Average cost of building a home to hit £250,000 with new building safety and green requirements

While building social housing “can still be economically beneficial in the long term” as there are savings in other areas such as temporary accommodation and health, there is a “clear requirement for upfront subsidy”.

It is also estimated that current construction costs for an average-sized three-bedroom semi-detached house in the easiest possible setting are £133,000.

This figure rises to £202,000 after adding on the cost of external works, planning, professional fees, services and finance. Due to additional “abnormal” costs, such as site remediation, regional variation in labour costs and nutrient neutrality payments, a more typical cost would be around £242,000.

Meanwhile, the cost of building a typical two-bedroom flat is estimated at £225,000, rising to £281,500 per flat in very tall buildings (40 storeys) due to the increased difficulty of building at height.

In some cases, even with land for free, the costs of building are higher than the house can be sold for given local market prices.

Data from the Land Registry showed that in August 2023, 60 local authorities in the UK, or one in five, had an average sales price of new build housing that was less than £280,000, ie around the cost of building the housing with an allowance for buying the land.

The government’s consultation on the Future Homes Standard closed in March, with a response expected later this year. The policy is expected to require new homes to be built with green energy systems such as heat pumps, and could also mandate solar panels, mechanical ventilation and greater airtightness.

Earlier this year, the government also launched a consultation on the Building Safety Levy, which ministers expect will raise £3bn from developers over 10 years.

Assuming this is based on the government’s target of building 300,000 homes a year, this would come to an average extra charge of £1,000 per new home.

The report acknowledged that in strong housing markets, it may be possible to build mixed-tenure developments and use Section 106 requirements to create cross-subsidy for social housing, even after factoring in land costs.

However in weaker housing markets, “the value of new build market homes can be no higher than the costs of building those homes”, meaning “cash subsidy is the only way to build social housing” in these areas.

The report concluded that in many areas “it can be very hard to make the economics of new-build housing for the affordable housing sector… stack up”.

Allowing developers to build for the “upper end of the market” and letting social landlords use grant to purchase existing homes or focus on regeneration may be “the best way forward” in these areas.

Ministers should also ensure “sufficient grant funding” so that affordable housing is viable in all areas where it is needed, making use of cross-subsidy from market housing where markets are strong enough to support it.

Anna Clarke, director of policy and public affairs at The Housing Forum, said: “After years of inflation, it is clear that more needs to be done to make new housing more financially viable.

“There are things which the housing sector can do, like standardising designs and finding efficiencies in construction, but ultimately leadership must come from a national level.

“The government must do what they can in the short term to bring down costs, including ensuring a stable policy environment, provide financial certainty for social landlords looking to deliver new homes, and lead the way in researching ways to reduce the cost of building new homes.”