targets are coming into force. Some local authorities have said they are not yet ready to prepare essential documents, such as local development frameworks. 鈥淎ylesbury is not proposing to start work on its local development framework for two or three years so that won鈥檛 be ready till 2008,鈥� confirms Roger Turnbull, director of planning consultant Barton Willmore.

It will be difficult for housebuilders to play catch up and reach the official target for Aylesbury, in the Milton Keynes/south Midlands growth area, which is for 15,000 homes by 2016. This is because the number of homes a developer can build without driving down local house prices is ultimately dictated by the market. 鈥淗ousebuilders sell around 300 homes a year from a large site so it could take 18 years to build out a site,鈥� says Turnbull.

This is not welcome news for a government with a target of delivering 200,000 homes in the housing growth areas by 2016. And as the market is reckoned to be just starting on its downward cycle, the problems could be just beginning.

鈥淭his problem is likely to become increasingly apparent over the next two to three years,鈥� says Savills鈥� Donnell. 鈥淭he present situation highlights what Kate Barker has said, in that planning policy is two years behind the market.鈥� The full consideration of Barker鈥檚 recommendations, which the government pledged last week to carry out, can鈥檛 come soon enough.