Our latest research suggests that the UK affordable housing issue has reached a tipping point. Our latest Support Services sector quarterly reveals great opportunities for growth for investible, scaling businesses finding inventive new ways to improve the crisis.

If you are a private, scale-up company developing innovative solutions to take on the UK’s affordable housing problem, finnCap Group would like to hear from you.

Housing in the UK is more unaffordable than ever. For some time, house prices have been increasingly outstripping average earnings. Meanwhile the number of rough sleepers over the last five years has doubled, and young people are more likely than ever before to still be living with their parents.

Such is the current accommodation situation. It comes despite pushes from the Government in the form of programmes like Help to Buy, which nonetheless carry their own complications, alongside ambitious – some might say, unachievable – house building targets.

Mention the words ‘affordable housing’ to anyone and the outlook is generally gloomy

The affordability ratio

Looking at the data, ONS statistics indeed show that houses have been becoming ever-more expensive relative to annual earnings since 2013 – this statistic has increased by 50% over the last 15 years. Meanwhile, there’s been a substantial decrease in additional affordable homes being built, that figure now sitting at a 30-year low.

The status quo regarding housing provision is certainly not enviable. The same ONS data set shows that London is far and away the area with the least affordable housing, with a house price to annual earnings ratio in 2017 clocking almost double what it was in 2002. The next most unaffordable areas were, in descending order, East England, South East England, and South West England. The remaining six regions, including Wales, came in below average.

The challenges remain, but things are on the turn

Interestingly, another ONS release looking into housing affordability in England and Wales in 2017 found that affordability was actually worsening at a quicker rate in flats and newly built properties, with the latter being available with assistance from Help to Buy.

This may seem a gloomy locale in which we’re currently living. finnCap’s Support Services quarterly sector research, however, indicates that big changes may be on the horizon as we reach what feels like a tipping point. The opportunity is there for innovative new players looking to get their foot in the door of our housing stock with radical, cost efficient solutions.

Why has this opportunity arisen?

The challenges remain, but despite these, things are currently on the turn. There have been marked improvements in UK average income over the last year, off the back of record employment, coupled with – mostly Brexit-induced – uncertainty pushing down house price growth. As such, wage growth is now beginning to outstrip property price growth. So much so, in fact, that the 2018 statistic for the house price affordability ratio failed to increase for the first time since 2013. Help to Buy may also have had an effect on the uptick in new build prices.

There’s even a luxury side to prefab now

This implies two things: one, it is likely that existing houses are not increasing in unaffordability at the same rate as new builds, meaning there is likely to be more affordable housing available than the data would predict. Two, if Help to Buy has been pushing up house prices, unaffordability should reign itself back in if the scheme is discontinued, as planned in March 2023. That said, that is still four years away.

Kick-start the biggest council housebuilding programme in more than 30 years

Better local government involvement

To aid the situation, support for more local council involvement in housing initiatives has been rapidly growing.

The Government set itself a monumental, and rather unachievable, task of delivering 300,000 homes per year. Nevertheless, this reinvigorated debate into how housing should be installed as efficiently as possible. The Local Government Association champions the idea of further involvement from local authorities following their relative absence from the industry since the 1980s.

In October, the prime minister announced the removal of a cap on the amount that councils could borrow to build new homes. This led to over 60 local councils signing an open letter promising to use their newfound powers to “build a generation of new properties”.

Affordability is more likely to improve if costs decrease first

The Labour Party’s housing green paper, published in April 2018, is supportive too, outlining how they “want to revive the role of councils to build again at scale and kick-start the biggest council housebuilding programme in more than 30 years”.

Housebuilding and innovation

Kick-starting the biggest housebuilding programme in 30 years requires perhaps more radical thinking than we’ve been accustomed to. There’s no reason that the affordable housing conundrum should be any less the harbinger of off-the-wall ideas than, say, innovation in the UK’s high-growth tech sector.

A sharp increase in housing completion will likely contribute to lower prices, especially for first-time buyers. That said, affordability is more likely to improve if costs decrease first.

Prefabrication – a.k.a. ‘prefab’ – is one avenue here. The concept of ‘prefab’ became particularly familiar in the UK’s post-WW2 era, as temporary replacements for housing in heavily bombed areas. As a temporary accommodation prefab housing was never synonymous with high quality. But the modern version retains that same dedication to cost effectiveness as a means to deal with a crisis.

Current prefab innovations offer cheap ‘flat pack’ houses for less than £50k, with some coming in for much less (though it should be noted that land must be bought on top of this).

The cost savings are clear: making the houses in factories is much quicker and cheaper than transporting labour and materials out to different builds, and the speed of the actual construction means that on-site assembly generally takes less than a week.

Ongoing costs are often much lower than those that come with buying an existing house – they are generally much more energy efficient, and developers can save through the use of structures that can easily tessellate together (particularly with prefab apartments), minimising wasted space.

There’s even a luxury side to prefab now, and select housebuilders have begun moving into this space.

Radical new thinking, especially for scaling, innovative prefab developers, can offer a healthy challenge

3D-printed houses is another cutting edge innovation that could be used to save on housebuilding costs in the future, although companies in this space are much more early-stage than more typical modern prefab.

A flavour of the technology’s potential is given by houses designed in a partner project between non-profit New Story and tech-construction company Icon. Whilst the construction still involves getting large pieces of equipment and groups of personnel on site, Icon’s 3D printer can build a house within 24 hours, saving much more time. Indeed, the partnership plans on ‘printing’ entire neighbourhoods in some of the poorest economies around the world.

Accommodating the future

Whilst housing might be more unaffordable than ever, the uptick is that it is currently not becoming more unaffordable. Our research suggests that we have reached somewhat of a tipping point. Wage growth, for a start, is beginning to outstrip property price growth.

Mention the words ‘affordable housing’ to anyone these days, especially in the capital, and the outlook is generally gloomy. But dig beneath the foundations and things need not feel so bleak. We are at a point where radical new thinking, especially for scaling, innovative prefab developers, can offer a healthy challenge to big, incumbent housebuilders.

Our research indicates that affordable housing development is a space ripe with opportunity for investible companies with innovative solutions, scalability, and the impetus to make a difference to a major national problem.

If you are one of these companies, whether you are considering growth financing or not, our expert team would like to hear from you.

We see the enormous potential in this burgeoning era of the housing sector. The door is open. finnCap can help you get your foot through.

Contact our Support Services team:

Julian Blunt, Corporate Finance Director – jblunt@finncap.com  020 7220 0561

Guy Hewett, Research Director – ghewett@finncap.com  020 7220 0549