The number of new homes in London will reach record levels in 2017 but what is being built currently does not match the demand, new research from Savills has found.
And while the majority have sold off plan, more homes will complete unsold this year than at any time over the past decade, according to Savills.
Total net completions, including sub-market and intermediate housing provision, are expected to peak at 46,500 this year, ahead of the minimum 42,000 homes a year target set by the London Plan.
But this is still well short of real housing demand, which Savills puts at 64,000 homes per year. Lead indicators suggest that 41,000 homes were completed in 2016.
However, the Savills report points out that what is being built currently does not match the shape of demand. Savills estimates that 58% of demand is for homes costing less than £450 per square foot, which accounts for just 15% of the five year build forecast.
It explains that over the past five years, private house building starts have raced ahead of completions, supported in large part by rising volumes of off-plan sales, which assist cash flow and give certainty to funders and are therefore vital to the current delivery model.
But, over the next few years, private sector completions are forecast to fall sharply, the result of rapidly falling home starts, as developers adjust to lower rates of sale. Policy intervention is required, Savills says, in order to reach the level of development needed and shift the focus to the lower value end of the market.
Sales have started to slow, meaning more homes will remain unsold on completion, particularly in the prime market.
Between 2013 and 2016, some 13,500 more homes were started than sold and Savills estimates that unsold, finished homes will total 2,800 this year, up from 1,000 last year.
The oversupply issue is particularly acute above the £1,000 per square foot price point. While the mainstream market has been constrained by stretched affordability and changes to the taxation of buy to let investors, there were 1.6 starts for every sale above the £1,000 per square foot price point during 2015 and 2016, accounting for nearly half of the 13,500 overshoot.
The report explains that since the peak of 2015, development starts have fallen sharply. Savills expects starts to total just 21,500 this year and fall to 18,000 annually over the next two years.
In turn, completions are forecast to fall to just 18,000 by 2021. While this will allow high levels of supply in the private market to be absorbed, assuming sales rates are sustained at 2016 levels, it will leave London chronically undersupplied in new homes.
An expected increase in large scale private rented sector deals and a marginal increase in overseas buyers attracted by the currency play will support volumes at current levels, but developers will need to adopt pragmatic sales strategies, particularly where land was bought at peak values. Sales are expected to run slightly ahead of start volumes from next year, ultimately allowing the market to correct.
“To a large degree, the fact that London almost hit its official new homes target last year should be seen as a massive success, but these figures suggest we are at the limit of what can be built under the current delivery model,” said Edward Green, Savills research analyst.
“This year may present some harsh realities for a number of developers, but the bigger issue remains that of a city chronically undersupplied in the homes it desperately needs. An additional model for housing delivery is needed, that adds to the output of major housebuilders and the market sales model,” he added.
Savills also suggests that more Build to Rent and a strengthened affordable housing programme are part of the answer. But in order to increase delivery in the market segments it is needed most, there need to be further changes to the way in which land is brought forward, including greater public sector land release.
The report adds that there is a real opportunity to boost supply if the Government and GLA implement measures to unlock investor appetite for PRS. Pro-active planning, proposed in the Housing White Paper, is a useful early step, but other policy measures are required, especially from the Mayor.