Building costs higher than house prices in one in five areas, Housing Forum finds

The cost of building a new home in 60 local authority areas in the UK is almost equal to or higher than its market value, a new Housing Forum report has revealed.

Construction costs for an average-sized three-bedroom semi-detached house in “the easiest possible setting” are estimated at £133,000.

However, the report said  that once fees for external works, planning, ‘abnormal’ expenses, and new building and environmental regulations are taken into account, the total figure rises to £251,700.

The new report ‘The cost of building a house: How has the thing we need most become unaffordable?’ notes that in some areas, even with free land, the costs of building exceed the price homes can be sold for due to local market prices.

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According to Land Registry data from August 2023, in 60 local authority areas, the average price of new-build homes was less than £280,000.

The Housing Forum highlights that this figure is roughly equivalent to the cost of building, with a modest allowance for land purchase.

As a result, the report notes that while mixed-tenure developments can be built and market homes sold for significantly more than construction costs in strong housing markets, this is not feasible in weaker housing markets.

The latest Nationwide House Price Index shows that UK house prices have grown by 3.2% year-on-year, the fastest rate in two years.

Across England overall, prices were up 1.9% compared to quarter three last year. Northern England, comprising of the North, North-west, Yorkshire & The Humber, East Midlands and West Midlands, continued to outperform southern England, with prices up 3.1% year-on-year.

The North-west was the best-performing English region, with prices up 5.0% year-on-year.

In quarter three, average house prices in the North of England were £161,066, while the North West averaged £215,807. Prices in the East Midlands reached £232,390, and in the West Midlands, they averaged £243,599.

Though construction costs for an average-sized three-bedroom semi-detached home are £133,000, after adding on the costs of external works, planning, professional fees, services and finance costs, the total cost of building a house comes to £202,000.

There are a large number of additional ‘abnormal’ costs to building a house such as additional costs to obtain planning permission, getting sites ready to build on and regional variations in labour costs. This means that a more typical cost to build a house would be around £242,000.

The report states that new environmental and building safety requirements such as the Future Homes Standard will mean that this cost will rise to £251,700 in the near future.

The Housing Forum suggests the government implement measures to speed up the planning process as these would reduce upfront costs, including borrowing expenses for land purchases, thereby helping to reduce overall build costs.

They say this could be achieved by creating a more stable policy environment, ensuring that local authorities have an up-to-date local plan, better resourcing planning departments, and avoiding additional planning burdens without first considering the additional cost.  

The report recommends lowering borrowing costs for SMEs and providing demand stimulus for new build homes to improve the viability of constructing new homes.

It also emphasises the need for sufficient grant funding in the affordable housing sector to help achieve the government’s housing targets.

Launching the report, director of policy and public affairs, Anna Clarke, said: “After years of inflation, it is clear that more needs to be done to make new housing more financially viable.”

She noted that there are things that the housing sector can do, such as standardising designs and finding efficiencies in construction, but that leadership must come from a national level.

“The government must do what they can in the short term to bring down costs, including ensuring a stable policy environment, provide financial certainty for social landlords looking to deliver new homes, and lead the way in researching ways to reduce the cost of building new homes.”