Centre for London research, presented last week at the London Housing Summit, argued that the main cause of London’s home ownership crisis is ‘affordability, not shortage’ – and the claim was widely reported.
There is clearly a housing crisis in London, especially in home ownership. But it’s a crisis of supply. Last year, work started on only 5,547 private-sector homes, down 84 per cent in a decade, and on around 4,500 affordable homes. Between 2001 and 2021, the proportion of homes that were owner-occupied fell from 57 per cent to 47 per cent, while the proportion that were privately rented almost doubled to 30 per cent. Greater London’s population has also increased by around 2.7 million. To suggest this is more important than supply is misguided.
The Centre for London report focuses on house prices rising far faster than wages since 2000, stating that ‘home ownership is 270 per cent more expensive than it was in 2002’. But for first-time buyers, who mainly purchase flats, the gap is smaller. Detached and terraced house prices have tripled to £1 million and £675,000 respectively since 2002, while flats have increased at a lower rate of 140 per cent from £173,000 to £420,000.
The only way to improve affordability is to build, build again and build some more
One of the report’s claims about supply is that London’s housing stock has stayed proportionally in line with population. In 2002, there were about 421 homes per 1,000 people in London. That figure dipped after the financial crisis but has since recovered. However, the figure was always low to begin with. Compared with our European neighbours, the UK has the second lowest number of homes per 1,000 people, ahead only of Ireland – the country that’s widely seen as having Europe’s worst housing crisis.
A Centre for Policy Studies analysis of European housebuilding shows that an extra one home per 1,000 people reduces average prices by about £8 per square metre. If the UK matched continental levels, a typical 94 square metre (1,010 square foot) home would be about £75,000 cheaper. For London flats, with an average size of 43 square metres, the reduction could be worth around £34,000.
The report also criticises homes that are ‘rented out expensively, left empty, and sold at prices most people cannot afford’. But high rents and prices are not an alternative to supply and demand, they are the result of them.
Evidence from American cities supports this. In Austin, increased housebuilding helped push rents down by 22 per cent from their peak. In Minnesota, rents increased at twice the rate in St Paul as in its neighbour, Minneapolis, which introduced a mass house-building programme. Even London has experienced freak changes in rent prices based on drops in demand. Rents dropped by between 20 and 34 per cent during the pandemic – when tenants left London – and surged afterwards when they returned.
Empty homes, especially those owned by foreign buyers, are often blamed for housing shortages. But the problem is overstated. In inner London, around 41,000 homes have been empty for more than six months – just 4 per cent of London’s 880,000 housebuilding target.
Proposals at the summit from other speakers included boosting private supply, building more social housing and dealing with ‘demand-side issues’, for example with rent controls. My colleague Michael Simmons has already shown why they do more harm than good.
Recent demand-side policies have tended to push up prices up as much as they help buyers. The government’s Help to Buy ISA aimed to support first-time buyers, adding 25 per cent to savings for purchases up to £450,000 in London. It is no surprise that this helped set a new price benchmark when not paired with a similar investment in housing supply.
The link between supply and affordability is well established. A Ministry of Housing study found that a 1 per cent increase in housing stock leads to a 2 per cent fall in prices. International comparisons tell the same story. In France, where housebuilding has remained high for decades, prices have risen far more slowly than in England. The contrast between Paris and London is striking. Since 2000, Paris’s population has grown by 6 per cent, while London’s has risen by 16 per cent. Yet Paris has built more than twice as many homes. As a result, since 2007, prices have risen by only 33 per cent in Paris, compared with 68 per cent in London.
If England had matched France’s building rate since 1982, it would have 2.9 million more homes – around 50 extra per 1,000 people – closing about half the housing gap.
Housing, especially in London, has become increasingly expensive, though prices are now falling in real terms. But the only way to improve affordability is to build, build again and build some more. Policies that instead only boost demand are only going to make our problems worse.
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