The supply of new housing in London has recovered from its low point in 2010, reaching 20,000 additional homes in the year to March 2012, according to our latest estimates. However, this remains one-third below the Mayor’s minimum target of just less than 30,000 per annum, taking account of vacant homes returning to use. See Graph 1.

The London Plan acknowledges the evidence that housing requirements are higher than this minimum; indeed the latest household projections indicate an annual requirement of 36,000. More new homes are needed to house London’s expanding population which could increase by 1.2 million people to 8.6 million by 2031, according to the London Plan.

Since publication of the Plan, the most recent population projections from the Office for National Statistics have put London’s population in 2031 at a staggering 10 million people.

Development for market sale

The shortfall in supply in 2010 was most dramatic for market housing, following the market downturn of 2009. Since then, we have seen a strong V shaped recovery in the London market, such that the average London house price is 2% less than peak levels in 2007, compared with a gap of 12% at a UK level. The recovery has been strongest in the prime markets of central London, where the average price is 21% above 2007 levels. See Graph 2.

We expect this divergence to continue, with high demand and scarce supply in London leading to forecast house price growth of 19% over five years in London (including 23% in prime central London), compared with an average of 6% for the UK.

However, market capacity remains constrained by the availability of mortgages, with residential transactions across the whole London market still 44% below 2007 levels.

The added factor operating in London has been the strength of demand from equity rich buyers. As part of this, international purchasers have bought more than 50% of new property in the prime markets over the last three years and more than 30% of new properties in the nonprime markets.

This strength of demand has led to a sharp bounce back in starts, sales and completions, which we expect to peak in 2012 at around 17,000 additional homes. This will still leave a supply gap of at least 15% against the Mayor’s target.

Taken from
Spotlight: London's Housing Supply, July 2012