The gap between the cost of building new homes and their final market value is widening, as new build house prices continue to rise far more quickly than the price of materials or labour, according to new analysis from West One Loans.

The specialist finance provider reports that the average price of a new build property has increased by 42.0% in the past three years. Over the same period, the cost of construction materials has risen just 8.5%, while labour costs are up by 17.8%. The resulting profit margins are giving developers a stronger incentive to bring fresh supply to the market, supported by alternative forms of finance such as bridging and development loans, the lender said.

In the past year alone, new build prices surged by 28.8%, whereas material costs rose by just 1.3% and labour by 4.8%. Over the two years prior, materials saw only a marginal increase of 1.2%, further highlighting how sharply new build values have outpaced input costs.

Thomas Cantor, co-head of short-term finance at West One Loans, noted that developers have had to navigate a challenging environment in recent years, characterised by inflationary pressures, rate hikes and elevated build costs. But he pointed out that the sector remains highly lucrative for those able to weather such challenges.

“The nation’s housebuilders have had to contend with a turbulent landscape in recent years, not least due to increasing interest rates, high material costs and increases to labour costs, all driving up the sums required to break ground and deliver new homes to market,” he said.

“However, at the same time, we’ve seen the value of new-build homes also climb and by substantially more versus the cost increases seen in materials and labour, demonstrating that the new-build sector remains a very profitable endeavour for those who can negotiate the challenges it poses.

“No surprise then, that we’ve seen a greater reliance from the nation’s housebuilders with respect to specialist finance products, with bridging, in particular, proving a crucial tool that allows them to negotiate any unforeseen cost increases and push on with their development plans.

“With buyer demand now on the up and new-build values remaining robust, we expect to see more housebuilders utilise the full range of weapons within the specialist finance arsenal over the coming year, in order to bring more homes to market and capitalise on this improving market sentiment.”