One of the characteristics of a significant demand/supply imbalance is a widening of the gap between the average cost of a new home compared with that of an existing one. Builders can only sell each property once, and they have a duty to their shareholders to get the best possible price for it. When buyers’ alternative options are few and far between, new homes prices will reflect their scarcity value.
Since the land registry began publishing a comparison between the average prices of new and existing properties in 2005, the gap has varied, mainly according to market conditions. The average difference between the two is around 23%. At its narrowest (just after the 2008/9 crash), it was just 14%. It will come as no surprise that the biggest gap was in March of this year, peaking at 35%! Some of that huge rise will be as a result of the change in mix, as the builders have been re-planning sites with houses rather than flats and bigger rather than smaller. But the main reason behind the lines diverging has been the lack of property on the market – and that is changing, rapidly. The result is a difference in the rate of decline of asking prices, with new homes feeling the pressure earlier and deeper.
As reservation rates fall, there is a temptation to call the Sales Director in, hand them a bit more of a dealing factor based on prices that were forecast in rosier times and tell them to get everything sold. But, in this market, that isn’t going to be enough. Price will undoubtedly be a factor in the decision-making process, but not the only one. Not by a long chalk. On top of all the other issues this market has thrown up, 2022 saw the end of Help to Buy, the Government scheme used by hundreds of thousands of buyers to secure their new homes since 2013. Over £100 billion worth of new homes. In my regular online MarketCasts, I have been warning since last summer that every builder needs to sit down with their IFA and thrash out a creative solution to capture those buyers who will be struggling without it. With a few notable exceptions, these have been thin on the ground.
We are back in a market where buyers have choice. They no longer feel obliged to make early decisions for fear of missing out on a property, something that was very apparent up until the summer, even when the property wasn’t exactly what they were looking for. Lots of buyers have decided to adopt a wait and see approach this winter, mainly driven by concerns on where interest rates might go and what the market might do.
Other than by simply reducing prices, how are we going to convince these hesitant movers that they should take the plunge? That our home is the one they won’t want to risk losing. What can we do to change opinions? Well, as far the product itself is concerned, in the short-term, not much. What we have, is what we have.
We can focus on presentation. On customer service. On sales strategy. On CRM. On enablers and incentives. All of those obvious things. But, longer term, perhaps there is a need to consider a wider-reaching strategy change. To create in our products a genuine Unique Selling Proposition. Do your sites, and the housetypes on them, have the ‘wow’ factor? Honestly?
In 2021, YouGov surveyed 2000 people on their preferences regarding new build and pre-owned homes. Two thirds of the respondents favoured second-hand and it was mainly about design. Older properties have more ‘character’, provide more space, offer more choice; these were the top three reasons why they wouldn’t expect to choose new. People also talked about better build quality, established neighbourhoods and ‘tried and tested’ homes.
It is not beyond the capabilities of any builder to address these issues in a meaningful way, but it might mean a re-assessing of priorities. Every business will have the cost of each square foot of production as one of their KPI’s, but does that KPI rank higher than level of kerb appeal say, or desirability of specification, or landscaping, etc. etc.
I still maintain that we are not about to experience a property price ‘crash’, but there is no doubt that the market over the next 12 to 24 months will be exceptionally competitive. Both in terms of second-hand and competing new-build. Anyone relying entirely on their marketing department or, worse still, sales teams, will find it a very difficult year indeed – particularly if they are to avoid a ‘race to the bottom’ on price.
It is time to invest in the product. To imprint your personality on your developments. To make visitors fall in love with what you’re building. And not just by relying on things that most people take for granted nowadays; high-speed broadband, superb energy efficiency and modern fixtures and fittings, but the things that epitomise ‘character’. Design features that surprise and delight, a specification that exceeds expectations, evident quality that runs more than skin deep.
There are builders out there that already invest in design and differentiation, they know who they are! But for those that have driven out cost at the expense of the end product, life will become increasingly difficult as the year goes on. The companies that loosen the purse-strings slightly on build costs, that use their imagination and flair, that set out to wow their potential buyers and develop an obsession for their customers – they’re the ones that’ll steal market share and, in the long run, will maintain their margins while others struggle. Oh, and make life easier for their sales and marketing teams too!