Savills’ current five year forecast for UK house prices predicts growth of 13.1%, a much slower rate of growth than the 20.5% over the five years to November 2021. This is largely because stretched affordability, combined with interest rate rises, will limit the capacity for further growth in house prices and consequently land values.

Savills has for the first time also produced a five-year forecast for greenfield land values. Recent increases in land values, supported by strong house price growth and a shortage of consented land supply has resulted in a strong market for greenfield development land. However, the company predicts that the next five years will see changes to environmental regulations and planning obligations, which will add significant costs to residential development.

The firm’s forecast for greenfield development land is for 4.4% growth over the five years to 2026, with most of that growth in the early stages of the forecast period.  The introduction of Future Homes Standards and projected slowing mainstream house price growth point to small value falls later in the period.

While house prices are not expected to grow quickly, the cost of development is likely to climb over the forecast period, according to Savills. In addition to the cost increase of building materials due to supply chain issues, new regulation is likely to increase costs further. 

In June 2022 regulations requiring a 30% reduction of carbon emissions from new homes and the cost of meeting this standard is estimated to be around £4,000 per home according to major housebuilders and DLUHC.

Coupled with this is the Future Homes Standard, coming into effect in 2025, requiring a 75-80% reduction in emissions, the cost of meeting this Standard is projected to add a further £3,000 – £5,000 per home in build costs.

Also, all planning applications will need to demonstrate that they have enhanced biodiversity. The cost of meeting the BNG obligation is estimated to be around £2,000 per home. This requirement which is expected to become mandatory in 2023 will further restrict potential for land value growth.

It is also highlighted is the fact that since the end of 2019 the number of consents granted nationally has been falling, dropping by 8% in 2020. This reduction in the flow of permissioned land has been a factor in the recent strong growth of development land values. 

Shortages have been most pronounced for immediate land with capacity for 50-150 homes, resulting in increased numbers of offers on sites and upward pressure on land values.

Patrick Eve, Savills head of regional development, said: “The fact that we have seen no increase in the level of consented land coming through the planning system has important consequences for our forecasts. 

“Additional build costs and developer contributions will put downward pressure on values, but a lack of supply is likely to limit the impact of these factors. Developers will need to absorb new costs, and tighten margins in order to secure sites in what we expect to continue to be a competitive market.”

Emily Williams, Savills research analyst, added: “We anticipate continued appetite for immediate and strategic land from the major housebuilders and SMEs, as they look to maintain steady growth in the medium term and replenish land pipelines following high levels of completions over the last 18 months.”