That London’s supply fell in 2020 is no surprise, but low starts mean future housing delivery will fall short of need

Housing delivery, unsurprisingly, saw a drop in 2020 due to the disruption caused by Covid-19. 

While the number of new construction starts dropped to an 8-year low, new build sales remained robust and finished 2020 higher than their 2019 levels.
Molior reported 19,901 completions in 2020 (on sites above 20 private homes), an annual fall of -10% and the lowest number of completions since 2015.
New build sales, predominantly driven by high levels of activity in the mainstream markets, saw a 1% increase in 2020 compared to 2019 levels. This was driven by the stamp duty holiday and Help to Buy.
The number of complete and unsold homes fell for the first time in five years, thanks to a slowdown in completion numbers and the resilience of the sales market. Numbers fell by -22% to under 3,000 homes which equates to around 15% of annual sales.  

Construction starts fell to 17,856 in 2020, a -9% fall from 2019 and just over half of the number of starts seen at the peak in 2015.
Developers were faced with uncertainty surrounding the pandemic and placed higher priority on building out current projects rather than starting new ones.

New applications and permissions granted have continued to decrease, by -20% and -17% compared to their respective 2019 levels. This suggests new starts are unlikely to see a drastic turnaround anytime soon.

As a result of the fall in starts, the construction pipeline has shrunk for the second consecutive year, with fewer than 61,000 homes currently under construction.

We are expecting this to translate into higher completion levels over the next three years, but the slowdown in starts since 2018 will constrain long-term housing delivery in London.

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 13.9% 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).

Although London’s supply is forecast to increase in the medium term, the continuing fall in starts, permissions and applications 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. Despite the number of affordable starts on GLA housing programmes reaching a record high of 17,256 in 2019/20, completions remain someway below what is required, with just 7,775 affordable homes completed in 2019/20, 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 sales driven up by Help to Buy and the stamp duty holiday

The mainstream market (below £1,000psf) saw a 12% increase in sales in 2020, while the number of starts remained flat.

A desire for more space for home-working and leisure, and policy stimulus from Help to Buy and the stamp duty holiday contributed to strong levels of demand in the mainstream market. The 17,218 mainstream sales in 2020 was the highest number of sales in the market since 2015.

This demand is expected to continue in the first half of 2021 due to the extension of the current stamp duty holiday to 30 June, and then by the anticipated economic recovery in the second half of the year.

There were 14,781 mainstream completions in 2020, which was their lowest level since 2015. However, with a strong pipeline of over 42,000 homes under construction, we anticipate completion levels will pick up over the next two years.

Annual Help to Buy sales lower than this time last year, but saw a very strong Q3

There were 5,427 Help to Buy (HtB) loans recorded in London in the year to Q3 2020, which is -16% below the previous 12 months, however the number of loans issued in Q3 (1,674) was the second highest number in a single quarter since the scheme began.

The Government has extended the deadline to complete a HtB purchase from 31 March to 31 May under the current HtB scheme to allow purchases experiencing construction delays due to Covid-19 to complete. 

After 31 March, only first-time buyers (FTBs) will qualify for HtB, though they already make up the vast majority (95%) of HtB users in London.  

The stamp duty holiday is expected to increase HtB demand in London more than the rest of the country. This is because the stamp duty saving makes up a greater proportion of the deposit than elsewhere in the country. 

Prime market held back by a lack of international demand

Prime (above £1,000psf) starts and sales dropped to their lowest levels since 2011.

London’s prime markets were held back by the absence of  international demand for the majority of 2020, with starts and sales  falling by -42% and -36% respectively. 

However, promising progress with the vaccine rollout in the early weeks of 2021 provide optimism for the return of international travel and London’s famous city buzz. London is still a very prominent global city and its strong fundamentals for investment will allow this market to recover in 2021.

Prime completions remained relatively robust in 2020, seeing just a -6% drop from 2019. With over 18,000 prime homes under construction, a large volume of prime homes are expected to complete over the next two years.

The drivers of sales varied across each quarter in 2020

In Q1, Build to Rent (BTR) accounted for around 40% of all sales, but this proportion shrank gradually as the year progressed, dropping to 27% in Q4.

During lockdown in Q2, sales rates slowed and we saw an increase in the proportion of homes switching to affordable, accounting for 23% of sales, the highest proportion since this data has been recorded. 

Help to Buy sales took a dip in Q2 but recovered once the market reopened, accounting for 30% and 27% of sales in Q3 and Q4 respectively, supported by the release of pent-up demand and the stamp duty holiday.

There was an uptick in overseas demand during the second half of the year, though this appears to be driven very much by price point and location, with more investment at mainstream rather than prime price points.

When international travel does return, we expect to see significant pent-up demand from overseas buyers returning to the market.

Complete and unsold home volumes fall for the first time since 2014

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

However, this reduction was almost entirely due to falling levels of complete and unsold stock in the mainstream market, which decreased by a third in 2020. This was supported by the stamp duty holiday and pickup in Help to Buy sales after the first national lockdown. In the prime market complete and unsold home numbers remained virtually unchanged in 2020.