The principal driver of the London housing market remains the chronic imbalance between supply and demand and this is particularly the case at Telford Homes’ typical price point. Housing starts reduced in 2016, further exacerbating the situation.
London’s economic growth has outpaced that of the rest of the UK for the last ten years, with the exception of 2009 to 2010 (see chart below), and it is projected that London will remain the fastest growing region, although its pace of expansion could reduce from around 2.5 per cent in 2015 to an average of just under 2 per cent in 2017-18.
The economic environment is proving to be robust and the economy has performed better than expected post the EU referendum vote, with the housing market remaining resilient.
Demand and population growth in London
There has been consistent, long term growth in London’s population (see chart below). This has led to ever growing demand for housing in the capital which has not been matched by the number of homes built.
Over the past few years there has been a recovery in the housing market driven by wider economic recovery, increased access to low cost mortgage financing, improved availability of land through the planning process and Government support for the housing sector. These remain key drivers for the market over the longer term with the outlook strong in the near term.
The immediate impact of the EU referendum in June 2016 was relatively short-lived, with the widespread positive attitude adopted within the UK maintaining consumer and business confidence. However, the medium term impact of the referendum as exit terms are negotiated is yet to be seen.
LONDON POPULATION (M) VS. COMPLETIONS (‘000)
Housing starts reduce
There were circa 17,000 new build starts in London for the year to June 2016, down from around 25,000 in 2015 (see chart below). This was the lowest level since 2012 and intensifies the cumulative deficit built up over decades.
ANNUAL HOUSING STARTS IN LONDON (000)
The move to a tiered system of Stamp Duty Land Tax (SDLT) in recent years has assisted the majority of the Group’s customers because Telford Homes’ typical price point is lower than the £925,000 threshold where higher rates are now payable. However, legislation introduced on 1 April 2016 increased by three per cent the SDLT payable by purchasers of buy-to-let or second homes. This has led to many UK based investors becoming more circumspect about new purchases, although overseas buyers have been less deterred, with the fall in the value of sterling since the EU referendum undoubtedly a factor. Build to rent investors factor SDLT into their acquisition model prior to any offer to purchase being made.
Changes have also been introduced to mortgage interest tax relief for investors. Prior to April 2017, landlords could deduct mortgage interest and other finance-related costs from their rental income before calculating their tax liability. This relief will be removed gradually between 2017 and 2020, although a ‘tax credit’ worth 20 per cent of the mortgage interest cost will remain allowable.
Increasing rental demand
Affordability of housing in London is challenging. In 2016, seven of the ten least affordable local authority locations in the UK were in London. Unsurprisingly therefore the number of households renting homes in London has increased by 450,000 in the last 10 years. The increase in average private rents in London relative to the rest of England is indicative of the demand for rented accommodation in the capital (see chart below).
CHANGE IN AVERAGE PRIVATE RENTS INDEX
The Housing White Paper published in February 2017 seeks to address some of the issues that have inhibited housing supply. Proposals including accelerating the planning process, making available more development land and supporting SME builders in order to build sector capacity are encouraging.
The planning regime has historically been a key constraint on the housebuilding industry’s ability to provide the number of new homes needed to keep pace with demand. Approval rates have improved over the last few years since the introduction of the National Planning Policy Framework, although the process to obtain planning permission and discharge conditions can remain arduous, with the shortage of local authority planning officers a key factor.
The Government’s Help to Buy scheme now provides an equity loan of up to 40 per cent in London and this has further increased the number of potential customers who can benefit at price points up to £600,000. Whilst the scheme remains available it will assist many people to own their own home in London who otherwise could not raise enough finance.
Despite macroeconomic uncertainty, particularly in relation to the outcome of the EU referendum, market fundamentals remain favourable. The attraction of London, as evidenced by its growing population and shortage of housing supply points to a continuing need for new homes, particularly in the locations and at the price points that Telford Homes develops.