London’s housebuilding meltdown: what happens next?

The big picture

London is a city of nine million people, where 73,000 homeless households are currently living in temporary accommodation, costing councils hundreds of millions of pounds. The need for new homes is acute, so why on earth has development collapsed?

The truth is that private housebuilding rarely, if ever, tracks underlying housing need. Rather, developers build to meet demand: the number of people willing to pay for a home at a price that will generate a profit to keep them in business. Demand moves in cycles, as we will explore shortly.

Let’s step back and look at general housebuilding in London over the last quarter of a century. Since 2000, the average number of new homes completed in the capital has been 30,000 a year. (The government-set target of 88,000 homes a year is therefore massively stretching: it has never been met in modern times.)

Former London mayor Boris Johnson managed a peak of 35,200 in 2015-16. His record was then smashed in the first seven years of current mayor Sadiq Khan, who oversaw a genuine boom in private housebuilding that peaked in 2019-20, with 45,676 net additions.

Now, however, Mr Khan’s housebuilding boom is over. Net additions in London are estimated at 31,800 for 2024-25 and will fall further in the next few years as those dire starting numbers translate into completions.

Since the pandemic there have been “real challenges” with housebuilding in the capital, says Mr Copley, Mr Khan’s deputy mayor for housing. “There’s no sugar-coating it really,” he says.

Higher interest rates in these years have not helped, “either in terms of financing for developers themselves or in terms of demand for homes because it’s been more expensive for people to get mortgages”, the deputy mayor continues. 

Plus the cost of building surged 24% between 2020 and 2023, according to the Building Cost Information Service, as supply chains were disrupted by the pandemic and the Ukraine war turbocharged energy costs. “London currently vies with Geneva to be the most expensive city in the world to build in,” Mr Copley says.

BSR teething problems

But for Mr Copley, one of the biggest challenges has been the introduction of the post-Grenfell Building Safety Regulator (BSR), which “we fully support in principle”. But, he adds, “there have been some real teething problems”.

As of 2024, all tall buildings must be signed off by the regulator at various stages, or ‘gateways’, of the construction process. Not only has the regulator struggled to work through a backlog of applications, it also rejects over 70% of applications due to lack of detail, suggesting developers do not know how to meet its standards.

“It’s been delays, it’s been lack of communication,” says Mr Copley. “Just the amount of information that is being asked for at Gateway 2 before starts on site. 

“We’ve had reports that they’re quibbling over the colour of skirting boards at Gateway 2. Now that is a safety issue for people who are visually impaired, the colour of skirting boards in public areas. But it’s not the kind of issue that should prevent the start on site. It should be addressed before the building is occupied at Gateway 3.”

“I’m quite confident [in] the new leadership that has been brought in – Andy Roe, Charlie Pugsley – who are very well known to us at the Greater London Authority because they were both at the London Fire Brigade,” says Mr Copley. “I think that we can get through that, and the Building Safety Regulator can be made to work efficiently and effectively.” 

A BSR spokesperson said: “We acknowledge the frustrations delays in approving building control applications for high-rise buildings are causing for the sector. Setting up a new regulator has been a complex challenge.

“We’ve made several changes to our operations and expect significant reductions in processing times in the coming months. We recognise working with industry is the best way to reduce the length of time approvals are taking and to establish the new regulatory regime aimed at keeping residents safe.” 

More demanded, less offered

Nick Cuff, managing director at development consultancy Urban Sketch, wrote a blog this summer titled “Why London stopped building”. He says that developers’ profits have been eaten away as cash-strapped boroughs demand more in the way of infrastructure and affordable housing.

Does that suggest central government austerity in the early 2010s – where grants to council budgets were slashed and social housebuilding grants were cut by 60% – is behind today’s drop?

“Yeah, I think so. It’s part of it,” he says. “On the one hand more is demanded [of developers], but on the other side of the equation there’s less that can be offered, because the buildings that we’re producing now are a lot more complicated than they were 10 to 15 years ago.”

He cites extra lifts and stairwells required under building safety laws, which came in under the previous Conservative government, and eat up the space developers can charge for. “You require all these new things, which maybe are needed, but then you also universally tax it more as well for diminished viability, so it’s a double hit,” he says.

Other recent regulations have had an impact, like the dual-aspect design requirements, which require homes to have openable windows on at least two walls, and bike requirements that mean “the whole ground floors are given up to cycle storage and waste servicing”. 

Air source heat pumps and mechanical ventilation require more kit, and there is a mandate that 10% of homes need to be accessible for disabled residents, with associated car parking, which didn’t exist 10 years ago. “All of these things in isolation, there’s an argument for them,” he says. “When you start to aggregate them all together and you don’t ease anything else in the system, it all starts to add up.”

Mr Cuff says the rise of single-family housing – institutional investment pouring into new build houses in the suburbs – shows that private capital is willing to invest in housing. It’s just not willing to invest in high-rise flats “because of all the risk”.

 

 

“You can’t blame everything on the mayor of London. He’s not the devil incarnate,” says Mr Cuff. “The mayor’s policies could have worked quite well when you had things like Help to Buy as a stimulus on the other end. It clearly doesn’t work now because… you just don’t know who your end users are or who’s going to live in these homes.”

Again, it’s the mismatch between housing need and demand. Who will buy these homes at the price the developer wants to make a profit?

Mr Cuff argues that a remediation package is required now to help developers get building again, similar to measures introduced after the global financial crisis of 2008. “The London Plan is too slow. The government is going to have to step in above it,” he says. “There are developers I know, decent businesses, that are shedding 10, 15% of their workforces. 

“We’re going to have to see something from Treasury around planning and around maybe some support subsidy if we want to see any kind of resurrection in numbers.”

Should government lower affordable housing requirements?

Adam Cradick, head of London living land at CBRE, says that before build cost inflation and building safety regulations, a developer could afford to provide 35% affordable housing on a site. Now, he argues, the maximum viable amount of affordable housing is closer to 20%.

The Labour government has placed great emphasis on planning reforms, while the mayor of London has promised to open up parts of the green belt for development. But for London, “supply of sites is not the problem”, Mr Cradick says. “There are plenty of brownfield sites. You’ve got to help the viability.”

He suggests doing more to encourage buy-to-let investors to buy new homes off-plan and reconsidering affordable housing provision and Community Infrastructure Levy, which is currently paid upfront, leading to a “cash flow issue” for developers. More should be done to encourage small and medium-sized developers, too. “Gateway 2 is really difficult for SMEs,” he says. “It’s added another year to their programmes. London is becoming the preserve of big balance-sheet developers.”

I ask Mr Copley whether the affordable housing requirements in the London Plan are too high for a tough economic environment. “I think there is a misconception about what the 35% affordable housing [requirement] in the London Plan is,” he says. “It’s designed to be an incentive. 

“If a developer on the scheme genuinely can’t feel that they can hit that percentage, they can absolutely go down the viability-tested route. And our viability experts at City Hall will scrutinise that carefully. We’ll comb through the figures, and we’ll make sure that the developer is telling the truth, and they can’t meet that requirement. And in those instances we would grant consent with a lower percentage.

“Obviously what we want to do is to maximise the amount of affordable housing that we can, and that’s what the threshold approach that this mayor brought in has been very effective at doing.

“We’re looking at all of this as part of the next London Plan to make sure that that incentive is still working, is still the right one.”

Social landlords still underpowered

If private house builders won’t build in London, can’t we rely on London’s huge social landlords to step in? In theory, these non-profit housing associations will build through economic cycles and place a greater focus on meeting underlying housing need.

But readers of Inside Housing will know that the capital’s housing associations remain in a perilous financial situation, facing huge cost pressures – from cladding remediation to damp and mould – to invest in their existing homes rather than build or buy new ones.

Mr Copley is optimistic that the central government settlement announced for social landlords will make a real difference and help get social landlords building again.

More grant funding, a 10-year rent settlement with rent conversion and access to the Building Safety Fund for social landlords will create a “recapitalised” social housing sector, he says. “That has a wider ripple effect”, he says, because social landlords will be able to buy more Section 106 homes.

But some housing associations have called for ministers to go further, by introducing an ‘amortised grant’ model. This would see higher grant payments made upfront to housing associations that are repaid at a later stage. The hope is that this would keep interest payments lower, meaning housing associations can widen their interest cover ratio, which is restricted in lending covenants.

‘The trade-offs are different now’

Mount Anvil is one developer still building in London, with the help of a £50m loan from the Greater London Authority. It builds exclusively in the capital and focuses on estate regeneration.

Lisa Ravenscroft, chief growth officer at Mount Anvil, says the firm is going to complete 1,100 homes this year. It has 3,000 homes in planning and six schemes starting on site in the next year.

The developer has taken a “ferocious focus on eliminating waste” and marketing its homes for sale, to ensure there is sufficient demand for homes once they are built, she says. It has also had “candid conversations” with residents about increasing height and density to ensure affordable housing provision is met.

For example, on its Barnsbury Estate project, changes had to be made to satisfy the BSR. Mount Anvil then put the changes to a second ballot, asking “would you support this new scheme with 200 extra homes? The residents voted for it because they understood the trade-offs,” she says. “There is a cross-subsidy model at play here.”

“In a pre-Gateway world, that wasn’t necessary – the trade-offs are different now,” says Ms Ravenscroft. “Otherwise it becomes ‘drop the affordable percentage’. That’s not the right answer.”

Green shoots

One of the problems, Mr Copley says, is that, “like anything in development, housing is long-term; making changes can often be like turning around an oil tanker”.

“We’ve got into this trough unfortunately,” he says. “It could take some time to pull us out. But I really do see some green shoots.

“I’m quite confident, particularly as we go through this year, we’re going to be seeing an uptick in terms of affordable housing delivery, and we are also going to be going through the process of coming up with the next London Plan, which is going to absolutely have housing and growth at its heart.”

Mr Reed will be watching closely.