The economics of London’s land and real estate market pose a major challenge to aspirations to triple the current output of private purpose-built rental housing. A newly released report and recommendations from housing policy experts in the United Kingdom calls for construction of 500,000 new homes by 2025 — including 15,000 new units of private rental housing annually — to meet projected demand and provide a market brake on soaring rents and housing prices.
“London is facing a housing crisis of unprecedented proportions brought about by a chronic undersupply of new housing. It needs urgently to be building far more houses of all types and tenures,” maintains Lord Bob Kerslake, former chair of the U.K.’s Department for Communities and Local Government (DCLG) and chair of the five-member London Housing Commission, which produced the report. “If nothing is done, both the scarcity and affordability of housing across London will continue to worsen. Levels of homeownership will continue to fall and rents will continue to rise.”
Private rental housing is home to more than a million London households, who have seen a 16 per cent increase in rents, on average, over the past five years. Citywide, private landlords charged a monthly median of 1,400 pounds (CAD $2,660) for rental dwellings in 2015, ranging from a low of 950 pounds (CAD $1,805) to a high of 2,300 pounds (CAD $4,370) throughout London’s 33 boroughs.
Meanwhile, the average house price is now pegged nearly 50 per cent higher than prior to the 2008 financial crisis. At 500,000 pounds (CAD $950,000), the current average is more than 12 times the median income of city residents.
The Housing Commission report recognizes that goals for purpose-built rental housing construction won’t easily translate into reality while capital growth continues to significantly outdistance income return. The required huge capital outlay for land diminishes — or demolishes — the appeal of longer-term rental housing income return.
“Despite this high and rising demand, and despite an alleged ‘wall of money’ looking to enter the London property market, build-to-rent struggles to compete when compared to build-to-buy,” the report states. “The evidence also highlights that while rents are rising more sharply in London than in other parts of the country, income returns from rents are much higher in the areas where property prices are lower.”
In contrast, the Housing Commission’s recommendation for heightened regulatory scrutiny would be more straightforward for the government to mandate. The report notes that nearly half of London’s existing private rental housing was built before 1919 and that nearly a third would not comply with the Decent Homes standard that social housing landlords have been compelled to meet. (Nor do private landlords have access to public funding made available to social housing landlords to fulfill these obligations.)
The Housing Commission has recommended that London boroughs be given authority to create their own licensing schemes for private landlords, along with flexibility to prohibit the leasing of substandard dwellings. This would be premised on the Housing Commission’s recommendation to give the Greater London mayor and the 33 boroughs greater autonomy over housing matters with the transfer of planning, regulatory, borrowing and taxing authority from the U.K. government. In turn, the local governments would be expected to create the capacity to deliver 50,000 new homes per year by 2020.