Economist's report warns that spiralling cost of land will outstrip home price rises and eat into housebuilders' profit margins over next decade .
Housebuilders鈥� profits will be hit by the rising price of land over the next decade, warns a report by respected economist James Morrell.

In his annual report, Business Forecasts for the Housing Market,* the former economic adviser to Charterhouse Group predicts that land prices will rise 7% a year over the next 10 years, taking the average price for bulk land in England and Wales to more than 拢600 000 an acre. This increase is 1% more than Morrell鈥檚 forecast for house price rises, which he predicts will be 6% a year over the same period.

鈥淒evelopers like to make consistent margins of more than 10%,鈥� said Morrell. 鈥淏ut it is going to be increasingly difficult for them to make those margins in the years ahead. We are already looking at a scenario where land accounts for about 30% of selling price.鈥�

Morrell outlines three possible scenarios to show how different land price rises could affect profit margins.

  • If land prices rise 5% a year over the next four years, housebuilders鈥� average profit margins will increase from 14.5% (this year鈥檚 average) to 14.7%.

  • If land prices go up 8% each year, profit margins will have fallen to 10.3% by 2002.

  • An 11% annual rise in land prices would see profit margins down to just 5.5% by 2003, barely more than one-third of their current level.

    Morrell also forecasts that South-east-focused housebuilders will start to encroach on rivals in the north and west of England. He says opposition to the government鈥檚 plans for increased housebuilding in the South-east could put the brakes on development, forcing housebuilders to look elsewhere. 鈥淗ousebuilders already say there is an enormous struggle to find pockets of land in the South-east,鈥� said Morrell. 鈥淲e will see an increasing number of firms relocating their activities further away from London.鈥�

  • Business Forecasts for the Housing Market is priced 拢250. Fax 0171-628 3563 for a copy.

  • HM Land Registry鈥檚 quarterly survey of average house prices in England and Wales shows that sale prices for the third quarter of 1999 were 12.28% up on the same quarter in 1998 and 8.31% up on the second quarter of the year. The largest rises were in Greater London, where prices were 16.8% up on the same period in 1998 and 8.31% up on the previous quarter. Yorkshire and Humberside saw the lowest rises.