Off-plan gross sales share falls to lowest stage since 2013

The share of new homes being sold before they’re built has dropped to a decade-low, according to Hamptons.

Fewer than a third of new homes sold in England and Wales last year were bought by a buyer before they were built, marking the lowest level since 2013, when the help to buy scheme was introduced, the estate agent says.

Brand new homes are often advertised for sale before they are completed – and in some cases before construction has even begun.

When buyers purchase a new build pre-completion, this is known as buying off-plan, with buyers choosing their home based on an architect’s plans or a show home, rather than the real thing.

In the past, landlords made a large proportion of these purchases, but with tax changes resulting in fewer buy-to-let purchases, off-plan completions are falling.

The share of new homes sold off-plan peaked at 47 per cent in 2016, according to Hamptons. 

This was when investors rushed to beat the 3 per cent stamp duty second home surcharge which came into force in April 2016.

Since then, landlords have made up a progressively smaller share of purchasers and the share of new homes sold off-plan has fallen in all but one year since.

Last year, first-time buyers outnumbered investors by two to one among off-plan purchases, which is an exact reversal of the same ratio in 2016.

Why are off-plan sales struggling?

Analysts at Hamptons say higher mortgage rates are likely to be the key factor behind the slow down in off-plan sales.

This may be because fewer buyers feel they are able to afford the new build homes due to higher mortgage costs, but it may also be because fewer buyers are prepared to risk an off-plan purchase during a time when mortgage rates have been somewhat erratic.

Marc von Grundherr, director of Benham and Reeves says that due to a surplus of homes on the market there has been less need for buyers to purchase off-plan.

He says: ‘We haven’t seen the same buyer feeding frenzy over the last year which means that buyers have had more stock to choose from, whereas previously a certain proportion would have had no other choice but to look off-plan.

‘Of course, higher mortgage rates have also been a factor, with buyers who may have traditionally over stretched to purchase a new-build now choosing to sit tight instead as a result of mortgage affordability changes.’

Hamptons says higher mortgage rates have squeezed brand-new home buyers harder than most, with bigger off-plan homes struggling to attract interest.

Larger homes recorded the sharpest falls in off-plan sales last year, according to the estate agent’s analysis. 

Buyers who had been stretching themselves to trade up have sat tight amid higher mortgage rates to keep their monthly repayments affordable.

Just 22 per cent of detached homes and 31 per cent of semi-detached homes were sold before they were built, recording an eight and 10 percentage point fall respectively between 2022 and 2023.

For the first time since the pandemic, flats were more likely to be sold off-plan than terraced houses. 45 per cent of flats were sold off-plan last year, down five percentage points.

Hamptons says the upturn in the flat market has been led by more first-time buyers alongside a decrease in the number of flats built last year.

Housebuilders shied away from building flats because of falling demand during the pandemic.

Back then, low interest rates meant first-time sellers could afford to move from a smaller flat to a larger house given their ability to borrow more at a time when borrowing money was cheaper.

However, last year, higher mortgage rates meant that more recent homeowners with less equity faced 30-50 per cent increases in their existing mortgage repayments. Consequently, they’re taking smaller steps up the housing ladder when upsizing.

‘In a world of low-interest rates, incentives that cut the size of the deposit were the magic bullet to help buyers into homeownership,’ says David Fell, lead analyst at Hamptons.

‘Even buyers with a 5 per cent or 10 per cent deposit found mortgage repayments were much cheaper than renting a similar home.

‘But higher mortgage rates have introduced a new barrier in the form of unaffordable repayments and have pushed buyers towards smaller, more affordable homes that are often second-hand.’

Anthony Codling, head of European housing for investment bank, RBC Capital Markets has a slightly different take. 

He says housebuilders have been focusing on building more family homes, rather than smaller first-time buyer and buy-to-let properties. 

He thinks this could explain the overall drop off in the proportion of off-plan sales. 

‘Since 2007, housebuilders have been shifting their product mix towards building more family homes,’ says Codling.

‘The data shows that the larger the home the less likely it is to be sold before it is built.

‘Larger homes are more likely to be bought by homemovers than first time buyers. 

‘Homemovers are likely to be part of a chain and therefore committing to buy a home before it is built is more risky, as you need a home to move into before you can move out – and sell your current home.’

It’s worth pointing out however that Hamptons’ data relates to the share of legal completions in each year that had been reserved or sold before they completed.

This means that in some cases, 2023 completions will have been reserved in 2022 or even 2021, prior to mortgage rates rocketing.

The figures also only include homes which were bought by the general public. This means bulk sales to build to rent operators are excluded.

Build to rent is a rapidly growing area in the rental sector and is slowly making up for net loss of landlords, which Hamtons estimates to be nearing 300,000 since 2016.

The build to rent sector now stands at 101,875 completed homes, according to Savills, up 17 per cent year-on-year.

There are a further 54,814 homes under construction as well as 108,917 homes in the planning pipeline, including those in the pre-application stage.

Will fewer off-plan purchases be bad for house building?

For housebuilders, this will be a concern because a fall in off-plan sales indicates a fall in demand among buyers.

This can lead to them delaying building projects or slowing the rate at which they build to preserve cashflow.

David Fell of Hamptons adds: ‘Off-plan sales are the foundation of most housebuilders’ businesses. This means selling fewer homes before they’re built is bad news for their bottom line.

‘In what’s a cash-intensive business, housebuilders typically borrow to build homes, paying it back when they’re sold.

‘But with more homes only sold after they’re finished, it means developers are borrowing money for longer and at higher interest rates.

‘With off-plan sales harder to come by, housebuilders have responded by slowing build rates to preserve capital and ensure they’re not left with large numbers of unsold finished homes.

‘This means the government is unlikely to get close to hitting its house-building targets until interest rates drop back considerably and demand picks up.’

Anthony Codling disagrees however, and says that current sales are up across the new build sector.

This, he says, would suggest the opposite is true and that demand is outweighing supply.

‘Housebuilders typically build to order,’ says Codling, ‘but in this more challenging market post September 2022, homebuyers typically want to see the home before they buy. This means housebuilders will build more show homes than normal.

‘In our view, sales rates are currently pointing to a good market and we believe that more homes could be sold if more sites were opened.

‘To get more sites opened we need reform to the planning system and the Labour party appears much more willing than the Conservatives to do that. 

‘Although, if they are elected in July, time will tell if they follow through and become builders not blockers.’

Why are new build prices booming?

The findings may seem odd, given that the average price of a new build property is up 17 per cent year-on-year, according to the latest figures from the Office of National Statistics. 

Meanwhile, the average price on existing homes fell by 1.8 per cent year-on-year.

Codling adds: ‘Housebuilders are price takers, their prices cannot be out of kilter with the secondhand market. 

‘If they were much higher the homes wouldn’t sell, and no one is forced to buy a new home. The strong pricing reflects the demand and supply imbalance.

‘Rightmove reported last week that in the first four months of 2024 sales agreed was up 17 per cent, but the number of new homes offered for sale was only up 12 per cent, therefore the pressure on prices is up not down, for every 17 additional buyers there are only 12 additional homes to buy.’