Developers face financial barriers as construction costs outpace sales values
Constructing new homes is not financially feasible in nearly half (48%) of England and remains difficult in nearly two-thirds (64%) of the country, according to a recent report from property listing platform Zoopla.
The firm’s analysis indicates that in many areas where new homes are needed most, current pricing levels do not support financially sustainable development. The number of homes granted planning permission has fallen by 23% since 2022 and is 7% lower over the past year, placing the national housing target in doubt.
Construction costs have increased at a much faster rate than sales values. Data from major listed housebuilders show that the cost of building homes rose by an average of 17% between 2022 and 2024, while average selling prices edged up by just 1%. Smaller builders, responsible for around 30% of new developments, are likely to have experienced even greater cost inflation.
The rise in development costs is attributed to higher borrowing expenses, increased build costs, and additional regulatory requirements. Forthcoming measures such as the Building Safety Levy and the Future Homes Standard are expected to add further financial pressure.
Demand for new homes has also declined since the end of the Help to Buy equity loan scheme in autumn 2022, alongside recent increases in mortgage rates.
The affordable housing sector has seen reduced demand, with housing associations—who typically acquire up to a quarter of new builds through Section 106 agreements—facing their own cost and funding challenges.
“While the government says it wants to ‘build baby build’, our analysis shows that this can only be currently achieved across half the country, in areas that are typically more expensive for consumers to buy,” said Richard Donnell (pictured right), executive director at Zoopla. “It is much harder for builders to build homes where it’s affordable for home buyers to buy.”
A pronounced north-south divide in development viability has emerged. In southern England, 64% of areas have average sales prices sufficient to cover development costs, compared with just 13% in the Midlands and 10% in the North.
Many current projects in less viable areas are proceeding on land acquired before recent cost increases, with developers absorbing the impact through reduced margins. However, acquiring new land for future projects is becoming increasingly difficult, particularly as over a third of housing targets are in regions deemed unviable for development.
Even in southern England, where development is more feasible, high house prices limit the pool of potential buyers, leading to slower sales rates and increased risk for new schemes.
The report sets out four recommendations:
- Reform the planning system to simplify land development
- Review regulatory changes that add to development costs
- Provide targeted funding for affordable housing to enable acquisitions by housing associations
- Consider reintroducing targeted support for first-time buyers to stimulate demand without driving up prices
“The government can't control the price of raw materials like bricks or concrete, but it can influence the rising costs of new regulations,” Donnell said. “While recent planning reforms and affordable housing funding are positive steps, they are not a complete solution to boosting new home building. Further reforms are needed to boost capacity and speed at the local planning level and new funding should be focused on immediate, not long-term, delivery. Direct support for homebuyers could help, but if deployed, requires careful targeting.
“Builders also need to ensure they are marketing homes as efficiently as possible. Affordability pressures are making people look further for their next home, especially in the new homes market. Zoopla has boosted the visibility of new homes within property search and is helping builders target would be buyers from across wider catchment areas.
“Building more homes is vital in helping to ease the pressures facing those in the housing market, but the viability of building is at risk from further cost increases and we can't rely on higher house prices to fix it.”
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