The London property market lives by its own rules. Price growth in the capital continues to outpace the rest of the country, resulting in a widening gap in values. Prices in London rose by 12% in the year to March 2014 compared with 5.6% for England and Wales according to figures from Land Registry. Although house price growth has now started to ripple out of London, the average cost of a home in London is more than double the national average.

Lack of housing is largely to blame as demand far exceeds supply of available homes. London’s population is booming, having risen to 8.4 million last year from 6.7 million in 1986. It is projected to surpass its 1939 peak by 2016 and reach nine million by 2020, according to the Greater London Authority (GLA).

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Building completions by contrast, remain down on their 2008-09 peak. In the year to March 2013, 22,000 homes were built, well below the revised target of 42,000 homes a year identified in the new draft London Housing Strategy.

We believe this target is too conservative. Savills research shows that there is need for 50,000 new homes a year across all tenures, even before we take into account the backlog of need that has built up over the years.

Furthermore, with 70% of households earning less than £50,000 a year, the bulk of that need lies in the mainstream markets. We estimate that 82% of that need is for homes costing no more than £700psf with the bulk of that requirement for homes under £450psf (including affordable housing of all types). (see Graph 2)

Our estimate is based on employment forecasts from Oxford Economics and is consistent with independent demographic analysis.

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Mainstream demand

Developers are responding to demand. Since we first ran this analysis almost a year ago, the number of new homes coming through the pipeline has increased. Last year, we calculated that an annual average of 28,500 new homes was set to emerge over five years.

An increase in sales rate and planning applications has brought 
that number to an average of just under 35,000 a year, reducing the shortfall to 15,000 homes a year. 
This is good news.

However, the risk that mainstream markets will remain undersupplied is significant as the shape of the development pipeline fails to match the shape of demand.

We calculate that the biggest gap between the emerging supply and what Londoners can afford lies in the lower mainstream markets where a shortage of almost 6,500 homes is likely. Within that band, the bulk of the undersupply will fall into markets priced under £375psf where we expect to see a shortfall of 5,500 homes a year. This is in addition to a shortfall of 7,500 new affordable homes in the broadest sense.

However, the gap narrows further up the market. In the upper mainstream market (£700psf – £1,000psf) we have identified a gap 
of less than 500 homes a year.

Beyond prime

In contrast, the prime markets (£1,000psf upwards) are now fully supplied, as a result of a shift towards higher value markets among developers seeking to secure sales to wealthier cash rich buyers and foreign investors with the potential to forward-fund schemes.

Furthermore, strong house price growth in London has enticed developers, which may have previously aimed their product at the top of the mainstream market, to pitch their prices higher up the price bands.

Given the potential oversupply of prime property, if demand fails to keep pace with this increasing pipeline, and the unassailable demand for more homes in the mainstream markets, the case for building away from the centre is compelling. Now is the time to look beyond the prime markets of central London.

Regeneration opportunity

There are wide variations in prices within the London market. At just over £1.2 million, the price of the average home in Kensington and Chelsea is over five times the cost of the average home in Barking & Dagenham (£238,909), according to Land Registry data.

However, following five consecutive months of annual double digit house price rises, the biggest growth in value is no longer in the centre of town, as stretched London buyers seek better value for money further out.

In the 12 months to March 2014, Waltham Forest topped the chart with a rise of 23.5%. It was followed by Lambeth (21.9%), Southwark (21.1%), Islington (20.6%) and Hackney (19%). All massively outperformed the heady London average of 12.4% while values in Kensington and Chelsea rose by 12.8%.

The ripple effect is also reflected in transaction data. The east of London recorded the highest number of transactions in London last year, which at almost 29,000, represents a 23% rise on 2012. This compares with 27,000 in central London following a 19% rise.

The boroughs which have seen the biggest price growth, have also seen a degree of socio-demographic changes, infrastructure improvements and new development. As we illustrate in the map overleaf, these are all essential ingredients for creating best value.

Taken from
Spotlight: London Regeneration - Boosting housing supply beyond prime