London’s Housing Supply Issues

housing shortage

The UK’s capital has a major issue with housing supply. Persistent under delivery of new housing in London is putting huge pressure on pricing, affordability but also economic competitiveness. The average house price in London now stands at £552,755 according to Office for National Statistics (ONS) data.

As the UK economy slides into recession and interest rates rise, it seems likely the gap between demand and supply will further widen putting more pressure on rents. And further fuelling long-term price growth.

How many new homes are required?

The London Plan published in Dec 2019, set an annual target of 52,000 homes. Which is considerably short of the assessed requirements:

  • London Strategic Housing Market Assessment – 66,000 new homes p.a.
  • Local Housing Need – 72,000 new homes p.a.

Actual new housing supply

The issue is that the actual supply of new homes is falling considerably below of the requirement, even the lowest figure of 52,000 new homes. In 2021, just 22,445 new homes were delivered according to research undertaken by Molior.

London Construction Completions PropTech Pioneer London’s Housing Supply Issues
Source: Molior London

But more concerning is that new constructions starts are declining meaning that in the medium term the delivering of new housing in the capital is like to decline sharply, due to the delay in delivery between starting construction and completion.

London New Construction Starts PropTech Pioneer London’s Housing Supply Issues

Source: Molior London

If significant challenges of affordability are ever to be addressed throughout the capital, London must provide in excess of the expanding demand for housing. A strategy to guarantee the availability of high-quality housing is necessary, particularly in light of the government’s deregulation of the planning system.

Apartments under construction.  Housing supply in London is limited.

Will house prices will grow over the long term?

We expect house price growth to accelerate in London over the long term for several reasons:

  • Land market – the land market remains tight and as house prices rose rapidly so too are expectations for landowners in terms of how much they are expecting to sell their land for. It is impossible to deliver new housing without land to build it upon. As land prices increase so too do developers expectations in terms of sales prices, because in order to maintain their profit margin they must seek to increase prices.
  • Supply chain issues – the housing market is being plagued by supply chain issues. As a result the cost of raw materials such as steel, copper, bricks and other materials are all seeing sharp price inflation. Ultimately these cost increases will be borne by purchasers.
  • Staffing Shortages – the impact of new BREXIT regulations has made it far more difficult for developers and subcontractors to get enough labour to meet demands from not only the housing market but other parts of the construction industry.
  • Housing reform – the UK government has for several years talked about introducing new reforms to the housing market to deal with the systemic issues to deal with the chronic supply issues. However, despite the governments efforts they have simply not been able to deal with the issues and increase supply of new houses.

Despite the UK economy sliding into recession and the cost of living crisis taking hold for many, the long term outlook for house prices in London is one of price growth. Whilst there there are immediate downward pressures on prices, these will be outweighed in the long term by supply side limitations, causing upward pressure on pricing.

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Laptop 4 PropTech Pioneer London’s Housing Supply Issues