Labour has such a “slim” chance of meeting its own housebuilding target that Britain’s economic watchdog is considering downgrading its growth forecast, The i Paper has learned.
The move would cause financial pain for the Government, housebuilders, and anyone looking to buy or sell a home.
Mortgage rates could rise if a lower growth score causes the cost of government borrowing to rise. It could also put off investors in housebuilding – further stalling the already dwindling supply of new homes.
Housing market expert Neal Hudson told The i Paper that he was invited to meet with the Office for Budget Responsibility (OBR) to discuss his data and analysis as the watchdog seeks “to understand why the housing market has underperformed relative to their forecasts”.
He was told the OBR is “looking at the growth forecast they attached to planning reform” – this was 0.2 per cent to be added to GDP by 2029/30 – and that the watchdog feared it might be “overblown” because “the homes will not be built”.
The OBR looks at a broad range of economic indicators, not just housing targets, when it draws up its growth forecasts ahead of a Budget.
These include population growth, the proportion of people active in the labour market as well as overall employment rates and their productivity and wages, inflation forecasts and the government’s plans for tax and spending.
But housing targets and associated planning policy have a bearing on long-term growth forecasts.
Labour pledged to build 1.5 million new homes by 2029, bringing in the Planning and Infrastructure Act to make it easier to build new housing.
However, just over 300,000 homes were added to the housing stock in the first 18 months of the new parliament, according to government estimates – nearly a third short of the number needed to meet the manifesto target.
Developers have already warned the OBR the housing target will not be met and at the end of 2025, Housing and Planning minister Matthew Pennycook said 1.5m pledge was “stretching”. He argued that a slow start on housebuilding was down to the “legacy” of low Conservative housebuilding figures.
By September this year, Housing Secretary Angela Rayner admitted there was a “slim” chance of meeting it.
Angela Rayner has admitted there is only a ‘slim chance’ the Government will meet its flagship target as housebuilding stalls (Photo: Chris Radburn/AFP)Under Sir Keir Starmer and Rachel Reeves, the Government hoped planning reform and housebuilding would deliver much-needed growth and boost Britain’s economy and homeownership, particularly for younger people.
Labour had banked on inflation and interest rates continuing to fall this year to boost the mortgage market as well as housebuilders’ finances, but the war in the Middle East has been a lead factor in changed expectations.
Rising inflation as a result of the war in Iran, and rising borrowing costs which appear to have been triggered by uncertainty around Andy Burnham’s spending plans, have resulted in what Hudson called “the most dysfunctional housing market in decades”.
The Bank of England held interest rates at 3.75 per cent on Thursday but warned it is likely to raise them if the Iran war continues and that inflation is on track to hit 4 per cent early next year.
Mortgage rates have already started to spike because the cost of government borrowing has surged in recent weeks.
The yield on ten-year government-issued bonds (gilts) hit 5.21 per cent last week, the highest since 2008, while yields on 30-year bonds climbed to 5.89 per cent, their highest since 1998.
Mortgage lenders’ rates are priced with swap rates, which are impacted when gilts rise like this. As a result, Barclays, Santander and TSB confirmed rate rises. Other banks are expected to follow them.
“We are utterly f****d,” Hudson said. “What’s happening is killing the market.”
The housing analyst said Labour’s target of 1.5 million new homes by 2029 was always going to be “unachievable” because house prices were high and builders’ costs were rising even before the general election. The OBR’s original growth score for planning reform was therefore “optimistic in the best of times”.
The Government is waiting for the OBR’s verdict on the Planning and Infrastructure Act and the recent announcement of £10 billion for social and council housebuilding across England.
It argues that there has been a 54 per cent year-on-year increase in the number of proposed homes in planning applications.
A Ministry of Housing, Communities and Local Government spokesperson said: “We won’t shy away from our stretching target of 1.5 million homes and have seen encouraging signs of progress, with housing starts up 15 per cent as our planning reforms begin to bear fruit – while recognising the challenges the sector is facing with construction costs and macroeconomic headwinds.
“We’re supporting delivery of the homes the country needs, including investing £39 billion in social and affordable housing, tackling planning blockages, and backing builders with a £16 billion National Housing Bank.”
The OBR said it would not comment while putting together its next Economic and Fiscal Outlook. It is expected to deliver it on October 28 alongside Chancellor John Healey’s Budget.
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