By Thomas Cantor, Head of Bridging Finance, West One Loans
At times over the past decade, the UK's housing market has resembled a runaway freight train.
No matter what happened in the wider domestic or global economy, our property market seemed resistant to market shocks.
It lived through multiple crises, including both Brexit and Covid-19, and has come out stronger on the other side.
However, a once-in-a-generation cost-of-living crisis and an unprecedented run of interest rate hikes has left the housing market looking more vulnerable that it has for some time.
The data suggests the slowdown has already started. Provisional figures from HM Revenue & Customs (HMRC) shows housing transactions were down more than 18% in February. Meanwhile, Nationwide revealed that house prices fell at the fastest pace in 14 years in March.
This suggests that higher rates and soaring costs are having a negative knock-on effect on confidence in the housing market as well as demand.
Logic dictates that when a market slows, all of its key factors - in this case, lenders, developers and brokers - slow with it.
Trade body UK Finance has already predicted that mortgage lending to house purchases will fall 23% this year, which will be a blow to both brokers and lenders.
However, it is the householding sector that is seemingly feeling the worst of the slowdown. It may sound counterintuitive, but that could well be good for the bridging sector - I'll explain why.
In this latest half-year results, Barratt Developments, the UK's largest housebuilder, revealed a significant drop-off in demand year-on-year in the six months to the end of December. During that period, it said net private reservations and forward sales had fallen by 45.6% and 23.3%.
In other words, people are reserving fewer homes, and as a result, the builder's sales pipeline is smaller than a year earlier.
Recent results from Persimmon Bellway and Taylor Wimpey - the next three largest - paint an eerily similar picture, suggesting this is an industry-wide trend.
Many traders are private, companies, and are therefore not obliged to release such detailed financial statements. However, as drivers of the property market, if the Big Four are experiencing such a significant tailing off in demand, you can almost guarantee the smaller players are, too.
Unsold plots
That leaves the housebuilding sector in a tricky situation. Unless they are using their reserves to fund construction, most developers utilise development finance to fund new sites.
With development finance, the terms are relatively restrictive, meaning typically you have two years to construct a site and sell the necessary number of homes needed to repay the facility.
The trouble is, that becomes harder in a slowing housing market, where there are fewer buyers looking to purchase new-build properties.
As I have outlined above, far fewer people are reserving new homes, meaning that many builders are going to be stuck with unsold plots.
While that presents difficulties for the housebuilder, it presents an opportunity for brokers and lenders operating in the bridging sector. Why? Because a slowing market means housebuilders may need to refinance to give themselves more time to shift any unsold units.
Given the inflexible nature of development finance, a natural alternative is to use bridging as an exit. That way, housebuilders can buy themselves a further 12 months - or longer - to sell their remaining stock and exit the project.
The longer and deeper the slowdown in the housing market, the more likely builders will be to turn to the bridging sector for a solution.
Lenders and brokers are not immune from a market slowdown, of course, and volumes in the bridging sector and the wide mortgage market may also fall this year. However, this unexpected boost from housebuilders could help support bridging volumes at a time when conditions are challenging in the wider market.
If you're a broker or a lender operating in the bridging space, this is where I would be looking for opportunities in the coming 12 months.
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