New home completions continue their recovery but London’s prime markets remain sluggish

London’s construction industry has continued its recovery in Q2, with 6,472 new homes completing in the quarter according to Molior, who track developments with more than 20 private homes (large sites). This is the highest number of completions in a single quarter since 2018 and takes the number of completions in the year to Q2 2021 to 22,848, 9% above the figure at this point last year.

The number of new construction starts, however, has remained low. There were 15,891 new starts in the year to Q2 2021, which is -16% fewer than this time last year.

The volume of homes currently under construction has shrunk to its smallest level in six years due to completions outpacing new starts. There are now currently 55,326 homes under construction on large sites in London.

New home sales have also struggled to recover from the effects of the pandemic. With 17,730 sales in the year to Q2 2021, annual sales are -13% below this time last year. The spread of new variants of the virus has meant international travel has been slower to return than expected, limiting sales volumes, particularly in the markets above £1,000 psf. 

The mainstream markets have fared slightly better, assisted by a significant pickup in Build to Rent in Q2 which, combined with Help to Buy, accounted for roughly 70% of all new homes sales in the quarter.

The gradual return of employees to central London offices and international travel will boost demand in London’s new homes market in the second half of the year and 2022.

The number of complete and unsold homes increased slightly in Q2, owing to high completions and low sales rates. There are now 3,096 complete and unsold homes in London, though this 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. 28,614 homes gained permission in the year to Q2 2021, an annual increase of 17%. However, new applications submitted have continued to fall and the number of new homes applied for are down by -10% annually.

The number of new Energy Performance Certificates (EPCs) registered in the year to Q2 2021 stands at 40,717 and reflects the recovery shown in the data from Molior, up 11% compared to this time last year. EPCs are a good proxy for housing delivery and offer a more up-to-date view on total housing supply compared to official figures. 

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 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 next 18 months, 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 them. 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 and sales have been muted in H1 2021, but completions continue to pick up 

The mainstream (below £1,000psf) sales market was very robust in 2020, finishing 10% above 2019 levels. However, sales activity has struggled to maintain this momentum in first half of 2021.

There were 15,175 mainstream sales in the year to Q2 2021, a fall of -5% compared to this time last year. Uncertainty surrounding the implications of new variants of the virus seem to have hampered buying activity that had benefitted from policy stimulus and pent-up demand.

The economic recovery may provide a boost to consumer confidence in the second half of the year, but it is likely the loss of the stamp duty holiday could potentially counteract this impact. 

Mainstream starts recovered slightly in Q2, but the annual figure of 13,013 is still -7% below the same point in 2020. 

Annual mainstream completions have increased by 11%, with 16,654 completions in the year to Q2 2021.

Annual Help to Buy sales hit new highs, fuelled by the stamp duty holiday

There were 6,804 Help to Buy (HtB) loans recorded in London in the year to Q1 2021, which is the highest figure ever recorded. 

The number of Help to Buy sales have been boosted by the stamp duty holiday. It is likely that Q2 will see similarly high HtB sales as buyers seek to take advantage of the stamp duty holiday before the potential savings begin to taper off after June 2021.

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 around 95% of HtB users in London are FTBs and the price cap in will remain at £600,000 in London. 

Despite Q1 being the last quarter that home movers could use the scheme, there was no significant shift in the proportion of home movers and FTBs using HtB.  

A record-breaking quarter for prime completions, but sales at their lowest in eight years

The delay to the return of international travel has meant prime (above £1,000psf), sales have taken longer to recover than expected with just 2,555 prime sales in the year to Q2 2021, an annual fall of -42% and the lowest number since 2011.

A number of international launches have been pushed back to the first half of 2022 which is when we’re expecting to see prime sales return to pre-covid levels.

Prime starts have also remained low, with 2,878 new homes starting in the year to Q2 2021, -42% below this time last year.

There has been a record-breaking number of prime completions in Q2, with 2,160 homes. This has been fuelled by a number of large tower schemes finally completing. In the year to Q2 2021, there have been 6,194 prime homes completed, an annual increase of 4%.

Build to Rent and Help to Buy dominate the market while overseas sales remain low

There has been a significant pickup in Build to Rent (BTR) activity in Q2, accounting for around 40% of sales.

The market has been largely dominated by BTR and HtB sales in Q2, between them accounting for nearly 70% of all sales. This is the highest proportion of sales that these two groups have made up in a single quarter.

Overseas buyers have made up a relatively low proportion of sales once again due to ongoing restrictions on international travel. Around 12% of sales were to overseas buyers or launched off-plan. In mid-2019, these accounted over a quarter of sales.

Whilst the Delta variant has delayed the return of international travel, fully vaccinated travellers from the US or EU into the UK will, as at the start of August, no longer face isolation rules. This will provide a boost to overseas sales demand in London which will support the prime markets in particular. 

The return to central London offices will also contribute to increased demand for London properties and domestic demand for city living in general, aided by the fact that London rents appear to have bottomed out. 

Complete and unsold homes expected to top out in 2021

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 -23% fewer complete and unsold homes than there were in 2019. 

However, with a relatively low number of sales in the first half of 2021 and completions picking up we have seen the number of complete and unsold homes tick back up, now standing at 3,096 homes. Despite the record number of prime completions in the quarter, we have not seen an increase in the number of prime complete and unsold homes due to the fact that the large majority of the homes completing were already sold. We expect the number of complete and unsold homes to continue increasing in H2 2021, ending the year at around 2019 levels, before decreasing from 2022 onwards, as sales rates return to normal levels. The percentage of unsold prime homes that are complete is currently 14%, which is still well below the peak of 21% in 2009.