“Water, water, everywhere, nor any drop to drink.”
Keith Breslauer is managing director of Patron Capital
Here in the UK, the housing market seems dictated by some strange inversion of Samuel Taylor Coleridge’s famous verse from The Rime of the Ancient Mariner: new houses scarcely anywhere, but transactions on the brink.
For decades, one overarching point has defined the UK housing market: we don’t build enough homes. In a market where demand chronically outstrips supply and is set to keep doing so, you’d expect house prices and deal volumes to be powering ahead. Yet they aren’t. House price growth has been largely flat since 2022, while total UK residential property deal volumes fell by around 42.3% between December 2022 and December 2023.
So, why is there this paradox and what does it mean for investors? The answer to the first question lies less in the data than what drives it: people and specifically confidence.
Developers always talk about undersupply like it guarantees buoyancy. But people don’t buy homes based on macro-level shortages; they buy based on whether they can afford the mortgage payments and feel able to commit to them long term. In recent years, affordability, both mathematical and psychological, has been a constraint. Even in an undersupplied market where demand should be strong, inflation, lack of mortgage availability, political uncertainty, rising unemployment and the threat of higher taxes have sapped confidence and depressed house prices.
Furthermore, after years of government intervention, from the Help to Buy scheme to stamp duty holidays, many consumers have become conditioned to wait for government support before acting, whether it is needed or even in their best interest. They could be right, as it was recently reported that the government is considering a new version of Help to Buy, lifting housebuilder shares in the process.
I’d suggest Help to Buy, or a similar scheme, is more important to the market than raw usage numbers suggest. Yes, it would likely support deposits, but, more importantly, it would support confidence. It tells people the government wants them to buy – and that reassurance could unlock a lot of demand. Combined with cheaper mortgages and lower inflation, this can have a big knock-on effect on sentiment, helping spur deal momentum. For a scheme that only targets a small part of the market, it has an outsized impact.
Time to invest in housebuilders
On my second question of what the current stand-off between housing supply and the health of the housing market means for investors, there is one clear conclusion: now is the time to invest in UK housing and housebuilders.
Housebuilder share prices look depressed relative to net asset values, especially as they have land to build on and the government is desperate to get closer to its target of 1.5 million new homes. With voters consistently ranking housing as a top concern, politically something has to give and a new support scheme such as Help to Buy seems likely, creating the confidence needed to unlock growth.
Importantly, shares in London’s biggest software companies were hit recently when a new AI product that may threaten their businesses was unveiled. As AI threatens more service sector business models, the investor case for seeking shelter in companies with land that cannot be automated away also looks strong.
Investors bullish on UK housing today look set to be rewarded tomorrow – not due to undersupply, but because buyer sentiment, a missing ingredient in recent years, could be about to turn. And when sentiment turns, it tends to turn fast. UK housebuilders are already a strong value play; they may also be a momentum story about to happen.
Keith Breslauer is managing director of Patron Capital