• End of Help to Buy and wider political and economic headwinds points to changing buyer mix in the next five years

• Supply and demand imbalance is likely to continue – less than half of demand is likely to be met across both private and affordable delivery

• The greatest shortfall is below £450 psf and affordable. It accounts for 59% of market demand but only 31% of upcoming supply in the next five years

• Unlocking investment into infrastructure and Green Belt land, particularly in South East London, will be key to increasing housing delivery

• London risks losing talent and investment if affordability and undersupply not addressed.

As we’ve seen, the shape of demand for new homes in London has changed over the last five years, and supply has been delivered in regeneration zones where enhanced transport connections have played a fundamental role in housing delivery. But where do we think supply will come forward in the future? And, crucially, is it at the price points most needed?

Sales forecast to fall with loss of Help to Buy

The end of Help to Buy (HTB) is set to have the biggest impact on the market in the near term. This is likely to result in overall sales volumes falling and will mean that both developers and purchaser strategies will need to change due to a lack of government stimulus.

Whilst a small proportion of current HTB users may still be able to access the market, or buy a smaller home, they will have limited other options. Low deposit schemes like Deposit Unlock and First Homes are unlikely to have a significant impact in London due to the affordability constraints, particularly as interest rates and the cost of living rise. Shared Ownership demand will likely increase but numbers being delivered are limited by the amount of grant funding available and the number of homes that could be funded through Section 106.

Those not reliant on a mortgage will be less limited over the next five years. The appeal of buying property to hedge against inflation and new build energy efficiencies will likely mean cash buyer numbers increase. This is particularly the case in central London, where discretionary super prime buyers are becoming more active in a market that has been sluggish since 2014.

UK-based buy-to-let investor numbers have generally fallen over the last five years amidst stricter tax and mortgage regulation. But looking forward, they will also see the appeal of investing in more energy-efficient new build and will benefit from strong rental demand from young professionals unable to buy – though in competition with BTR stock.

The growth of the BTR sector is likely to continue in the next five years, particularly once HTB ends. However, this growth may be constrained by planning legislation and borough stances on this tenure. Private for-sale developers will have an increasing opportunity to sell units or blocks to BTR operators, given the volume of capital investing into this sector.

International investors were impacted by travel constraints during Covid-19, and we have not yet seen their full recovery to pre-pandemic levels. But the long-term appeal and underlying fundamentals of London in a global context, particularly for education, will sustain demand. Sterling’s weakness against other global currencies, particularly the US dollar, will encourage overseas buyers, though it’s important to note these buyers will still be selective on price and product.

On the other hand, international owner-occupiers are a market sector that has grown in the last five years, albeit off a small base, driven by political and economic uncertainty elsewhere. We expect these buyers to increase with similar drivers to international investors. However, behavioural patterns suggest that they are unlikely to purchase off-plan and wish to view completed product and schemes prior to purchase.

Ongoing undersupply of ‘affordable’ homes

With sales likely to fall in the next five years, so will the pipeline of development as the market faces headwinds over rising inflation, competition with other land uses, ongoing policy and political changes at a localised level alongside increasing environmental regulation – all of which are likely to impact values and viability.

By 2026 we expect the number of private homes under construction to be 18% lower than the peak in 2018. But how will that impact the supply and demand imbalance already present in the market?

Using the Standard Method for calculating housing need would assume that 83,000 new homes are needed across London each year. Based on our projections of supply due to come forward by 2026, less than 50% of the new homes needed would be delivered.

And as referenced before, the greatest shortfall is in the market for homes below £450 psf, which is also where the biggest challenges are for land supply. We’ve assessed future demand by price point based on what people could afford to pay for both buying and renting. Demand below £450 psf accounts for 59% of the market and yet, we forecast, represents just 31% of supply for private and affordable homes.

Where could new homes come forward?

Areas which have previously seen the greatest levels of development are likely to continue seeing that over the next five years – with notable hotspots in Tower Hamlets and Newham. Ealing is also forecast to see a significant increase in delivery, particularly of BTR schemes, though there could be limitations on this from grid capacity and competing land uses in West London.

Crucially it’s the more affordable outer borough locations, such as Bromley, Bexley and Sutton, which are forecast to see some of the lowest delivery in the next five years. These are the markets which have the ability to meet the greatest segment of demand in the market under £450 psf, but a lack of existing transport connections and Green Belt restrictions in South East London have severely limited large-scale development potential within these boroughs.

_{(See below our interactive map which allows you to see where forecast supply is coming forward by price band)}

Conclusions

The economic headwinds the UK is facing means there’s a significant risk to London’s future in continuing to attract talent and investment as a global city if affordably priced homes are not provided. This will impact the entire market, not just those developers trying to build under £450 psf.

The impact of the mini-budget and uncertainty over future housing and planning policy from the new Prime Minister has put the supply and demand imbalance in London into greater focus. Whist the move towards Investment Zones rather than Levelling Up may improve London’s GDP growth prospects, affordability and the undersupply of housing will remain major constraints to the market.

Housing targets, instead of being abolished, need to be more sophisticated in planning how to bring forward sites that allow more diverse players to build at a range of price points. This will be particularly key in outer London alongside infrastructure improvements, but local authorities need resources and funding to do that effectively.

It’s hoped a good example of this will be TfL’s development company, which has ambitions to deliver between 10,000 and 46,000 new homes. And we could see more local authority-led regeneration, such as we’ve seen in Barking and Dagenham and Havering. But key to this will be providing robust funding, policy and partnerships to support it. The new Prime Minister will need to ensure that cohesive and consistent housing policy remains a priority if London is to protect its future growth.

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