Number of homes under construction at its smallest since 2015, whilst London’s prime starts are their lowest in a decade

The recovery in London’s construction industry has slowed with 4,464 new homes completing in the quarter according to Molior, who track developments with more than 20 private homes (large sites). It takes the number of completions in the year to Q3 2021 to 22,070, +8.8% above the figure at this point last year. However, the last quarter has been slower, with -3.0% fewer completions than the previous quarter. 

The number of new construction starts also continued to fall. There were 15,338 new starts in the year to Q3 2021, which is over -17% fewer than this time last year and -55% below the peak in 2015.

That means the volume of homes currently under construction has shrunk to its smallest level since March 2015 due to completions outpacing new starts. There are now 55,390 homes under construction on large sites in London.  And there are 3,133 complete and unsold homes in London, similar to the previous two quarters.

New home sales have also struggled to recover from the effects of the pandemic. With 17,188 sales in the year to Q3 2021, annual sales -10.3% down compared to two years ago, prior to the pandemic. The return of international travel has taken longer than anticipated, particularly with the emergence of new variants. The mainstream markets (below £1,000psf) have fared slightly better than prime, assisted by a significant pickup in Build to Rent in Q3. This, combined with slightly fewer Help to Buy sales, accounted for over 60% of all new homes sales in the quarter.

The continued return of employees to central London offices and international travel is expected to boost demand in London’s new homes and rental market in the new year. However, this is dependent on the impact of new variants.

Weak forward looking supply indicators

There has been an increase in the number of permissions granted in London in the last twelve months. Over 28,000 homes gained permission in the year to Q3 2021, this is down by -11.6% when compared to Q3 2019 (pre-pandemic). New applications submitted have also continued to fall, with the number homes in applications down by -19% annually.

Latest official data from the DLUHC shows 37,183 net additional dwellings were delivered in the year to March 2021. This represents an annual decrease of -9%. It is just under 15,000 homes short of the 

London Plan housing target and less than half the 93,500 homes required in the Government’s housing need formula (Standard Method 1.1). More information on SM1.1 can be found in our separate note here.

London delivery way below target

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 housing 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. Many London boroughs are now strategic partners of the GLA in delivering the grant funded affordable homes programme. 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 remained down on the previous year and completions recovery stalled

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 2021.

There were 14,438 mainstream sales in the year to Q3 2021, a fall of -20% compared to this time last year. The continued uncertainty surrounding the pandemic seems to have hampered buying activity that had benefitted from policy stimulus and pent-up demand that occurred last summer.

The economic recovery may provide a boost to consumer confidence in the new year, but the loss of the stamp duty holiday and the prospect of rising interest rates may slow this recovery. 

Mainstream starts remained relatively flat this quarter. However, the annual figure of 12,839 is -10.1% below the same point in 2020 and -46% down on the 2018 peak.

Annual mainstream completions have increased by 2.6% this quarter, with 15,656 completions in the year to Q3 2021.

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

There were 7,688 Help to Buy (HtB) loans recorded in London in the year to Q2 2021, which is the highest figure ever recorded. 

The number of Help to Buy sales were boosted by the stamp duty holiday. It is likely that Q3 will see lower HtB sales as the stamp duty holiday was tapered off in June 2021.

As of 31st March 2021, the scheme has been 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 has remained at £600,000 in London. 

Despite Q2 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.

Prime starts are at their lowest in a decade whilst sales remain low

The expectation of a return of international travel has not fully materialised so far in 2021. This meant that the prime (above £1,000psf) sales recovery has been sluggish with 2,750 prime sales in the year to Q3 2021, a fall of -22.1% on an annual basis. However, this quarter’s sales have offered some hope of a turning point as sales increased 7.3% from Q2 2021.  

A number of international launches have been pushed back to the first half of 2022, however, this is dependent on the impacts of new variants on travel restrictions.

Prime starts have continued to fall, with 2,499 new homes starting in the year to Q3 2021, -41.7% below this time last year.

But there has been a record-breaking number of prime completions in the year to Q3 2021, with 6,414 homes, an annual increase of 27.8%. This is the highest number of quarterly completions since March 2020. This is due to a number of towers completing in this quarter, particularly in Canary Wharf.

Build to Rent continues to dominate the market whilst Help to Buy’s share declines

The Build to Rent (BTR) sector continues to see high levels of activity in Q3, accounting for over 40% of sales.

The market has been largely dominated by BTR and HtB sales in Q3, between them accounting for over 60% of all sales. 

Registered Providers (RPs) are switching from private homes for sale to affordable rent/sales, and this as a proportion, makes up 8% more sales than the previous quarter. RPs are reacting to the weak sales environment by switching to affordable housing. 

Overseas buyers have made up a relatively low proportion of sales once again due to ongoing restrictions on international travel. Around 15% of sales were to overseas buyers or launched off-plan. In mid-2019, these accounted for over a quarter of sales.

The return to central London offices has increased demand for London properties and domestic demand for city living in general, evidenced by the fact that London rents appear to be recovering strongly. However, the emergence of new variants leaves the continuation of this recovery uncertain.

Complete and unsold homes expected to increase

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 during 2021 and completions picking up we have seen the number of complete and unsold homes tick back up, now standing at 3,133 homes. Despite the record number of prime completions in the quarter, we have not seen a significant 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.