March 19, 2024

Government Inaction Fueling the Housing Crisis

by Charlotte Garrett
Example H2

In the UK, there has been a recurring story around the collapse of offsite suppliers, however, what isn’t normally reported is that the failures predominantly service the housing sector. The following insights reveal a sector in crisis, with private housing reporting a 68% fall in project starts in Q3 of 2023 after mortgage spikes, which is likely to continue with an expected further 4% fall, and the wider housebuilding sector seeing a drop between 25-35% following the anticipated regulatory change last year and continued planning challenges. We need change and we need it now.

We know there is a huge need for housing in the UK. The second largest city in Britain, Birmingham, recently closed its social housing waiting list due to a build-up of over 11,000 unassessed applications. With over 23,000 currently on the register, these aren’t just statistics, they are people.

Despite years of investment and millions of pounds spent, many businesses are vanishing from the market, signaling a systematic issue that extends beyond the manufacturers. The housing sector is on its knees with labor shortages only getting worse through retirement and Brexit.

The housing sector desperately needs a government-led strategy to stabilize and boost the housing sector and meet the pressing demands for affordable, sustainable, and quality housing. We need to embrace innovative solutions with a combination of product platforms, offsite construction methods, and digital technologies to industrialize the supply chain and deliver diverse low-rise, high-rise, and retrofit projects that meet our value-driven outcomes at scale.

The Downfall of Innovative Suppliers:

Recent years have seen a perfect storm of challenges for housebuilding in the UK, all of which have created a challenging environment for everyone, including offsite construction suppliers. This has led to a scenario where businesses building homes are experiencing diminishing profits, and, in some cases, administration.  

Despite the clear benefits of Offsite Construction, including increased efficiency, quality, and sustainability, numerous obstacles hinder its widespread adoption. For example:

  • risk aversion among warranty providers and insurance companies.
  • ambiguous building regulations, and reforms
  • rising material prices
  • resource scarcity
  • a recession
  • perception
  • inflation
  • lack of standardization from clients
  • fixed price contracts.
  • Lack of strategic leadership

While the mandate to use Offsite construction methods in the affordable homes program showed promise, it fell short of resolving all of the challenges faced by the sector. The sector needs more than just monetary support. Standardization, consistent demand, leadership, and improved access to finance with updated procurement routes to suit are essential for the long-term success of Offsite construction.  

DLUHC and Homes England are developing a strategy to support this with a standardized Digital Kit of Parts forming an industry-wide approach that will enable us to industrialize the supply chain alongside the development of BSI 8700. Without this work that aims to address these fundamental issues, the housing industry will continue to face challenges in meeting its targets and delivering high-quality, affordable homes.

Struggles Beyond Offsite Construction:

The method by which we construct our homes is not the problem, there is a bigger picture that needs more attention. Below are just some of the headlines in Q1 2024.

The struggles facing the housing industry extend far beyond Offsite construction methods:

Tight Margins:
Projects were priced on fixed-price contracts 2, 3, or even 4 years ago when material and labor prices were lower. The steady increase in material costs and labour rates has removed any profit margins, impacting the financial health of businesses across the sector.

Furthermore, the planning system's inefficiencies, highlighted by the Barker review back in 2004, continue to hinder progress in housing development due to a lack of resources and slow decision-making processes with 75% of local authority planners overstretched, according to RTPI. The decline in major planning applications decided within 13 weeks, has increased from 60% in 2012 to 20% in 2022.

Skilled Labor Shortages:
The shortage of skilled labor in the construction sector further compounds these issues, and the lack of specific training programs for the skills needed in the sector adds to the complexity of the problem.

Despite the efforts of many businesses to navigate these challenges, persistent cost overruns and supply chain issues continue to strain finances and, in some cases, lead to insolvency. These failures have a ripple effect throughout the sector, impacting housing associations, large housebuilders, contractors, and the overall market dynamics.

Housing Associations:
Housing associations are grappling with a 14% increase in the average cost per unit of social housing, meaning they can no longer afford it. This strain is evident in cases like Crawley council, which declared a housing emergency as temporary accommodation costs soared from £456,000 in 2018-2019 to £5.7 million in 2023-2024, a 12-fold increase.

Large Housebuilders:
Large housebuilders such as Persimmon and Taylor Wimpey have also faced challenges, experiencing significant declines in home completions and orders. Many of the large housebuilders are feeling the pressure of skills shortages and are investing in and moving to Offsite construction.

Contractors have been significantly impacted, with several major players filing for insolvency. This has created a ripple effect throughout the supply chain, leading to subcontractors facing payment delays or non-payment. These challenges have intensified financial pressures downstream, exacerbating the already strained financial landscape of the industry.

Not that long ago many reported an expected growth in 2024 however the latest forecasts are more pessimistic. Now an expected 2.1% decline in 2024, particularly impacting new build projects. According to the Construction Products Association’s winter forecast, the industry will have to wait for 2025 to see that 2% rebound.

Successes in Other Sectors:

Despite these challenges, there are positive movements in the retrofit sector, with initiatives supporting energy efficiency and net-zero goals. Housing associations like Clarion and L&Q are adjusting their focus to prioritize improvements in existing stock, showcasing resilience and adaptability in the face of adversity.

The success of Offsite construction in sectors like healthcare, education, and prisons is not just about the methods themselves but also about adopting a holistic approach that includes product platforms, portfolio management, and industrializing the supply chain. Which has succeeded through leadership that influences procurement with Presumption in Favor of offsite which forced the sectors to align with standards alongside the use of collaborative contracts.

The progress towards introducing digital technologies and standardization has played a crucial role in the success of Offsite construction. Projects like HMP Five Wells and Lynch Hill Enterprise Academy have leveraged digital technology to streamline design processes and improve collaboration between stakeholders. This has resulted in shorter design periods, reduced risk, and even earlier occupation of buildings.

Overall, the success of Offsite construction in these sectors is not just a result of the methods themselves but also of the broader approach taken towards industrializing the supply chain, adopting digital technologies, and standardizing processes. As these practices become more widespread, the construction industry will undergo a significant transformation, driving efficiency, quality, and sustainability across the sector.

Call for Action:

The housing crisis has been further impacted by the recession, reported in the latest Office for National Statistics (ONS) data, and demands urgent government intervention to support the sector's recovery and growth.  

Despite housing's critical role in the UK economy, recent government statements, including the Chancellor's autumn statement and the spring budget, have failed to provide the support the sector needs. The lack of long-term plans focused on sustainability, and promotion of Offsite Construction is particularly disappointing. The Chartered Institute of Building (CIOB) hopes that the next budget will prioritize improving skills, crucial for levelling up and boosting the sector's resilience. However, the next budget seems a long way away with several councils going into administration, resulting in services like temporary housing being cut. Along with planning reform, we need to see:

  • Leadership!
  • Reforming the planning system, a notorious bottleneck in construction, is critical to accelerate project delivery and remove obstacles to Offsite construction adoption.  
  • Investing in digitization, and standardizing data formats and workflows would create a more predictable environment for manufacturers and suppliers, promoting market efficiency and resilience.
  • Encouraging standardization initiatives like Pattern Books and standard house types across local authorities can drive interoperability and efficiency across the sector and industrialize processes, share risks, and stimulate competition, thereby creating the pipeline and demand that manufacturers require.  

Collaborative action from policymakers, industry stakeholders, and the broader community is necessary to overcome the systemic issues plaguing the housing industry and build a more sustainable and resilient future.

The challenges facing the construction industry, particularly in the housing sector, require urgent and decisive government action. The industry cannot be left to resolve these issues alone, as past failures have demonstrated. It is crucial to re-introduce the Modern Methods of Construction (MMC) task force with adequate funding to help it lead and drive meaningful change at scale.  

Market conditions have deteriorated, and support must be directed towards small and medium-sized enterprises (SMEs) and those below the top 20 largest companies.  

Failure to act now risks significant job losses, factory closures, and a deepening housing shortfall. It is imperative for politicians to recognize construction as a key driver of economic growth and to prioritize the sector in policy-making and funding decisions.