Yahoo Finance Budget 2023: How to fix London’s ‘toxic’ housing market — the changes Jeremy Hunt should have made
The London housing market is not broken, “it is entirely rotten”. The foundations have crumbled and quick-fix announcements expected in the Spring Budget would likely have done little more than paper over the cracks.
As it transpired, Chancellor Jeremy Hunt ignored the chance to implement reforms to the housing market. Yet an urgent solution is needed if we are to avoid a brain drain, an exodus of key workers and the glissade into a city where no ordinary people can afford to live.
“London and the South-East are not just unaffordable, they are extravagantly unaffordable,” says Paul Cheshire, professor emeritus of economic geography at the London School of Economics.
“It is terrible what has happened, in particular to the under-40s,” he continues, referring to how difficult it is for young tenants to both make their rent and save to get on the property ladder.
Renters
Rents in London have gone up by £262 or 13.8% to £2,161 in the year to February 2023
Small private landlords are selling up at their fastest rate for four years
The average house price in the region is now 13 times household income, compared to an international standard of three (according to Demographia). Such levels of unaffordability are “bad for the capital’s economy and stop us attracting the best and the brightest [talent],” Cheshire adds.
This toxicity reverberates up the housing ladder. The cost of a house (rather than a flat) has increased 24 per cent since 2019, forcing second- and third-steppers to move out of the capital or languish in homes that cannot meet their needs.
London property
The costs
Average income: £48,959
Average renter income : £42,104
Average household income: £57,999
Rent as a percent of income: 64%
Average Greater London rent: £2,161 per month
Average flat price: £547,640
Average house price: £873,390
Average mortgage payment (for a flat): £2,340 per month
Average mortgage payment (for a house): £4,350 per month
Mortgage payments jump for second steppers who bought a flat in 2017: 86%
Source: Hamptons
“Thousands of ordinary London families are fed up with high-rise flats they can neither afford nor fit into… which are too often money boxes for foreign cash,” says Jackie Sadek, chief operating officer of UK Regeneration. “The London housing market is rotten and every aspect of it needs rebuilding,” she says.
Can we build our way out?
In 2019 an individual first-time buyer needed an income of £64,010 to buy a house with a 10 per cent deposit in London. This has rocketed to £97,308 — amounting to a pay rise of 34 per cent in four years, according to Hamptons.
Cheshire blames this squarely on what he calls the collapse of house-building. “The root of the problem is building too few homes over more than a generation and building the wrong sorts of houses in the wrong places,” he says. “Between 1959 and 1988 approximately 7.5 million homes were built [in Britain], whereas only 3.3 million have been built in the last 30 years. That is a shortfall of 3.1 million homes,” Cheshire explains.
First-time buyers
In 2019 a first-time buyer needed an income of £64,010 to buy a house with a 10% deposit. This has rocketed to £97,308, a pay rise of 34% required in four years.
Hard limitations on building out and up are a factor: the green belt was drawn in 1955 to prevent urban sprawl, there are height restrictions across much of London due to conservation areas and there are 13 protected sightlines of St Paul’s also capping storeys.
Cheshire is not advocating building on urban parks or adding to the London skyline. “Parks and commons are valuable public amenities that genuinely generate social welfare. But there is poor quality agricultural land and abandoned golf courses that count as green belt, close to commutable stations in Zones 5 and 6, which could be built on.” He nods to just one example — a disused golf course in Bromley.
A paper by Cheshire and the Centre for Cities estimates there is enough buildable, low-quality land within 800 metres of London’s commuter stations to deliver 891,600 homes at a density of 40 houses per hectare.
NIMBYs not welcome
A discretionary and uncertain planning system slows the delivery of new homes and deters developers.
In countries such as Japan and Germany, according to Cheshire, builders are already working to an umbrella housing plan. In the UK, construction firms undergo a huge risk (in terms of time and money) by putting in an application to build, unsure of the outcome, and that is before arduous negotiations begin on the provision of affordable homes or community contribution.
Sadek believes the dilution of overall housing targets by central government in December compounds this uncertainty. It suits MPs and councillors who do not want to back plans for new homes and face constituents’ fury.
Both Sadek and Cheshire want to see a Greater London masterplan and overall housing targets, which are then broken down borough-by-borough with the number of homes needed based on local affordability levels.
“I want a bottom-up approach,” says Sadek. “We need to assess the needs of people on council [social housing] waiting lists and start meeting them.”
A better housebuilding ‘ecology’
Sadek is also calling for the reintroduction of Help to Buy for first-time buyers. But only for the purchase of homes provided by small and medium-sized builders to encourage a healthier housebuilding sector.
The Government’s shared-equity scheme helped first-time buyers purchase a home with just a five per cent deposit divided opinion. It encouraged developers to build more homes and stimulated supply, but was also criticised for driving up prices.
“I don’t like Help to Buy,” says Sadek. “But I would bring it back for small construction firms, not the big boys,” she adds. Her thinking is that using it only on smaller, infill projects would not have the same impact.
“We need a better ecology in housebuilding,” agrees Siân Berry, former leader of the Green Party and member of the London Assembly. She says long delays in housing delivery often occur when a single major builder controls vast swathes of brownfield sites. “The council should section the land into small parcels for SMEs so that there is a more frequent stream of homes coming to market,” she suggests.
Holistic tax overhaul
A dearth of family-sized homes has pushed up the price of a house disproportionately out of all property types.
Since 2019 the cost of a flat has risen two per cent taking the average price tag to £547,640 (Hamptons). The cost of a house, however, has jumped 24 per cent in that time to £873,390.
“There is merit in revisiting the stamp duty system, which is detrimental to [sales] activity,” says Simon Rubinsohn, chief economist at RICS (the Royal Institute of Chartered Surveyors).
He suggests a stamp duty break for downsizers to encourage them to free up family-sized homes, but says: “We don’t want to force people to move.” According to recent Savills research, many rural downsizers are looking to relocate to smaller, more energy-efficient and lower-maintenance homes within cities, but stamp duty deters them. Of course, a supply of good quality new homes is needed too to meet this need.
Cheshire would go further. He advocates the scrapping of stamp duty in favour of a land tax paid for by whoever owns the plot. “Stamp duty is a bloody silly tax,” he says. “It is regressive and stops people being able to move within their locality to meet their changing needs, effectively it prevents upsizing and downsizing,” Cheshire explains.
Second-steppers
The average cost of a house in London is now £873,390, an increase of 12% since 2021 and of 24% since 2019.
The flat owner needs to find an extra 59% of the value of the flat to stretch to buying a house.
Council tax also comes in for scathing criticism, not least because the bands used to calculate it are still based on property valuations made in 1991. Since the top value is still £320,000, the single occupant of a house worth £2.5 million on a London street may pay less than their married neighbours with a child in a one-bedroom flat next door.
Pulling just one individual tax lever in a Budget only serves to inflate house prices further. For example, the short-term emergency stamp duty holiday given in July 2020 encouraged people to buy homes without increasing the number of homes available, pushing up prices.
Therefore Lucian Cook, head of residential research at Savills, would like to see tax incentives in areas that stimulate supply, such as for the research and development of modular homes, an energy efficient construction method that enables homes to be built at speed.
What about renters?
Rents in Greater London have grown 13.8 per cent since February 2022, taking the average from £1,899 to £2,161. For a lone tenant occupying an entire unit, this equates to an average of 64 per cent of their income (Hamptons).
As workers and students return to office and campus life after the pandemic, demand has outstripped supply, compounded by the fact that small-time, private landlords are selling up at their fastest rate for four years.
Only last week the property group JLL forecast a shortfall of more than 110,000 rental homes by 2030.
When the Government scrapped interest rate relief and quashed profits for small private landlords it sided with the corporate-backed, build-to-rent operator, providing homes in new complexes. Rents in such purpose-built blocks are 15 per cent higher (according to Hamptons).
“Businesses are able to offset their costs and landlords should be no different,” says Dominic Agace, chief executive of Winkworth. “Tax relief on mortgage interest for landlords needs to be reinstated,” he says.
However, to treat “mom and pop” landlords like businesses also requires strict regulation and monitoring systems to ensure good quality accommodation and maintenance without disproportionate rent hikes per property.
Again, a borough-by-borough approach and collaboration between council and landlord is needed so rents are set appropriately, with oversight by a municipal body and a focus on renters’ rights.
Downsizers
Retirees own 3.5 million homes across the UK totalling £469 billion.
Stamp duty remains a deterrent for them to swap their family-sized houses for more suitable homes, releasing stock and equity back into the property market.
A healthier supply of rental homes by a range of types of landlords should also help control rental inflation, while investing in social rented housing would ease pressure on private renting. Just as the sales market needs a diverse range of builders to ensure volume, quality and varied styles of homes to buy, so too does the rental market need a variety of landlords.
To tackle supply in the rental sector and to rein in rent rises, Sadek proposes a Greater London Assembly task force embarks upon a building programme of private rental homes, with a focus on three-bedroom homes for families, all priced at half market rate.
This task force needs to think imaginatively about building rental homes on the high street and in the suburbs, she says, as well as a strategy on how to house key workers near where they need to work in expensive parts of central London.
“We would like to see landlords incentivised, perhaps with nil-rate VAT to help them meet energy efficiency standards as part of a drive towards more retro-fitting and net zero, provided tenants can be accommodated while works are in progress,” says north London estate agent and former RICS chairman Jeremy Leaf.
“More needs to be done to encourage buy-to-let landlords to stay invested and reduce the number who are leaving the sector. Perhaps this could be achieved by re-introducing mortgage interest tax relief and re-adjusting stamp duty thresholds to coincide with the Rental Reform Bill becoming law.”
Housing is a right, not a political tool
The Spring Budget marks the start of the Conservative Party’s electoral campaign, with a general election anticipated for next year. Although the Chancellor did not give housing the focus it deserves, Cook expects the noise around affordability (for both tenants and buyers) to ramp up.
“Given the rental growth and mortgage costs we face, affordability of homes will become a more pertinent political issue,” he says.
With industry voices calling for a cross-party approach to the provision of new homes, surely it is time to rebuild the sector for younger generations who can neither afford to rent a home or buy one in London.
House prices across every London borough
London borough | Average house price | Growth since 2019 |
Barking & Dagenham | £358,560 | 16% |
Barnet | £770,270 | 27% |
Bexley | £426,500 | 16% |
Brent | £677,400 | 26% |
Bromley | £595,020 | 20% |
Camden | £1,210,430 | 7% |
City of London | £946,890 | -19% |
Croydon | £457,200 | 8% |
Ealing | £655,380 | 19% |
Enfield | £529,180 | 17% |
Greenwich | £515,740 | 9% |
Hackney | £708,750 | 6% |
Hammersmith & Fulham | £995,290 | 7% |
Haringey | £765,250 | 21% |
Harrow | £587,300 | 23% |
Havering | £453,730 | 17% |
Hillingdon | £509,990 | 18% |
Hounslow | £595,270 | 22% |
Islington | £841,820 | 15% |
Kensington & Chelsea | £2,382,800 | 17% |
Kingston-upon-Thames | £669,100 | 19% |
Lambeth | £669,500 | 3% |
Lewisham | £553,900 | 20% |
Merton | £749,500 | 21% |
Newham | £438,280 | -2% |
Redbridge | £520,150 | 19% |
Richmond-upon-Thames | £960,200 | 19% |
Southwark | £668,020 | -4% |
Sutton | £484,110 | 16% |
Tower Hamlets | £581,630 | 8% |
Waltham Forest | £541,250 | 19% |
Wandsworth | £852,360 | 14% |
Westminster | £1,771,770 | -6% |
Greater London | £711,410 | 16% |
