Number of housebuilders going bust surges to record high

The number of housebuilders going bust surged to a record quarterly high in Q1 2022 (117), jeopardising the much-needed supply of new homes, according to data obtained by Price Bailey.

According to data obtained from the Insolvency Service under the Freedom of Information Act, a record 360 housebuilders went bust in 2021/22 (year ending 31st March), compared to 209 in 2020/21, which represents a 75 per cent increase in the past 12 months alone.

Price Bailey says that while many of the UK’s large listed housebuilders (e.g. Barratt Developments, Bellway, Redrow and Taylor Wimpey) have seen surging profits during and after the pandemic, SME housebuilders have been squeezed by a convergence of factors, including increasingly restrictive planning rules and rising material, labour and energy costs, all of which disproportionately harm small builders.

In 1988 SME builders constructed 39% of new homes; by 2020 this had dropped to 10%. The number of SME housebuilders has approximately halved since 2007 (Source: Savills and LDS). 216,490 new homes were built in 2020-21, down from 242,700 in 2019-20 (Source: Department for Levelling Up, Housing and Communities).

Matt Howard, Head of Restructuring & Recovery at Price Bailey said “Many listed housebuilders saw profits surge during the pandemic as buyers took advantage of low interest rates and a stamp duty holiday. Their success has masked growing financial distress among smaller housebuilders. The number of new houses being built has dwindled since the pandemic and the collapse of smaller developers is making the Government’s target of 300,000 new homes a year by the mid-2020s look increasingly unobtainable.”

“Many housebuilders are tied into fixed price contracts which quickly become under-priced as inflation eats away at margins. This has become an acute problem over the past year as construction cost inflation has risen sharply, making many contracts unviable. Larger builders with multiple sites can offset losses from under-priced developments but small house builders with a single site may have no option but to deliver houses at a loss.”

“While all housebuilders have seen their margins squeezed by rising labour and materials costs, smaller builders often operate to tighter margins and because they tend to lack the buying power of larger developers they are less able to mitigate rising costs.”

Price Bailey points out that on 16 March 2022, Natural England issued guidance to local planning authorities concerning “nutrient neutrality”, which seeks to reduce adverse impacts to protected wetland habitats resulting from nutrient enrichment caused by construction activity. More than 100,000 homes are now being delayed across 74 local authorities due to concerns over the impact of development on rivers, estuaries, and wetlands (Source: Architect’s Journal, May 2022).

Matt Howard said “Smaller builders find it harder to navigate the growing risk and complexity of the planning system. The nutrient neutrality requirements are yet another obstacle which disproportionately hinders smaller builders. Listed builders are generally able to mitigate planning risk across multiple sites but when smaller builders encounter planning delays on one or two sites it can mean the difference between a year of growth and a year of contraction.”

“Small housebuilders used to deliver a much higher proportion of new homes but their contribution to new housing stock continues to dwindle. They are often much better placed to develop small parcels of land on brownfield sites, which larger developers tend to overlook. Local authorities could do more to work with small builders so that small plots of land can be identified, developed, and quickly brought to market.”