London’s Homebuilding Crisis: Policy Challenges, Market Pressures and Solutions
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3) Challenges
It is no exaggeration to say that London housebuilding has collapsed over the past year or so, leaving the industry in a state close to an emergency.
Over the past five years, the capital has delivered on average 38,220 new units. But according to the London residential development specialist research house Molior, construction began on 3,248 homes during the first nine months of 2025 – equivalent to an annual rate of 4,331. That is not only just 11% of what is needed to sustain the activity of the past five years, it’s also under 5% of the government’s target.
This is starting to filter into construction volumes and completions, which are now lower than at any point since the aftermath of the Global Financial Crisis. Molior estimates – presumably based on the lead-in times for new homes – that just 9,100 homes will complete during the entire 24-month period spanning 2027 and 2028: just 5.2% of the government’s target for London.
This emergency is of national importance. London is expected to deliver about 25% of the UK’s total housing over the next five years. And while other regions are down on longer-term trends, at 25% or so below, their problems are nothing like London’s. Far more properties are delivered as houses or low-rise flats, meaning building safety issues are marginal, while affordability is less stretched. But as London remains the most productive part of the UK economy, allowing low housing supply here, at a time when the government is desperately searching for higher economic growth, is deeply unwise.
There are other reasons why this building crisis qualifies as an emergency. The most glaring is that in London, homes will be more expensive and scarcer than they would otherwise have been. Even more worryingly, this crisis extends just as much to affordable housing delivery. This shares some of the same problems as the private sector, with the additional problem that grant funding is no longer sufficient to make schemes work. Affordable housing outside London does not face quite the same issues and is acting in a more countercyclical way, as the chart below shows.
With building activity at such low levels, there are risks of widespread layoffs in the construction industry and business failures, which could cause economic scarring. It will be difficult for the supply chain to bounce back quickly if conditions remain so dire; if things do not improve quickly, it could take years to rebuild capacity.
But why has building in London stalled?
There is no shortage of potential reasons for why housing delivery in the capital is struggling so much.
1) Viability is severely challenged:
Construction costs for new housing have risen dramatically since the pandemic, by 14% and 34% over the past three and five years respectively, according to government data. This may be an underestimate for higher-density homes.
This is partly a result of inflation in materials and labour costs, and partly a result of more expensive building regulations and requirements.
- This is compounded by the fact that competition among contractors – particularly for complex high-rise blocks – has reduced. This has allowed them to become more conservative, and given recent inflation, they appear to be building more headroom into estimates and prices.
- This means that the calculations of land value and viability made before this surge are now out of date. This is likely to be more marked for the flatted development that dominates delivery in the capital, as construction costs will account for a higher proportion of Gross Development Value (GDV). Flats also have more upfront costs, as they all have to be built at once – unlike houses, which can be ‘drip-fed’.
Debt costs for developers have also increased by as much as five percentage points. This adds further to costs.
2) Market activity has weakened
Weak off-plan demand. Overseas buyers – who used to underwrite the early stages of large schemes through pre-sales – have stepped back from London’s market. This is partly a reflection of Brexit, Covid and the UK’s economic difficulties, but is also a result of the government introducing measures, such as the SDLT surcharge in 2021, which discourage foreign investment. There are also more locations competing for their attention. Together with the ending of non-dom status, this also gives the impression that they are not welcome, and other measures may be incoming. Domestic investors are also dissuaded by other factors, such as changing tenant legislation. Many developers used to sell a significant chunk of their scheme off-plan to access finance and kickstart the scheme.
Effective demand from first-time buyers has also weakened. Mortgage costs have risen steeply, particularly for those buying with small deposits – many of whom will be first-time buyers. Put simply, with mortgage rates at 4-5%, a buyer on a given income can simply afford rather less than when they were at 1-2%. Sales rates per annum have fallen from a high of over 25,000 in 2015 to 11,650 in 2024 and are on track for a similar figure this year. But this might be misleading, as it could be limited by availability.
The fact that unsold stock is building up suggests that this is not the case, though. There are currently 3,678 unsold completed homes available in London – the second highest on record after 2019’s 3,767, although this followed several years when there had been 22,000-24,000 completions, compared to last year’s c. 16,000. The ratio of unsold homes to the previous year’s completions might be a better way to look at market tightness. Using this measure, around 23% of last year’s delivery total remains unsold, marginally down from the 25% recorded at the end of 2024 but well ahead of the 10-year average of 13%. The chart below gives the data in detail.
Another measure involves looking at how sales over the year compare to the same year’s completions. At the moment, that figure is 54%; last year it was 72%; the average is 97%. The extent to which total sales over the period exceed unsold stock is also a measure of sales velocity. For the first six months of the year, total sales were just 10% ahead; in every other year on record, sales have been at least three times unsold stock, usually five to fifteen times. Whichever way you look at these figures, it’s clear that at the moment, effective demand is weak. That’s not a market in which developers will be keen to build more.
A further complication is where the unsold stock is. The top five boroughs for unsold stock are Tower Hamlets (556), Wandsworth (455), Westminster (315), Barnet (294) and Hammersmith & Fulham (274). These are not low-value boroughs, to say the least; the issues seem to be that the unsold stock is generally in locations where affordability is most stretched or where the market was most investor-dependent. (It’s notable that starts are clustered in cheaper, outer boroughs – see below – meaning developers are shifting away from more expensive, more flat-orientated Inner London).
New build has become more unaffordable. Part of the issue may be that new build prices have, despite the build-up of new build stock, risen faster than in the second-hand market. According to the Land Registry, new build pricing in London is now 7.8% higher than three years ago, compared to 0.3% for the market as a whole. Even over the past year, new build prices have risen by 3.4%, compared to 0.7% more generally. (This figure is based on a dwindling sample of new build sales, so it may be less robust, but it is worth noting that this trend is backed up by the Nationwide index at the national level, where new builds have increased in price by 6.2% over the past three years, compared to 0.9% in the wider market.) This reflects developers attempting to recoup the much higher costs – potentially lossmaking – that have been produced by the very different construction and debt conditions of the past few years. But it also means that sales fall and unsold stock builds up, as we are seeing.
End of Help to Buy. Help to Buy, the government’s equity loan scheme for new build sales, was not as important in London as elsewhere, but nevertheless, an estimated 27% of private housing completions over the scheme’s lifespan in London involved it. (This compares with a third in, for example, the South East). The end of the scheme for units completing by mid-year 2023 clearly impacted new build sales, which in that year were 35% below 2022 levels, and have not recovered since.
Build-to-Rent. According to Molior, there were just 37 build-to-rent starts in the first six months of the year, compared to 2,626 in 2024 and a 10-year average of 5,600. Build-to-rent faces similar problems in costs and viability to ‘for sale’ development, but it is complicated by the funding/investment side. Put simply, although residential remains a priority sector for many funds, which see the long-term issues around a growing population and a structural lack of supply, other asset classes, such as government bonds, currently look more compelling. So, the flow of capital has generally slowed. More specifically, yields for build-to-rent in London, at 4-4.5%, are lower than for any other sector, which, at a time of higher risk-free rates, is problematic. This also explains why build-to-rent development in the main regional cities (yields 50bps higher) has continued, albeit at a slower rate.
3) Regulatory Burdens increased while the market thrived, but have not yet been reduced despite weaker activity
Affordable Housing requirements have become too high and inflexible, given current market conditions. London has historically set relatively high affordable housing requirements (35%, compared to a minimum NPPF expectation of 10%). The package announced by the government, in combination with CIL reliefs and higher grant levels (see below), will boost viability, but a more flexible approach needs to be taken in the longer term.
CIL contributions represent a further burden. The Mayoral Community Infrastructure Levy (MCIL), which back-funds the Elizabeth Line, can be a prohibitively high amount in the current market, particularly when combined with local CIL levels.
Lack of capacity from Registered Providers (RPs). A further complication is the difficulty in finding an RP to take on any affordable homes, as most housing associations have financing issues themselves and are focused, in any case, on the issues around their legacy stock. The Home Builders Federation (HBF) reported in October 2025 that there were 17,432 Section 106 affordable units that remain unallocated. It is unclear how many of these are in London, but it is likely to be a high number.
The Building Safety Levy will be introduced next year. In addition to the above measures – which are already in force -there is another important factor coming into play next year. As of October 1, 2026, developers of residential properties of more than 10 dwellings (excluding affordable housing) will be liable for this charge at the building control stage. It will be calculated based on the size of the development, but there will be different rates for each local authority level. It seems likely that they will be higher on average in London.
The Residential Developer Tax. In addition to all the above, developers of residential property are liable for a 4% additional levy on their profits. While this does not impact the viability of particular schemes, it makes developers more risk-averse and conservative. It also deters new entrants, reducing competition.
4) The supply of land is falling as a result, and developers are becoming more risk averse
Landowners are not willing to drop their prices. Many owners of land are not in a rush to sell and are happy to sit out what they see as market cycles. In most cases, they will have a minimum price in mind, set by earlier market conditions or by the value of their asset in its existing guise, say a supermarket. At the moment, these are radically lower than a few years ago, which incentivises many to ‘sit tight’. Even if these conditions persist, it takes some time for their expectations to adjust. In the meantime, developers cannot feasibly meet the prices being demanded; if they do, they risk pricing themselves out of the sales market, as may already be happening.
The problem is compounded by affordable housing requirements, which are based on market conditions that no longer exist. This has forced land prices even lower – in some cases, below zero. Together, this means that the pipeline of land for development will be constrained.
Planning Delays and Costs. The UK’s already infamously complex, slow and costly planning process has become even more so over the past few years. This is a further drain on viability, but it also slows down the supply of consented land into the system. This is a result of the introduction of additional requirements (such as biodiversity net gain, which often has higher costs on long-term derelict sites), but also because councils have lost a lot of planning staff through budget cuts. Other services have been more protected. Even though funding has improved over recent years compared to the nadir of 2018/19, it remains 25% below the 2010 level.
Increasing risk aversion. Growing regulatory burdens, volatile construction costs, and an uncertain economic outlook are leading developers to focus on a smaller number of ‘easier’ schemes – largely housing-oriented sites away from London.
The Big One: The Building Safety Act and the Gateway Processes. The Building Safety Act introduced new requirements for residential buildings over 18 metres or six storeys. These include, for example, a second staircase to aid evacuation, which adds a not insignificant amount to build costs, especially in mid-rise schemes.
But more importantly, plans for such developments also need to be submitted to the Building Safety Regulator (BSR) for approval. This consists of Three Gateways. Gateway 1 relates to pre-planning guidance. The key issue is at Gateway 2, which is a ‘hold point’ where “construction cannot begin until the Regulator is satisfied that the design meets the functional requirements of the building regulation”. Plans need to outline exactly how compliance will be met.
Figures published in July 2025 showed that of the 193 applications received since the BSR was set up in 2023, only 64 had been determined by March 2025. Of these, only 15 had been approved, with 17 rejected, 12 withdrawn, and 20 viewed as invalid. This means that only 9% of proposed tall buildings hoping to start construction between Autumn 2023 and Spring 2025 have been permitted, in theory, to start.
A Freedom of Information (FoI) request submitted by the Architects’ Journal showed that, as of August 2025, there were still some 72 Gateway 2 applications which had been outstanding for more than 12 weeks – the target timescale for decisions – covering 18,436 homes. In scheme terms, more than half of them (37) were in London. Building magazine is reporting that the average sign-off time is nine months.
Gateway 3 occurs at completion as part of the building control process. The numbers reaching this stage are far lower – presumably because so many have failed to get past Gateway 2. Figures here are harder to get hold of, but in February, figures emerging showed that only 1 in 4 projects reaching this stage had been approved. One completed 487-home development in Ealing sat empty for months, gaining approval in late September this year. There is a danger that even if Gateway 2 accelerates, blocks of flats could be completed and standing empty long term if this third check proves to be equally delay-producing. This risk will clearly reduce the appetite for development.
The government has vowed to speed up the process, but it is unclear how and when this will be done. The process is understandable given the Grenfell tragedy that led to the original act, but it is having a distorting effect on the market. In particular, developers are avoiding schemes over six storeys, meaning:
- London is disproportionately affected, as delivery in the capital is skewed towards higher-rise buildings
- Inner London is particularly impacted, as delivery is even more skewed here
- This is further pushing developers towards more low-rise and suburban schemes outside London
THE END OF MODEL?
All these factors (and particularly the Gateway 2 delays and costs) are responsible for the delays. But perhaps the problem is deeper: the model that has underpinned London development for the past two decades is increasingly under duress. A reconsideration may be well overdue.
This ‘model’ is based on a set of assumptions: that land values would always increase in the medium term, that they could be tapped in some way to provide very high levels of affordable housing and other social goods, and that the expensive private homes driving the whole process would sell – with the early stages sold to off plan to (largely overseas) investors. This latter stage would ‘unlock’ the scheme, enabling debt at viable levels.
This does not mean that this model will never be viable again. But it would be misguided to think that it can return in the near future to such an extent that London can deliver more homes, let alone reach the government’s target. A new approach will be needed if London can deliver in the medium term.
- London’s Homebuilding Crisis: Why Has Building in London Stalled?