New homes are increasingly oustripping the material and labour costs of building them, making it increasingly profitable to create new supply.
The analysis comes from West One Loans, a leading provider of property finance and specialist mortgages.*
The finance provider found that new build prices have surged by a staggering 42.0% in the past three years. In comparison the cost of materials have risen by 8.5% in three years, while labour costs have increased by 17.8% over the same period.
Bridging and development opportunities
Given that labour and construction cost increases are steadier than the final property, there could be an opportunity to use alternative forms of finance to make a healthy return.
One such example is bridging and development finance, which can be used to develop or refurbish a property, effectively bringing it to a state where it can be mortgaged and potentially sold.
Based on how prices are surging, it seems likely developers could make back the cost of labour and materials quickly.
2024 a bumper year for new builds
Last year alone there was a huge spike in the price of new build prices, as they rose by 28.8% compared to minor increases to materials and labour, which ticked up by 1.3% and 4.8% respectively.
Over the preceding two years new build house price increases were steadier, but it all adds up, especially as material costs have barely changed, with an increase of 1.2% between 2022 and 2024.
Co-Head of Short-Term Finance at West One Loans, Thomas Cantor, commented:
“The nation’s housebuilders have had to contend with a turbulent landscape in recent years, not least due to increasing interest rates, high material costs and increases to labour costs, all driving up the sums required to break ground and deliver new homes to market.
"However, at the same time, we’ve seen the value of new-build homes also climb and by substantially more versus the cost increases seen in materials and labour, demonstrating that the new-build sector remains a very profitable endeavour for those who can negotiate the challenges it poses.
"No surprise then, that we’ve seen a greater reliance from the nation’s housebuilders with respect to specialist finance products, with bridging, in particular, proving a crucial tool that allows them to negotiate any unforeseen cost increases and push on with their development plans.
"With buyer demand now on the up and new-build values remaining robust, we expect to see more housebuilders utilise the full range of weapons within the specialist finance arsenal over the coming year, in order to bring more homes to market and capitalise on this improving market sentiment.”
