Introduction to the private homebuilding sector

KEY LEARNING POINTS

  • The best figures available suggest about 13,000-13,500 new homes a year are currently being delivered by private homebuilders. This includes single new dwellings created by individuals for their own occupation through new build (85%) and conversion (15%).
  • Data on the number of planning permissions granted for single new dwellings through new build and conversion (first time change of use) collected from local planning authority records indicate a total of 20,000 in 2017 (15,000 in England) and 15,000 in 2016 (12,000 in England). Not all permissions  for single new dwellings will be built out by private homebuilders. 
  • At present there are two broad categories of homebuilder – those in their 50s and 60s (who build their dream retirement home), and those that are seeking to build their first home (and for them affordability is the main driver).
  • There is strong demand, and the biggest hurdle for most would-be private homebuilders is the challenge of securing a suitable building plot.
  • The sector is changing rapidly, with new organisations entering the market and new supporting legislation in England that requires local authorities to identify sufficient plots to match demand in their area.
  • In addition to their statutory obligations, many local authorities are taking action through a range of initiatives to help the sector grow.

INTRODUCTION

The private homebuilding sector is diverse. There are many ways that ‘self’ and ‘custom’ build homes can be procured. Limited central data is collected about this part of the housing market and therefore estimates about the sector have to be drawn from a number of sources.

This Briefing Note provides a short overview of the sector. It explains who private homebuilders are and the overall levels of known and suspected demand. It also includes a brief overview of the legislative requirements on local authorities and Government policy.

The focus is the Right to Build as it is being implemented in England, but there is information and advice in this Briefing Note that will be of interest to those either working or wanting to build their own homes in other parts of the United Kingdom.

About

This is one of many Briefing Notes that explain resourcing, planning, land, finance, demand, marketing, consumer support and various technical issues. To see the full range of guidance click here.

Definitions

For the purposes of this Toolkit we have made the following definitions:

NOTE

This Briefing Note will be updated when the Government publishes the updated National Planning Policy Framework. The Government consulted on proposed changes in Spring 2018.

DEFINITIONS

The custom and self build market is frequently misunderstood by politicians and policy makers. It is also misunderstood by the wider public whose perception of the market is influenced by popular television programmes following people who build their own homes by often doing much or all the building work themselves. It is also misunderstood by many of the traders and companies who sell products and services into the sector.

For the purposes of this Toolkit we use ‘Private Homebuilders’ and ‘Private Homebuilding’ as umbrella terms for the many different approaches people use to build a home for themselves.

Private homebuilding can be divided into three main types:

Custom Build

This is when people commission the construction of their home from a developer/enabler, builder/contractor or package company. With ‘custom build’ the occupants usually don't do any of the physical construction work but still make the key design decisions. Exact proportions are not known but based on our understanding of the market, around a 60 per cent of all private homebuilding is currently delivered this way.

Self Build

This is when someone gets involved in, or manages, the construction of their new home (with or without the help of sub-contractors). At present around 40 per cent of projects are defined as ‘self build.’

Group Projects

This is when a group of people set themselves up as an organisation to procure the construction of a number of homes as a collective. There are many ways this can be done – for example, by creating their own development company, or by setting up as a housing co-operative, a co-housing organisation or as a housing association.  This is currently a small share of all private homebuilding - accountable for roughly 3 per cent.

Statutory definitions are provided in section 9 of the Housing and Planning Act 2016 which amends the Self-build and Custom Housebuilding Act 2015.

Although not a formal definition, the description used by Housing Minister Brandon Lewis in the House of Commons on 24 October 2014 when introducing the Self-build and Custom Housebuilding Bill is also a helpful reference point.

The Minister said “It is right to put on record the important distinction between Custom Build and Self Build within the sector. The definition of ‘Self Build’ covers someone who directly organises the design and construction of their new home, while ‘Custom Build’ covers someone who commissions a specialist developer to help to deliver their own home. What matters for the purposes of this Bill and our proposals on a new Right to Build is that we develop a framework that promotes both.”

MARKET SIZE AND DEMAND

Unlike other forms of house building there are currently no definitive statistics collected for the private homebuilding sector.

The best data available to represent the size of the sector has historically been derived from the number of VAT reclaims that are submitted to HMRC by private homebuilders.  Private homebuilders can recover VAT costs for building materials on their projects; so many submit a claim to HMRC. This has to be done within three months of the completion of a home.

However, this data underestimates the size of the sector. This is because many people don’t submit their claims on time and some don’t claim at all, particularly where private homebuilders work with developers/enablers, builders/contractors or package companies who are VAT registered and adopt mechanisms such as the “Golden Brick” to help private homebuilders recover the VAT they have incurred.

VAT data dates back to 1983, and this shows that in a typical year between 6,000 and 11,500 VAT reclaims are submitted to the HMRC.

Research undertaken by Homebuilding and Renovating magazine in 2010 suggests that 36 per cent of private homebuilders don't submit a reclaim. These figures can therefore be adjusted (by adding in an extra 36 per cent) to give the current best, albeit crude, estimate of annual private homebuilding numbers across the UK.

Research undertaken by NaCSBA in 2016 indicates that 50.3 per cent of private homebuilders use the DIY VAT Reclaim Scheme (413 NB for New Builds or 431C for Conversions). Some 37 per cent benefit from the zero rate of VAT on the construction of new homes because their contractor or custom build developer is not required to pay VAT (ie. is zero rated), 6 per cent recovered VAT through their own existing VAT registration and 7 per cent did not recover VAT, in some cases because the new home was not eligible (e.g. holiday home, retained an existing wall etc.).

These figures, which have been substantiated by independent research by Homebuilding & Renovating magazine in 2010 and 2017 are used to adjust the data released by HMRC on VAT refunds under the Reclaim Scheme to give an approximation of the total number of new homes built by private homebuilders across the UK each year.

This information shows that the sector built nearly 18,000 homes in its busiest year (2005-6). While output fell to around 9,400 homes in 2014-15, the most recent data according to the Homebuilding and Renovating Self & Custom Build Market Report (2017), suggest that there were 13,000 completed projects in 2017 (12,800 in 2016)- an increase of 7 per cent on the previous year.

Private homebuilding output hovered between about 14,000 and 16,000 homes a year, until the recession. The latest figures suggest that output is increasing again

The number of Custom and Self Build homes completed each year remained at between 16,000-18,000 for much of the 80s, 90s and 00s but then fell off during the recent recession when stage payment mortgage finance dried up. Since then the market has slowly begun to recover with the sector currently showing a 7 per cent annual growth trend.

The regional distribution of completion figures for 2016 suggests that the South East, South West, Eastern and East Midlands regions in England and Scotland are currently the most active regions for private homebuilding.

The distribution of self build completions across the different regions of the UK in 2016. Source: Homebuilding and Renovating Self & Custom Build Market Report (2017).

The distribution of self build completions across the different regions of the UK

WHO WANTS TO BUILD?

Private homebuilders can be broadly split into two distinct groups.

At present a significant proportion of all private homebuilders are at, or near, retirement age. They usually have the resources (from the sale of their existing properties) to fund the acquisition of a plot and to pay a contractor to build their ‘dream retirement home’. According to the Homebuilding and Renovating Self & Custom Build Market Report (2017), the average age of a self builder is currently 51.

Many current private homebuilders are in their 50s or 60s. They tend to have bigger budgets and often build energy efficient homes to retire in

A growing number of younger families are now building their own homes. According to Ipsos Mori polls commissioned by the National Self and Custom Build Association (NaCSBA) between 2014-2016, 35-44 year olds are most interested in undertaking a self build project. For many in this group, the driver is affordability – they see it as a way of getting more for their limited budget (by avoiding paying a developer’s profit, saving on Stamp Duty Land Tax and, where possible, doing some of the work themselves to reduce costs).

For younger families the focus is often on affordability – they tend to build smaller homes

Groups of private homebuilders are also often able to secure some economies of scale and reduce the cost of construction – many are typically in younger age groups, but increasingly older people are also forming groups to build homes. According to Ipsos Mori polls commissioned by NaCSBA between 2014-2016, one in four potential private homebuilders likes the idea of working together as a group.

One in four people are interested in the idea of building a home as part of a group

There are many reasons why people want to build their own home. Private homebuilding can be cost-effective as people don’t have to pay a developer’s profit and marketing costs (often equivalent to 20 per cent or more of the cost of a new home).

Homebuilders benefit from the zero rate of VAT on most construction costs and can save on Stamp Duty Land Tax as it is applied only to the purchase of land where the construction work is supplied as a separate ‘unlinked’ contract.

Where private homebuilders choose to ‘self build’ they can make even greater saving by reducing construction costs. According to the Homebuilding and Renovating Self & Custom Build Market Report (2017), the average uplift in the value of their home enjoyed by self builders on completion is 29 per cent.

The ability for people to plan the size and design of their home is another important reason why they want to build. According to the RIBA only one in four people would choose a new home built by one of the major housebuilders over the last ten years. This is also confirmed by the ‘Why buy new? Home Buyer intentions and opinions’ report (Home Builders Federation, 2016) survey which found that only a third of people surveyed would be likely to consider buying a new build home, with a with further 46 per cent saying it was unlikely.

It is also well established that new homes in the UK are much smaller than those in other countries, which may be a reason why the average floor space of a self build home is significantly larger (247 sq m) than average sized homes in the UK (90 sq m).

Private homebuilders aren’t just interested in stand-alone plots. Ipsos Mori polls commissioned by NaCSBA found that there is strong interest in plots that form part of a larger development.

Other reasons include the ability to build more energy efficient homes, to get involved and acquire new skills, and, a sense of entrepreneurism and achievement.

The Ipsos Mori polls also point to people being more likely to support new housebuilding in their area if private homebuilding made up a larger share of the new housing developments.

 

HOW MANY PEOPLE WANT TO BUILD?

There is clear evidence that many people across the country want to build their own homes. Consumer surveys by organisations such as the Building Societies Association and Confused.com suggest that between a third and a half of the UK population is interested in building a home.

According to Ipsos Mori polls commissioned by NaCSBA between 2014-2016, around half of the adult population would like to commission their own home at some point (long term), with around 12 to 14 per cent of the adult population (seven million people), expecting in the next 12 months to actively research how to achieve that goal.

The polls also suggest that 1 in 50 (or around 1 million people) are looking to take specific action to progress their project in the next 12 months (ie. the short term). Although the level of interest and activity will vary around the country this means there could be, on average, getting on towards 20,000 people in every local council area researching how to build their own home and some 3,000 potential private homebuilders taking action to progress a project.

We also know from NaCSBA’s comprehensive survey of all local authorities in England (NaCSBA, July 2015) that local demand assessments are recording steady demand for custom and self build housing.

The most recent figures (December 2017) suggest that over 33,000 people have now signed up to the Right to Build registers since April 2016, an 80 per cent increase on the 18,000 that signed up in the first seven months.

WHAT ARE THE MAIN BARRIERS FOR WOULD-BE PRIVATE HOMEBUILDERS?

A survey of nearly 2,500 would-be private homebuilders (NaCSBA, 2015) identified four main hurdles.

Access to reasonably priced building plots was easily the biggest challenge – this was four times as high a hurdle as the next three barriers; understanding the technical information required to build a home (16 per cent); securing finance and obtaining planning permission (both at 15 per cent).

The biggest challenge for would-be private homebuilders is finding a suitable building plot

Top Tip

Demand is strong

Around 1 million people in the UK say they want to start building their new home in the next 12 months. Almost all councils have set up Registers with many having hundreds of people seeking opportunities to build.

OTHER FACTS ABOUT THE SECTOR

According to the Homebuilding and Renovating Self & Custom Build Market Report (2017), at about 13,000 homes a year, the private homebuilding sector makes a sizable contribution to our housing supply and helps to diversify our housing industry promoting more competition and choice for consumers.

As set out in the Government’s Housing White Paper ‘Fixing our broken housing market’, the country needs to build between 225,000 to 275,000 or more homes per year to keep up with population growth and start to tackle years of under-supply.

It also recognises that we have lost many of our smaller builders and we urgently need to diversify our housing market. The number of homes registered by small builders declined by more than half from 44,000 in 2007 to 18,000 in 2015. The number of builders who build fewer than 100 new homes per year dropped by more than 50 per cent between 2008 and 2015. The majority of new homes (59 per cent) are constructed by just 11 large housebuilders (those that build more than 2,000 homes a year).

Private homebuilding is also good for the economy. According to the Homebuilding and Renovating Self & Custom Build Market Report (2017), the total value of the UK private homebuilding market is £3.9bn and is predicted to grow to £5.5bn by 2020.

The private homebuilding sector has the potential to speed up supply, particularly where permissioned serviced building land is facilitated, or where custom build developers offer package solutions and ‘shell homes’.

Any increase in the private homebuilding sector should create opportunities for new investors; it would also support existing builders, suppliers and tradespeople in the local construction industry, which helps local economies.  Every project sustains seven construction jobs for a year.

Despite these encouraging facts and its growth potential, we know that the size of the UK private homebuilding sector is very small when compared to our European neighbours where about half of all homes are built this way. In Germany, for example, about 60 per cent of all homes are procured by private homebuilders.

Less than 1 in 10 homes in the UK are built by private homebuilders, which is much lower than many other countries (NaCSBA 2016 update, unpublished)

How supportive are private sector housebuilders?

According to surveys from both the National House-Building Council (NHBC) and the Federation of Master Builders (FMB), most small and medium sized builders see the expansion of the self and custom build housing sector as an opportunity for their businesses.

The NHBC (October 2014) found that 54 per cent of smaller builders would prefer to build more homes for private homebuilders. The FMB (September 2014) found even stronger support for private homebuilding among its members with 89 per cent saying that they see it as a good thing for their business. The FMB also concluded that the provision of serviced plots was essential to scale up supply and create new opportunities.

It is also important to note that private homebuilders like working with small builders. The FMB surveyed 2,000 homeowners in 2018 which found higher customer satisfaction rates of homes built by small builders - with twice as many people (36 per cent) saying they are ‘very satisfied’ with the quality of their new home compared to those whose home was built by a volume housebuilder (17 per cent).

Larger builders are also becoming engaged in the private homebuilding market with opportunities coming forward from volume housebuilders such as Charles Church, Barratt Homes, Redrow, Linden, Bovis and David Wilson Homes as part of developments on larger sites.

What about firms specialising in custom build?

The custom build market is expanding rapidly and there are now more than 25 specialist custom build developers or enablers active in the UK. They range from large nationwide companies delivering many schemes a year of 100+ homes, through to smaller regional/local firms delivering sites of 10-50 homes. Further details are available from NaCSBA on request.

Top Tip

Identify local custom build enablers

There are more than 25 specialist custom build companies operating in the sector. Identify those active in your area and engage with them to explore how they can help deliver more local projects

HOW IS THE PRIVATE HOMEBUILDING MODEL CHANGING?

The private homebuilding market in the UK has traditionally been associated with detached homes built in suburban and rural locations on single plots of land (in many cases enabled by converting or replacing existing buildings). This in part has been caused by risks of getting planning permission and land availability. In a few cases, proactive groups of people have built homes collectively on larger sites.

This model is changing fast. There are now an increasing number of bigger housing sites coming onto the market that offer numerous opportunities for people to build their own home. These range from smaller sites with a capacity for up to ten homes, to medium sized sites of between 10-50 plots and significantly larger opportunities for hundreds and even thousands of homes (as is the case at Graven Hill in Oxfordshire. For a detailed case study of this project see Graven Hill, Bicester.

HOW KEEN ARE LOCAL AUTHORITIES TO HELP?

Local authorities have a statutory responsibility to maintain a Right to Build Register and most are taking the promotion and management of their register and related duties seriously. Almost all councils now have a Right to Build Register and many are taking forward a range of initiatives as part of their duties under the Right to Build.

NaCSBA’s survey of all local authorities in England (conducted in July 2015) found that councils were taking wider actions to help boost the opportunities available for people who want to build their own home: 

  • More than 70 councils had introduced policies through their Local Plans and other programmes, with some identifying areas or sites where private homebuilding is encouraged and where serviced plots should be released for a range of different developments
  • 30 councils had acquired or identified suitable sites or locations for their own new private homebuilding initiatives.

Councils in the North East were found to be the most proactive where 70 per cent of them were progressing initiatives to make it easier for people who want to build their own homes; and in three other regions (the South West, East of England and West Midlands) over half of the councils were supporting the sector.

The least active region was London, where just 18 per cent of local authorities reported specific actions. In August 2015 the Greater London Authority also established a pan-London Register to support its own planning and housing activities.

NaCSBA will be undertaking a new survey of local authority activity and details will be set out here when completed.

The ‘Right to Build’

In the 2014 Budget the Government announced that it would consult on a new Right to Build that would give prospective private homebuilders a right to a council facilitated building plot.

In September 2014 the Government announced that 11 local authorities would become Right to Build ‘vanguards’ to test out how the Right might operate in practice.

The Government’s consultation on the Right to Build: Supporting Custom and Self Build closed on 18 December 2014 and a summary of responses was published in March 2015.

Legislation for the Right to Build is now implemented and supported by Government guidance. Further detail is set out in our Briefing Note on the Right to Build

CREDITS

The NaCSBA Research & Development Programme is funded by the Nationwide Foundation and aims to promote the self-build and custom build sector as an affordable route into housing for a greater number of people in the UK.

For further information, please visit:

www.nacsba.org.uk or www.selfbuildportal.org.uk