Self build affordability in a higher interest rate world.

[gavztheouch]

Hi, we have a self build project that we shelved at the start of the pandemic due to increased costs and material availability. The war in Ukraine made things worse with the energy cost increases running through all materials.

 

We are 50/50 on wether to build or buy now. Property is fairly expensive and hard to find round here. However higher interest rates are definitely depressing prices and I expect that to continue as long as the base rate is above 2 or 3 %

 

Just wondering what people thoughts are on higher interest rates and how they will effect material prices.

 

Our build materials are significantly higher than in 2020 which is one extra cost to absorb, however something that I don’t see getting talked about much in the media is the effect of higher interest rates on self build affordability. I reckon if you have a 25% deposit in comparison to 2020 the monthly mortgage cost now in 2023 would be treble the 2020 price.

 

This would imply wages have to rise at least 50% now or material prices need to halve.

[nod]

A lot of material prices have dropped

Though still expensive 

Interest rates are still very low 

When I bought my first property The rate was 12% which rose to 15% soon after 
Predictions are peaking at 6%
But the same experts predicted a 1920s style recession straight after the lockdown ended 

Acquiring the plot is a massive part of the build 

[AliG]

Hi Gaz,

 

A lot depends own the price you pay for a plot.

 

Where I am in Edinburgh at the moment, plot prices have not fallen to take into consideration the massive increase in building costs. As far as I can see, unless you can build something very cheaply, say £2000/sq metre, then there is a good chance it would be cheaper to just buy something. I would say that using a main contractor you are looking at £3500/sq metre costs at the moment. I have heard of people being quoted £4000 as a ballpark figure. TBF this includes the often high spec in a self build house. I have noticed that builders have massively reduced their specs as a way of keeping costs down, e.g. virtually no tiles in bathrooms.

[ProDave]

That's not the end of the puzzle.  With interest rates rising, and so many people used the the previous emergency low rates as "normal" it is widely forecast people will stop buying houses and wait, causing a slump in the housing market, and falling prices.

 

If that happens, mass market builders will mothball their sites, they won't build with rising costs and falling prices, just like they did last time.

 

And so we enter the next "bust" phase of the unstable housing market.

 

If all the mass market builders do stop building material prices should come down.

 

I think keep looking for a plot but not to be in a hurry to actually start might be a good plan at the moment?

[SteamyTea]

Motly Fool has something to say.

 

https://www.fool.co.uk/2022/11/25/house-builder-stocks-are-on-the-rocks-opportunity-knocks/

[ProDave]

10 minutes ago, SteamyTea said:

Motly Fool has something to say.

 

https://www.fool.co.uk/2022/11/25/house-builder-stocks-are-on-the-rocks-opportunity-knocks/

Such speculation assumes things were "normal" until recently and would follow the same pattern as before.

 

But we have had 15 years of emergency low interest rates and a decade of "austerity" to try and revive the UK economy after the 2008 crash.  We have certainly NOT been living in "normal" times for a long time now.  So long that a lot of people believe this fragile propped up economy was in fact "normal"

 

Logic says we are at the start of a recession , and house prices will fall as demand falls, this is not a good time to invest in a house building company.  Unless you genuinely believe they are going to carry on building houses and manage to sell them at a profit?

[Nick Thomas]

32 minutes ago, ProDave said:

If that happens, mass market builders will mothball their sites, they won't build with rising costs and falling prices, just like they did last time.

 

I read today that this is already happening: https://www.theguardian.com/business/2023/jan/11/barratt-hiring-freeze-uk-housing-market-slows-down

 

Quote

The company said the average weekly net number of private reservations of properties fell in the second half of last year, down from 259 to 155.

It was also forced to scrap building plans for 3,293 land plots, cancelling out the 3,003 plots that proceeded with construction. The net cancellation of 290 plots compares with the net addition of 8,869 a year earlier.

 

I'm not going to cry too hard for them, though - they had 1bn in profit last year.

[gavztheouch]

I’m lucky enough to have a plot attached to my farming business. So far I’ve spent about 20k on planning and building warrant. Building warrant should be finished end of this month. 
 

Even with the free plot the build cost from a main contractor will be more than the equivalent house in my area. I also cannot afford a 100% increase in build cost. Been saving and building my business up for 20 years (I’m now 37) to be able to afford to build, def feel like the world wide governments with all the coordinated money printing/stimulus and subsequent inflation from the supply shock have thrown anyone with substantial savings set aside for a project, under the bus. 
 

The flip side is house prices should come down so I guess that could be my get out jail free card.

[gavztheouch]

If you sold your house for mega bucks at the peak I guess the increased build cost is somewhat hedged but what happens when the house you are selling drops in value by 20 or 30% that’s going to take another chunk of self builders out of the game.

[gavztheouch]

1 hour ago, nod said:

A lot of material prices have dropped

Though still expensive 

Interest rates are still very low 

When I bought my first property The rate was 12% which rose to 15% soon after 
Predictions are peaking at 6%
But the same experts predicted a 1920s style recession straight after the lockdown ended 

Acquiring the plot is a massive part of the build 

Build/plot and or house prices are much higher now compared to our wages today. Therefore we are already at a rough equivalent of 12% interest rates of the 1980s

[ProDave]

27 minutes ago, gavztheouch said:

I’m lucky enough to have a plot attached to my farming business. So far I’ve spent about 20k on planning and building warrant. Building warrant should be finished end of this month. 
 

Even with the free plot the build cost from a main contractor will be more than the equivalent house in my area. I also cannot afford a 100% increase in build cost. Been saving and building my business up for 20 years (I’m now 37) to be able to afford to build, def feel like the world wide governments with all the coordinated money printing/stimulus and subsequent inflation from the supply shock have thrown anyone with substantial savings set aside for a project, under the bus. 

That puts you in a good position.

 

If it is any help, the only time I talked to an architect, they gave me such a silly estimated build cost that I could never have afforded it, and I would be paying to build it way more than it's market value was.  I built if without an architect for half their estimate.

 

Are you really in a hurry?  How much if any are you prepared to do yourself?

 

I think if you wait a year, with large builders mothballing sites demand for materials will fall and you will find builders merchants a lot more interested in self builders and prices may come down.

 

If you can get a basic shell built, then most of the rest you can do yourself, that is what we did.  Because of a change in our circumstances and I did not want and was probably unable to borrow, ours became a 5 year long build as you earn.  Are you prepared to put in the graft for a similar result?

[gavztheouch]

6 minutes ago, ProDave said:

That puts you in a good position.

 

If it is any help, the only time I talked to an architect, they gave me such a silly estimated build cost that I could never have afforded it, and I would be paying to build it way more than it's market value was.  I built if without an architect for half their estimate.

 

Are you really in a hurry?  How much if any are you prepared to do yourself?

 

I think if you wait a year, with large builders mothballing sites demand for materials will fall and you will find builders merchants a lot more interested in self builders and prices may come down.

 

If you can get a basic shell built, then most of the rest you can do yourself, that is what we did.  Because of a change in our circumstances and I did not want and was probably unable to borrow, ours became a 5 year long build as you earn.  Are you prepared to put in the graft for a similar result?

Current plan was to do as you say. I can get work down to about 2 days/per week that leaves me 3 days a week plus the odd weekend. 
 

Plan was to do pretty much do everything myself apart from the roof to shell stage. I would have a labour budget of £50,000 for the shell to dip into to help when I get stuck or overwhelmed. Plus I have my dad to help with the digger work and 1 full time employee who is keen to help and learn on the job.

 

Both my dad and I are farmers, I also studied and worked as an engineer. My dad used to install septic tanks and drainage as a side job. I have a telehandler, storage sheds, flat site, diggers, every hand and power tool needed to build. I have a lot of advantages, it’s just the material costs and project complexity (it’s a passive house) that are putting me off, that and my two kids who are 3 and 1, lots of work.

 

to anyone thinking of building now I would say it’s worth keeping your design simple and as big as you need and no more. Might also be worth designing around materials that you know are not too inflated in price. Passiv house elements like wood fibre insulation, mvhr ducting etc are still very expensive.

[SteamyTea]

4 minutes ago, gavztheouch said:

I have a telehandler, storage sheds, flat site, diggers, every hand and power tool needed to build.

If you have a shed large enough to use as a workshop, you can make a timber frame house in it.  They are only OSB and timber, with some insulation in them.

 

[gavztheouch]

Well interest rates have gone higher and will possibly go higher and stay higher for longer than I imagined. Now even more confused about what to do. Apart from farming wood and osb I don’t see a lot if any reductions in material costs. Labour rates are still sky high and material prices are not reflecting the underlying fall in commodity prices or rise in interest rates. All in all, I feel it’s becoming harder or more expensive to build a house but cheaper to buy a house (assuming you don’t need a mortgage)

[Seren161]

You sound like you have got a decent amount of support as well as a reasonable skill set to be getting on with it..

There isn’t any reason to be confused IMHO.

The reasons you wish to self build and your personal finances, situation , risk appetite,  ability to deal with challenging circumstances etc could be on a sheet of paper and help you clarify your thoughts about what will and will not work for you.

Reading through this forum.. you’ll notice that the self builders are all very diverse in terms of experience, motivation, self build approach taken, reasons for self building, serial and very experienced self builders, complete newbies powering through on their own..etc but you’ll also see familiar themes in the challenges encountered.

Rates will be up or down, the variable costs of labour or materials will also go up or down, there won’t often be a sweet spot to commence.. and if said sweet commencement conditions happened, they can and will change mid build.. sometimes multiple times.

If you are thinking of self building just to save on the cost of your home, then yes you probably still can achieve this but you will need to do more by yourself, 
If you are self building because you want something that is exactly what you and your family want in the location you want.. then what are the chances of you finding this on the market and delaying it might save you some pounds but not yet met anyone who can buy back wasted time.

If you want to flip the property and make a profit then possibly you have a greater challenge in the present market 

Self building is not easy and there will always be reasons not to do it but only you will know why you want to, if you truly want to etc and then you can move on to what can I afford and how can I make it happen within my budget..

[BristolBuild2020]

We're in the same boat now, we've now got Full Planning, SAB, Building Control...

 

QS price (FWIW) came back as knocking on the door of £4k sqm (Gross) over 260sq.m including everything we've spent to date.
Overall cost would be £100k over a realistic worth even at todays prices.

 

Our budget has already gone from £1500 to £2000 sq.m and we're currently resizing the house (9% reduction in Net Area doesn't really solve the problem).

Given Self Build mortgages want 20% ontop of an agreed build price (in cash that we have to tuck away) means we can't actually borrow enough to build.

 

So plan is to chip away at it slowly over the next year or two to maximise progress for minimal cost...

Edited July 9, 2023 by BristolBuild2020

[Seren161]

Getting our SB mortgage was easily the hardest and most stressful part of our build. What are the factors contributing to the high cost per square metre? 

[Kelvin]

We are on track to come in at £2100/sqm all in but only because we fixed prices last year and I paid deposits on everything. Had I waited if would easily be knocking on £3000/sqm. The timber kit and windows increased by 20% shortly after I paid for ours for example. 

[BristolBuild2020]

3 hours ago, Seren161 said:

Getting our SB mortgage was easily the hardest and most stressful part of our build. What are the factors contributing to the high cost per square metre? 

Combination of a few things, rainwater attenuation, green roof, on a slope, building up the garden to have somewhere to sit a 11m3 attenuation tank high enough to drain into the nearest sewer (forced to do this by SAB…!)

 

The more I work on the numbers the less certain I think I’m going to go ahead..! Even if I remove all the things we don’t need we are still well away from where we need to be!

Edited July 9, 2023 by BristolBuild2020

[LaCurandera]

I think we're likely to not do a full build. Do a renovation and then wait until we can amass enough funds to make it reasonable for us. Plus, living the next few years without the extended mortgage feels like quite a win in itself

 

[Indy]

Returning to this forum after almost a year away - where we've been stuck in planning hell (and still no resolution in sight). This is the exact question I ponder over most days now.

 

When I originally started my journey in 2021, IRs were 2% and build prices were being quoted at about £2k-£3k/m2 , with some outlandish quotes around £3.5-£4.5k/m2. Pricey in London/SE but just about doable as the end result would have been worth the investment, hard work and effort - in the sense that you would at least be safe in the knowledge that your capital would be recoverable if you were forced to sell. 

 

2 years on, IRs are triple that (higher for self build mortgages) and the parts/labour rates for self building also seem to have crept up and stayed up. Even assuming extreme cost engineering, I can't see how you could bring it in for less than £2.5k/m2. 

 

If you factor in the cost of the land, the investment in a self build doesn't really stack up anymore as you're unlikely to break even, let alone build any equity. It probably costs less now to look for something already done or wait for another 6m and see how the market plays out.

 

One thing I have seen is a lot of plots now coming on to the market with planning permission granted - stuff that would be very rare pre 2021. This is surely the developer community realising that it's not worth it for the small chance of a return and cashing in any gains realised by getting PP on the land/plot. 

[AliG]

Exactly right, basically land is overpriced at the moment relative to rising build costs.

 

The problem is many self builders just want to build and often aren't that fussed about the financial returns. If there were lots of plots available then these people wouldn't be enough to sustain the market, but in most places there are very few plots so of the moment prices remain high.

[saveasteading]

On 09/07/2023 at 22:47, BristolBuild2020 said:

rainwater attenuation, green roof, on a slope, building up the garden to have somewhere to sit a 11m3 attenuation tank

How much of this is your own choice? I can't think what SAB means.

You have rw attenuation 3 times in that list. Can that be simplified?

A green roof is the first to go for cost and maintenance. I've done one reluctantly on someone elses planning, but subsequently argued against them successfully. £100/m2 is a lot of saving (after including structure and edge detail).

[saveasteading]

34 minutes ago, AliG said:

basically land is overpriced 

Yes and not about to reduce. Those with lots of land don't usually need the money so can negotiate hard/ sit tight.

S106 contributions are too low, again I suspect because it basically comes off the land value.

[Indy]

On 12/10/2023 at 10:59, saveasteading said:

Yes and not about to reduce. Those with lots of land don't usually need the money so can negotiate hard/ sit tight.

S106 contributions are too low, again I suspect because it basically comes off the land value.

 

I agree with the points made above though the use case drastically reduces to those that have massive cash reserves and can finance purely out of savings. 

 

Borrowing at current IRs makes little sense as there is no light at the end of the tunnel - i.e. complete the development and then remortgage to a domestic product at reduced rates. There is no concept of reduced rates at least for the foreseeable future and long term predictions are all around 4-5%.

 

I'm not sure I fully agree that land prices won't come down as a result. For very old and large landowners with little borrowing - sure, they can afford to wait it out and see what happens. For anyone who bought in the last 2-5y, their financials won't stack up anymore and I'm guessing more of these plots with PP will start to hit the market.