The continued recovery of completions and low number of starts sees London’s pipeline shrink further

The size of the construction pipeline in London has fallen to 58,000 homes, the first time it has dropped below 60,000 homes since 2017. This is due to the combination of resilient completions and low numbers of starts.

Molior reported 19,587 completions in the year to Q1 2021 (on sites above 20 private homes). Whilst this represents an annual fall of  -16%, completion numbers have now increased in three successive quarters. 

On the other hand, new home sales and construction starts have both been significantly lower this quarter than usual. The third lockdown and general uncertainty surrounding the implications of the pandemic have weighed on consumer and developer confidence.

There were 15,752 construction starts in the year to Q1 2021 which is less than half of the number of starts seen at the peak in 2015. The quarterly figure of 2,778 is the lowest since 2011.

Sales volumes also slowed in Q1, with fewer sales this quarter than in Q2 2020, when the housing market was essentially closed. In the year to Q1 2021, there have been 17,628 sales, an annual decrease of -16%.

Help to Buy made up a higher proportion of sales in this quarter than any in the last two years, and developments not able to offer the scheme have struggled to sell.

The number of complete and unsold homes increased slightly in Q1, owing to high completions and low sales. There are now 3,100 complete and unsold homes in London, which, however, is still -18% below the peak in 2019.

There has been a pickup in the number of permissions granted in London in the last twelve months. 27,299 homes gained permission in the year to Q1 2021, an annual increase of 8%. However, new applications submitted have continued to fall and are down by -18% annually.

There is still a relatively strong pipeline of schemes completing in the short term that will mean completions continue to recover. We forecast completions to peak in 2022, before then dropping off to reflect the slowdown in new construction starts.

Latest official data from the MHCLG shows 41,720 net additional dwellings were delivered in the year to March 2020. This represents an annual increase of 14% but is still over 10,000 homes short of the newly adopted London Plan housing target and is less than half the 93,500 homes required in the government’s new calculation of housing need (Standard Method 1.1). More information on SM1.1 can be found in our separate note here.

 Although London’s supply is forecast to increase in the short term, the decline in starts, permissions and applications over the last few years means future housing delivery in London will remain some way short of targets and need.

With the greatest demand for housing in London being for more affordable homes, local councils have stepped up their efforts in building these homes. A number of local authorities have their own housing companies with significant development pipelines for the next few years. Despite this, there is still expected to be a large shortfall in sub-market housing in London over the next five years. The number of affordable starts on GLA housing programmes fell by -23% in the year to March 2021 to 13,318 homes. Completions continued to rise, with 9,051 affordable homes completed in 2020/21, but remain well below the strategic target to ensure that 50 percent of all new homes in London are to be affordable as set out in the London Plan. 

Mainstream starts at their lowest level in eight years as the mainstream market loses momentum in Q1

The mainstream (below £1,000psf) sales market was very robust in 2020, finishing 10% above 2019 levels. However, sales activity has lost some momentum in first three months of 2021.

There were 14,805 mainstream sales in the year to Q1 2021, a fall of -9% compared to this time last year. A third lockdown and general uncertainty surrounding the implications of the pandemic seem to have hampered buying activity that had benefitted from policy stimulus and pent-up demand.

We expect sales activity to bounce back in Q2 as we continue on the roadmap out of lockdown and the economic recovery boosts consumer confidence.

Mainstream starts dropped to their lowest annual level since Q2 2013, with just 12,251 starts in the year to Q1 2021. 

Annual mainstream completions have fallen by -11%, with 14,945 completions in the year to Q1 2021.

Help to Buy sales in 2020 were slightly below 2019 levels, but saw a record-breaking Q4

There were 6,213 Help to Buy (HtB) loans recorded in London in 2020, which is just -1% below the 2019 figure. 

The fourth quarter of the year saw a record number of HtB loans issued in London, with 2,284. This was 36% more than the next highest quarter (Q3 2020).  

As of 1st April 2021, the scheme is limited to First Time Buyers (FTBs) only and subject to regional price caps. This will not have a significant impact on the demand for HtB in London as, in 2020, 95% of HtB users in London were FTBs and the price cap in will remain at £600,000 in London. 

Despite the scheme closing to home movers, there was no significant shift in the balance between home movers and FTBs among HtB users in London in 2020. 

Prime sales drop to their lowest level since 2012, but starts tick up in Q1

The lack of international travel remains a hurdle for the prime market (above £1,000psf), with just 2,823 prime sales in the year to Q1 2021, an annual fall of -39%.

However, as the success of the vaccine rollout continues, there is optimism that international travel can return in the second half of the year and be the trigger for the release of pent up demand from overseas.

Prime starts have recovered from the very low levels seen in 2020 with 3,501 starts in the year to Q1 2021. This may be a sign that developers expect a recovery to coincide with the return of international travel and we expect that, without further lockdowns,  this confidence will be sustained throughout the rest of 2021.

We forecast that prime London capital values will increase by 6.0% in 2022 and by 18.1% in the five years to 2025. More information on our prime forecasts can be found here.

Help to Buy pivotal in maintaining sales rates in Q1 as Build-to-Rent sales continues to slow

Help to Buy was the main driver of sales in Q1, accounting for around 39% of sales in the top-selling schemes.  

The combination of HtB and the stamp duty holiday has been influential in maintaining sales rates this quarter.

Conversely, the proportion of Build-to-Rent (BTR) sales has been falling over the last few quarters, dropping to around 16% this quarter, down from a high of 42% in Q4 2019. Molior reported 424 BTR sales in this quarter, the lowest quarterly figure since 2014. BTR developers have been prioritising completing current schemes over starting on new sites since the pandemic has taken hold.

We expect that once the economic picture improves, activity in the BTR market will pick up again as there is a significant pipeline of consented homes ready to start construction.

Overseas sales, including schemes launched overseas prior to start, remain hamstrung by restrictions to international travel. As these restrictions ease, overseas demand will return, providing a boost in central London demand in particular.

Complete and unsold homes tick back up after falling in 2020

The number of complete and unsold homes decreased in 2020 for the first time since 2014 due to the combination of resilient sales rates and a slowdown in completions. At the end of 2020, there were -22% fewer complete and unsold homes than there were in 2019. 

However, with a relatively low number of sales at the start of 2021 and completions continuing to recover, we have seen the number of complete and unsold homes tick back up. This increase was seen only in the mainstream market, with prime complete and unsold numbers falling at the start of this year. The future of the number of complete and unsold homes in London depends on the balance between increasing completions and sales rates. Whilst the unlocking of international travel will provide a boost to prime sales, the tapering of the stamp duty holiday from Q2 to Q3 may see mainstream sales slow further.