STEEL yourself: We haven’t begun to feel the pain from London’s housing crisis.
Homebuilding slowed to a crawl more than a year ago, so the idea that the real trouble hasn’t yet arrived is a sobering thought.
Supply is on the brink of an “extraordinary collapse” that will start next year and extend through 2029, according to developer Ballymore Group.
The privately held company, which has projects in Canary Wharf, the Nine Elms district near Battersea Power Station and Brentford in west London, is building at a rate of 1,000 homes a year – less than half the pace of a decade ago, John Mulryan, Ballymore UK’s chief executive officer, told the Times this month.
He blamed higher building costs, tighter planning restrictions and tax changes that have deterred investment and made large-scale development unviable, according to the newspaper.
Unfortunately, there’s no reason to doubt this diagnosis. It can be seen in the data. The gap between the capital’s housing starts and completions last year reached the widest in figures going back more than three decades.
A flurry of emergency measures has so far failed to stimulate any significant revival. The recent sharp upturn in the blue line below is more of a statistical artefact that evidence of a broad-based recovery.
It largely reflects delayed higher-rise projects finally moving into construction after being held up by tougher building safety requirements enacted in response to the 2017 Grenfell fire, which killed more than 70 people.
London’s looming supply crunch
Housing starts are running far below completions, presaging a sharp drop in new homes for sales.
Lower supply will support prices and rents, making it a positive signal for homeowners and investors. But it’s corrosive to the longer-term vibrancy of Britain’s most productive city and ultimately a drag on gross domestic product growth.
High housing costs deter workers from moving to the capital, narrowing the available labour pool, raising recruitment costs for employers and denting the city’s ability to make the most of its economic potential.
A collapse in London housebuilding also makes it all but impossible for Prime Minister Andy Burnham’s Labour government to meet a national target of building 1.5 million homes in this parliament (a goal it has already acknowledged it has only a slim chance of meeting).
The pullback has yet to be felt by end users, with London housing completions still close to their average since the early 1990s.
The same goes for net additional dwellings, the benchmark measure for supply that takes into account other factors such as conversions and demolitions.
The housing ministry estimated provision at about 32,000 units for the 12 months ended March 31, little changed from the previous two years (though way below the central government’s target for London of 88,000 homes annually).
That number is likely to start looking a lot uglier toward the end of this decade.
The cliff edge hasn’t arrived
London’s net additional dwellings, which include conversions and demolitions, have yet to decline sharply.
Ballymore’s outlook chimes with what I’ve heard from developers and other property professionals since the start of summer.
The most immediate problem is the absence of buyers. There were 4,629 homes complete but unsold as of the end of June, according to Molior London Ltd – the highest number the property-market research company says it has ever seen.
A further 2,704 unsold homes were halted part-built.
“It’s probably the hardest sales market many people can remember,” said Marcus Bate, director of partnerships, planning, communities and sustainability at Mount Anvil Group. The privately owned company has a construction pipeline of 5,000 homes across London’s three most central zones, focused on ventures with housing associations and local authorities.
“You had hyperinflation of costs around Covid. Then you’ve had hyper-regulation. And now we’re having hyper-distress on sales.”
There’s less incentive for developers to break ground when so few people are buying, particularly when so many other factors have combined to challenge the viability of projects.
The start of the Iran war scuttled this year’s early optimism that interest rates would decline, driving up energy costs and inflation.
Mortgage costs have jumped, and economists now forecast the Bank of England will raise rather than cut its benchmark rate.
The issues are deeper than a temporary affordability crunch, though. A development model dependent on rising values, offshore investor demand and cross-subsidy of affordable housing is increasingly breaking down.
Developers used to rely on pre-selling apartments to overseas buyers; this gave them cashflow and the confidence to start projects, as well as helping to finance discounted rental homes for less wealthy locals.
But these investors have retreated after being blamed for driving up prices and targeted with heavier taxes. At the same time, construction cost inflation and an increased regulatory burden have made affordable housing harder to fund.
Affordability is still stretched
Relative to earnings, London home prices are far more expensive than they were in the early 2000s, when mortgage rates were similar.
The core problem is that prices are still too high for the average buyer. The median house price to earnings ratio was above 10 last year, compared with less than eight in the mid-2000s – when mortgage rates were similar – and four in the late 1990s.
Government programmes such as Help to Buy, which was introduced in 2013 and has since been shut down, papered over this uncomfortable fact for years by increasing first-time buyers’ purchasing power.
Recent emergency measures such as relaxing affordable housing quotas and giving developers relief from infrastructure levies are similarly short-term fixes.
Real estate prices tend to be sticky: When they are stuck above the market- clearing level, activity dries up.
“A lot of policy makers think the problems are cyclical and are going to get better in the next 12 months,” Jon Neale, director of research and insight at property consultant Montagu Evans, told me.
“It’s a big structural change going on. The amount of unsold stock is going to get worse before it gets better. The days of runaway price growth aren’t coming back unless interest rates fall dramatically.”
It’s hard to resist the conclusion that the state will have to play a more active role. If the market cannot meet London’s housing needs, what else can?
Burnham has promised a generational uplift in UK social housing, though it isn’t clear how a fiscally constrained government will pay for this.
Buy-to-rent could become a bigger source of supply, though developers in this sector face many of the same challenges affecting those in the sales market.
One idea receiving attention is of a public sector master developer that assembles land and then parcels out sites to private builders.
This in theory could reduce planning risk and financing costs for developers, altering the viability equation.
Whatever happens next, the status quo looks untenable. Something will have to change. — Bloomberg
Matthew Brooker is a Bloomberg Opinion columnist covering business and infrastructure. The views expressed here are the writer’s own.
