The Spotlight on London Demand examines the challenges London will face with an ever growing population. Download here.

There are more than eight million people living in London. Projections show that by 2021 the population is set to rise by another million, the fastest rate of growth ever. At this pace, London’s population is going to hit nine million before New York and approach 10 million by 2030, according to calculations by the Greater London Authority (GLA).

This expansion is the result of greater longevity and live births in the capital, often to immigrant families. It also reflects the attraction of London as an desirable place to live, work, study and invest.

Unfortunately, there are not enough homes in the capital to absorb all this demand. If London’s current population is the equivalent to the sum of 24 major English cities including Manchester, Leeds and Sheffield, over the next decade we will need to find ways of accommodating the equivalent population of another Birmingham and Hartlepool put together.

The scale of the challenge is not lost on London’s Mayor. In 2020 Vision, the document in which he outlines his ambitions for the capital, Boris Johnson states that we will need to build another 400,000 new homes in London over the next decade. The figure exceeds the previous GLA target of 32,000 new homes a year, which is likely to be revised next year.

Savills Research believes a minimum 50,000 new homes are needed a year. This is the equivalent of 18 new Olympic villages a year. This is an estimate based on employment driven data calculated by Oxford Economics. It allows us to estimate the levels of demand in different income brackets and extrapolate how much households can afford to pay, whether they are buying or renting.

Savills analysis shows that the greatest demand lies in the Mainstream markets where there is call for some 28,500 new homes a year at the lower end of the market (including affordable housing) and a further 18,500 in the mid and upper end of these core markets.

These are markets where a typical two bedroom flat is priced between £280,000 and £570,000 respectively. Further calculations taking into account levels of supply in these brackets shows that there is a supply gap of 15,000 homes in the lower end of the market and 6,500 in the Mid and Upper Mainstream markets a year.

The level of housing requirements based on population growth alone could be far higher. London Councils, which represents 32 boroughs and the City, has called for 80,000 new homes a year over the next 10 years. The figure includes what is needed to satisfy new demand as well as meet the backlog of housing need.

Yet given that only 24,000 new homes were completed in London last year, it is evident that there is a substantial gap between supply and demand by anybody’s measure.

Market prices

The London market behaves like no other in the UK. The mismatch between available housing stock and demand has pushed up the cost of the average home in the capital by 10% over the past year while outside the capital values are either flat or beginning to recover from the economic downturn.

Strong capital growth means prices are high relative to income. House prices to earnings ratio has doubled in London over the last 15 years. This alone makes it harder for Londoners to buy. Even in a city that attracts vast global wealth, 70% of households earn less than £50,000 a year.

The credit crunch has also raised the bar to homeownership as lenders have demanded bigger deposits relative to house prices. A first time buyer in the capital needs to save an average deposit of £60,000 to qualify for a mortgage.

We estimate that Help to Buy, the two part government scheme to boost homeownership by helping buyers to purchase homes worth up to £600,000 with a minimum 5% deposit, will assist some 400,000 to get on the property ladder over its three year lifespan.

However, so far the greatest take up of the first part of the scheme has been outside London.

We expect it will prove more useful to the income rich but equity poor and reduce demand for rental homes in higher price brackets. However, as our exclusive YouGov survey shows there are some who rent out of choice rather than necessity among higher income groups. We expect this may temper the effects of Help to Buy.

Private renting

Overall affordability pressures means the private rented sector will continue to expand. Private renting in London has grown from 14% of all dwellings in 2001 to a quarter of all dwellings in 2011. We expect this to rise to 34% by 2021, though some London boroughs already exceed this figure. In Westminster, the Royal Borough of Kensington and Chelsea and Newham, the concentration of households renting is closer to 40%.

For these reasons, the delivery of new private rented sector housing is critical to meeting the demand in the Lower and Mid Mainstream markets where there is the greatest shortfall in the supply of private housing. This is the level at which affordability is most stretched. Hence the need for rental homes is greater than the demand for properties for sale.

The development of a large scale institutional investment market is crucial to fund these homes. Without this, ordinary Londoners will suffer, as ultimately will the capital’s economy

Taken from
Spotlight: London Demand