We have a housing crisis in London of a different order to the past

London has always been a relatively expensive city to live in, but the current crisis is of a different order to the past. The average house now costs half a million pounds, more than 12 times the median income: the highest the ratio has been since records began. House prices are now 45 per cent above where they were before the financial crisis hit.

Figure S1

House prices in London are now almost 50 per cent higher than they were before the financial crisis hit
House price inflation since pre-crash peak (index 100 = November 2007 prices)

Source: Land Registry 2016

This is reducing homeownership: the rate of mortgaged homeownership has been falling by around one percentage point a year for the last decade, and fewer than half of Londoners now own their own home.

The growing number of renters in the capital are faring little better. Rents in London, already twice the English average, are rising more quickly than earnings, meaning an ever-larger share of tenants’ income is spent on rent.

Even though London’s wages are the highest in the country, around a quarter of households are living in poverty, compared with a fifth across the country as a whole – a difference that is almost entirely explained by the high cost of housing. Changes to housing benefit and other aspects of the benefits system are yet to feed through to the poverty figures, meaning they are likely to get worse still.

As we have seen with the financial crisis and its aftermath, we cannot expect a ‘market correction’ or downturn to fix affordability in the capital. London’s problems are now too entrenched – indeed the dramatically reduced supply that will result from any downturn will be a further barrier to fixing the capital’s housing problems.

Measures to reduce demand, such as by achieving more balanced economic growth across the UK, can form only part of the solution

Population and income growth are keys drivers of the strong demand for homes in London. On current projections, London will be home to an additional 1.5 million people by 2030. High inward migration – both from elsewhere in the UK, and from abroad – is a driver as well as a consequence of London’s success, and not something we should want to discourage.

In the long-run, an economic policy that encourages a more even distribution of business activity across the country – thus making London a relatively less attractive place to live – might help to alleviate London’s housing crisis. However, even if such a policy were put in place today, it would take many years to achieve the sort of rebalancing we would need in order to see a significant improvement in the affordability of homes in the capital.

Some of the rise in house prices (and thus also rental prices) stems from buyers treating property as an easily financed and tax-friendly investment. The government has taken some steps to dampen this – for example, by increasing stamp duty on buy-to-let and second home purchases, and by imposing an annual levy on non-domiciled (non-dom) owners. But this will not solve the affordability problem in London or the shortage of supply: the basic problem remains that the population is growing while housing supply is not keeping up.

Increasing supply through conversions or more efficient use of existing stock will not be enough

Building new homes is not the only way to boost housing supply: returning empty homes to the market or converting non-residential properties such as shops or offices for residential use can also play a role. However, the potential for either of these options to make a significant difference to London’s housing shortage is limited. London has an estimated 21,000 long-term empty homes, versus an annual new homes requirement of at least 50,000. And large-scale conversion of office or retail space to new homes on the scale required would risk creating a new problem, by significantly reducing London’s space for work and employment.1

Building more homes is therefore the only way to create the step-change in supply needed to improve affordability in the capital for the long term

The only way to solve the housing crisis is by building far more homes. On current population projections, we need to build 500,000 homes over the next decade if we are to match the expected growth in the number of households in the capital. This will not be easy: in the last decade, we built only 194,000. And these need to be of all types and tenures.

Recent government policies may help with supply – but nowhere near enough

The government’s renewed commitment to delivering 1 million homes by the end of the decade is a welcome step, and it has taken measures to increase housing supply by changing planning rules, investing in infrastructure, and supporting buyers to access new-build properties through its equity loans scheme. However, despite these changes, new orders to build homes in London appear to have peaked in 2015, and shifting the dial from delivering 25,000 new homes in the capital last year to delivering 50,000 a year by the end of the decade will require many more effective interventions to keep the capital and the country building. The current array of government policies are not, on their own, sufficient to address this substantial shortfall.

It will take some time for supply to catch up – in the meantime, we must keep intervening to ensure that workers can afford to live in the city, in decent conditions

Even in the best possible scenario, it will take time for housing supply to catch up fully with population growth. In the meantime, market prices will continue to rise – which, other things being equal, means a further squeeze on household finances, rising homelessness, and growing complaints from businesses that their workers cannot afford to live in London. We also risk continuing to see many private renters living in substandard conditions.

To mitigate these consequences, we need continued intervention by government – at national, city and borough level – to ensure that a significant proportion of housing is genuinely affordable and that the standard of rental property is improved.

The government’s focus on promoting homeownership through initiatives such as Starter Homes may move people from renting to ownership but not, by itself, have much impact on supply. Indeed, by putting all of our eggs in the homeownership basket, we risk making new supply vulnerable to a future economic downturn, when demand dries up and mortgage lending falls. Promoting homeownership, if it comes at the price of fewer affordable rented properties, will add to London’s housing challenges.

The nature of London and Londoners’ incomes means that we need to deliver more homes across all tenures in London, for people with a wide range of means and expectations. Of the 50,000 new homes London needs every year, 25,000 will need to be at market price (whether for sale or rent) and 25,000 will need to be ‘affordable’ (at submarket prices).

Within the 25,000 new homes needed at market price, experience shows that the market will not absorb more than 10,000 for owner occupation – so the remaining 15,000 will need to be for private rent. This target of 15,000 ‘build-to-rent’ homes is well above London’s performance last year, which saw the completion of only 5,000.

Within the 25,000 affordable homes needed, 15,000 will need to be social or affordable rent (compared to delivery last year of only 8,000) and 10,000 will need to be ‘intermediate’ homes (also well above current delivery levels).

Thus, across all tenures, London is falling short of its needs – and while increased homeownership is one answer, it is far from the whole solution.

Through strong leadership and increased placemaking capacity, it is possible to deliver the quantity and quality of required new housing supply

The housing challenge that London faces is huge but not intractable. The response must be led by London and draw in all of the public and private capacity that London possesses. The mayor and the London boroughs will need to combine their efforts and invest in new placemaking capacity at a city-wide and borough level, and local communities will need to be fully engaged in the growth and development of their own areas. By this approach it will be possible to deliver both increased quantity and better quality of new supply.

The terms of a new housing deal with central government

The mayor and London boroughs would be significantly better able to address the housing crisis if they were given new powers by central government. So they should come together to ask government for a new devolution deal, in return for a commitment that they will, by 2020, double the annual supply of homes.

The mayor and boroughs will only be able to deliver on that commitment if they work very closely together. To do that, they should form a joint London Housing Committee to coordinate housing policy across the capital, and to negotiate this new deal with central government.

They should ask central government for the following:

  • To exempt London from the National Planning Policy Framework (NPPF) and instead give the mayor’s London Plan the same status as the NPPF – and give the mayor the power to force boroughs to change their plans if they are not identifying enough land for housing. This will mean that local authorities outside London have a duty to cooperate with the mayor to help solve London’s housing crisis.
  • To allow the London Housing Committee to set planning fees for London.
  • To allow both the GLA and the boroughs to borrow more for housebuilding and infrastructure.
  • To devolve stamp duty on the same model as the government’s recent devolution of business rates to local authorities, allowing London to retain a substantial proportion of its stamp duty income, in return for an equivalent reduction in grants from central government, and to adjust stamp duty rates in consultation with the business community, such as via the London Chamber of Commerce and Industry and London First.
  • To allow the boroughs to levy, at their discretion, council tax on developments that fail to meet agreed building targets.
  • To allow boroughs to create their own landlord licensing schemes.

In return, the mayor and boroughs should commit to central government:

  • To double the supply of new homes to London to 50,000 per year by 2020, and to maintain this for at least the following five years.
  • To ensure that London has sufficient housing at submarket rents.
  • To eliminate non-decent housing in the private rented sector by 2025.

To lend credibility to those commitments, the mayor and boroughs should also commit to take a number of specific actions, including:

  • To identify sufficient land to deliver 50,000 homes per year for the next decade.
  • To significantly increase the volume and speed of planning approvals, by increasing the capacity of boroughs’ planning departments and creating a London planning inspectorate.
  • To earmark a significant proportion of public land for affordable housing and new privately rented housing.
  • To take an active lead in the nurturing of housing and planning skills in the private and public sector.

Immediate actions for the mayor and boroughs

Even if central government does not rapidly give London the extra powers described above, there is much the mayor and boroughs can do right now to address the housing crisis and to prepare the ground for a future devolution deal.

Find more land

  • Speed up the release and development of public land identified as not in use by the London Land Commission for building homes.
  • Lend planning expertise to Transport for London for it to review the potential for higher-density development around tube, rail and bus stations.
  • Support communities to conduct their own neighbourhood planning to identify opportunities for regeneration and small sites not currently in the London Plan.
  • Review greenbelt land near public transport sites, in exchange for improved community amenities and the extension of greenbelt protections in other places.

Turn land into homes

  • The boroughs should conduct and publish an annual audit of the progress of local planning applications in their areas, and the progress of large sites in particular. The sites identified by the audit as needing extra support to be developed, either from the boroughs, the mayor’s office or central government, should be given that support.
  • Offer public landowners the support of the London Development Panel to turn public land sites into new homes, on condition that a proportion of the public land is used exclusively for privately rented housing (for a limited period of time).
  • Where it is appropriate for the site, or if a developer cannot be found, the combined resources of the mayor and boroughs should be used to directly commission housing on sites through housing associations and private developers.
  • Support smaller developers by offering them first refusal on a proportion of small public sites identified for development through communities conducting their own neighbourhood planning, at no initial charge. The public landowner should take a stake in the sale or rental value of the homes created.

Improve planning

  • Boroughs should publish an annual review of their progress against national and local targets for development.

Provide more affordable homes

  • The mayor should immediately issue London-wide guidance on negotiating affordable housing with developers, and commit not to call in planning applications that demand a specified proportion of affordable housing.
  • The mayor and boroughs should do a deal with housing associations to double their housebuilding in exchange for a pipeline of new sites.
  • Consult on simplifying the affordable housing requirement of planning negotiations between boroughs and developers through the establishment of a London-wide affordable housing tariff.

Improve substandard rented homes

  • Launch a London lettings hub to link up tenants directly with good-quality, accredited landlords, and to offer discounted lettings fees to landlords offering longer tenancies.

Table S1

Timetable of major reforms over the next mayoral term

1 Conversions of offices to homes also do not provide additional funding for community infrastructure and services, unlike new homes.