OBR Cuts Housing Forecast by 190,000 Homes as Costs Squeeze Developers

Britain’s housing ambitions are running into a familiar commercial problem: the cost of delivering a home is becoming harder to reconcile with what buyers can afford to pay.

The Office for Budget Responsibility has cut its forecast for growth in the UK housing stock by around 190,000 homes compared with March. Higher borrowing costs, weaker demand and rising development expenses are making the route from a viable-looking site to a completed sale more difficult.

For developers, the significance goes beyond the national total. A project can still have planning permission, interested buyers and a capable contractor, yet produce a very different return from the one anticipated when the land was bought.

The pressure often arrives gradually: a revised construction quote, a buyer seeking a discount, another month before exchange. Together, those changes can consume the profit that made the development worth undertaking.

What has changed in the OBR’s forecast?

In its October Economic and Fiscal Outlook, the OBR expects annual net additions to fall from around 230,000 in 2025–26 to 220,000 in both 2026–27 and 2027–28, before recovering to 260,000 by 2030–31.

The 190,000 figure is a cumulative downgrade across the forecast period, rather than a count of homes already cancelled or a shortfall in a single year. It measures growth in the housing stock.

The OBR still expects the 2024 planning reforms to support housebuilding. Its weaker outlook reflects the wider economics of development, including construction costs and the cumulative impact of regulatory and fiscal changes.

Planning permission is only one part of the calculation

A consented site gives a developer the opportunity to build. Whether it makes commercial sense to proceed depends on the price of the land, the cost of construction, the funding available and the sales the finished homes can achieve.

There is a particular difficulty once a project is under way. The land has been purchased and much of the spending is committed, while the eventual sale prices remain uncertain. If buyers become more cautious, the developer cannot simply reverse those earlier costs.

A longer programme adds another pressure. Interest continues to accrue, site costs continue and cash expected from completed sales arrives later. The original profit allowance must absorb each change.

This helps explain how a national housing shortage can coexist with developments that struggle to proceed. Demand for homes does not automatically translate into buyers able to pay the price needed to make a particular scheme work.

How a £1 million profit can shrink to £300,000

Consider a hypothetical residential development with expected total sales of £6 million and all-in project costs of £5 million, including its original finance allowance. That leaves an anticipated £1 million profit before tax.

Now assume achievable sale prices fall by 5%, reducing expected receipts by £300,000. Construction costs rise by £250,000, and a slower sales period adds £150,000 in interest.

The extra interest assumes a constant £2.5 million loan balance for six months at an illustrative annual simple rate of 12%. It excludes compounding and any additional fees or holding costs.

In this example, the combined changes remove 70% of the expected profit. The development remains profitable on paper, but there is much less room for another delay, an unexpected bill or a further reduction in sale prices.

There may also be a cash problem before there is a loss. The contractor needs paying while proceeds remain tied up in unsold homes. An eventual profit does not, by itself, provide the money needed to reach completion.

Buyers’ mortgage budgets feed back into development returns

The OBR expects the average effective interest rate across outstanding mortgages to rise from around 4% in 2026 to 5% in 2031. This describes the mortgage stock over time, including borrowers leaving older fixed deals; it is not a quotation for a new mortgage today.

For a developer, the practical connection is the purchaser’s monthly budget. A buyer may like a property and have a deposit, but still be unable to support the mortgage needed at the asking price.

That can lead to longer negotiations, smaller purchase budgets or a decision to postpone moving. Sales assumptions therefore need to reflect what local buyers can finance, alongside comparable property values.

Reservations and viewing numbers are useful signals, but completed transactions release the money that repays a development loan. A funding plan built around brisk sales can come under pressure even when enquiries remain encouraging.

For unfinished schemes, the immediate issue is reaching completion

Where construction is continuing, the useful starting point is an updated assessment of the cost to finish. That means comparing the remaining works and professional costs with undrawn loan funds and the developer’s available cash.

If that comparison exposes a gap, refinancing or additional funding may help a sound project move forward. The new arrangement needs to cover the work still required and leave a credible route to repayment from the completed development.

The headline loan amount does not tell the whole story. Some of a replacement facility will repay the existing lender; fees and interest provisions can absorb more. What matters on site is the cash left available to fund the remaining work.

A lower valuation can also reduce the amount a new lender is prepared to advance, even if the existing debt has barely changed. A developer expecting refinancing to release additional cash could instead need to contribute more equity. That possibility belongs in the appraisal before a replacement loan is relied upon.

Addressing this while there is still time to review the figures gives the developer more scope to compare an extension, a replacement loan or further equity. Waiting until contractors are unpaid or maturity is imminent can narrow those choices.

For completed homes, extra time has a price

A completed development presents a different question. The building work may be finished, but the original loan could mature before enough properties have sold to repay it.

We recently examined this situation in our coverage of Allica’s development-exit changes. Development-exit finance can provide a further sales period and repay the construction facility, where the scheme and borrowing fit a lender’s requirements.

The commercial decision is whether the benefit of waiting exceeds its cost. Holding out for a higher price may be worthwhile, but the additional interest, insurance, maintenance and marketing must be set against the extra proceeds expected.

A lower offer that completes promptly can sometimes produce a better net result than a higher offer several months later. Equally, a rushed sale can sacrifice value unnecessarily. Comparing the likely proceeds after debt and carrying costs makes that choice clearer.

A delayed sale can also delay the next site

For a smaller housebuilder, cash retained in one development may be the equity intended for the next acquisition. A few unsold homes can therefore affect more than the profitability of the current scheme.

If that money remains tied up, the developer may defer a land purchase or postpone starting another project. This is one way pressure on individual businesses can feed through into weaker housing delivery.

Releasing capital can help, but extracting too much from the existing scheme leaves less protection against further delays. The finance decision needs to consider both the next opportunity and the development still carrying the debt.

The figures that matter are the ones the project faces now

The OBR’s downgrade is a reason to revisit appraisals that were prepared under different market conditions. Current sale evidence, an updated construction budget and a realistic timetable are more useful than relying on the profit shown when the project began.

Willow can review those figures alongside the existing loan to assess development refinancing, funding to complete or development-exit options. Where the underlying project remains sound, a different funding arrangement may provide useful breathing space.

Where costs have overtaken achievable receipts, more debt alone will not restore the margin. Recognising that early gives developers a better basis for decisions about pricing, equity and their next investment.