London’s Homebuilding Crisis: Working Towards a New Model for London Residential Development

6) Conclusions

The measures announced in September are a strong step in the right direction and together are much more effective than when considered in isolation.

But a combination of the recommendations above will also be needed to stimulate much-needed development in the longer term. and contribute to London’s economy and the well-being of its residents.

This raises the question of whether a deeper rethink is required. Private development at scale in much of London is a relatively new phenomenon. It has always been based on very different factors from most of the rest of the country.

These include:

• End prices that were assumed to be very high and constantly rising
• Investors (mostly but not exclusively overseas-based) buying off-plan, ‘unlocking’ finance for the development
• Support from Help-to-Buy in lower value locations (mostly Outer London), where investors were less active and affordability was less stretched
• Relatively strong demand from domestic owner-occupiers and, at times, from institutional investors (through build-to-rent)
• Very high land values (produced by the above) that could be used to provide large amounts of affordable housing and CIL revenue

In a world of higher interest rates, alternative investment options, and a weaker economy (at least in the short term), this model appears increasingly redundant. This rethink may require policymakers to think about how they can encourage and stimulate development in London, rather than how price increases can be used to support a growing list of wider objectives.

One of the overriding problems is that the post-war planning system was primarily designed with greenfield sites and new settlements in mind. The system we have for promoting and controlling urban development has been patched together according to a set of market conditions (and land supplies) that increasingly look historic.

Developers are unable to offer the prices that induce landowners, who are often in no rush to dispose of their long-term security, to sell. If residential land values fall below a certain point, other uses will become more appealing, or owners may simply opt to wait until conditions improve. This has huge ramifications for the supply of the raw material for development.

Aligning affordable housing so strongly with private development in London also means that it cannot act as a countercyclical stabiliser, helping to keep supply chains active and sites viable during market troughs (as appears to be happening in many other parts of the UK at present).

This paper does not argue that we should simply ignore planning gain. There will still be strong uplifts in land, created purely by planning consents, which can justifiably be used for affordable housing and other social goods. But now and in the future, these may not be as large as in the past, except in the most high-value areas.

In other words, we need a planning (and planning gain) system which:

• Be far more flexible and adaptable Given that market shifts may be more pronounced in the future given volatile economic conditions.
• Be far more rapid Given that in such conditions speed becomes more, not less, important to developers, as future values are more uncertain. Higher interest rates have increased the time value of money, meaning delays are more costly and more damaging to viability.
• Provide financing for some form of affordable housing or viability fund This can be used to support the industry, or even individual sites, during market downturns.

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  London’s Homebuilding Crisis: Policy Challenges, Market Pressures and Solutions

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  London’s Homebuilding Crisis: Working Towards a New Model for London Residential Development