Is a bubble about to burst?
8 Mar 2016
Whisper it, but we might be heading towards a housing market crash. There’s been a slew of increasingly nervous articles about the vulnerable state of central London’s luxury new-build sector, and the consensus seems to be growing that this particular market is in for a bumpy ride. The Evening Standard have been cautioning of wobbles in developments around Battersea for a while. Capco have reported a slowdown in sales of luxury properties amid a glut of supply, and Morgan Stanley are warning that prices for ‘new, upmarket London flats’ could fall by as much as 20% this year. And City AM ended last week with a positively alarmist Friday front page: ‘Battersea panic stations: Investors flee luxury scheme as up to £2m is knocked off some asking prices‘.
Potential drivers of the current uncertainty are many and varied – from changes to stamp duty and the potential of Brexit reducing investor confidence, to international issues such as falling oil prices, warnings of global economic slowdown, and exchange rate movements restraining demand at the top end of the market. Underpinning much of the market’s jitters, however, is the fact that supply seems to be exceeding demand within this market.
It seems strange to talk of a new-build glut at a time when the nation is in the midst of a chronic housing shortage. Families across the country are stuck in unaffordable, unstable private renting, young professionals in London are forced to consider sharing not just their home but their bedroom, and there is little optimism for future generations’ housing prospects. The Mayor’s own assessment indicates we need to be building 50,000 homes a year to meet London’s demand: actual output is barely half that. But while the capital may be following the country in failing to build the homes it needs overall, in recent years the London market has at least produced lots of luxury apartments marketed across the globe. Developers have focused their attention on what seemed to be an infinite influx of cash into London’s high-end property market, forward funding their schemes with off-plan sales and devising ever more elaborate features to attract the world’s wealthy. And there’s estimated to be tens of thousands of similar properties in the pipeline.
There’s good grounds for thinking that this glut of expensive flats is a real problem. Firstly, identikit, easily-marketed luxury properties might appeal to investors, but they’re neither affordable nor suitable for ordinary families. The development industry is often said to be facing capacity constraints – so at the very least, every swanky apartment block being built consumes space and resources that are not building more affordable homes. Secondly, local authorities’ ability to demand some affordable housing as the price of planning permission for private homes has been weakened in recent years, so these developments may not be making much of a contribution to meeting Londoners’ needs via that route either.
Finally, there are the possible consequences of a bubble and burst in the luxury new build market. While we’re not necessarily opposed to the idea of house prices coming down, we are very worried about the potential ramifications of a major bust for non-prime supply. We’re deeply concerned about the ability of the house building sector to survive a shock. If developers are relying on this income stream to cash flow their businesses, a fall in sales in central London could have a disproportionate impact on supply across the country. Even developers not currently active in the London market could be affected by reduced confidence in the sector as a whole, resulting in yet another sharp contraction in overall house building.
In short, a bubble-prone market fixated on building expensive flats for wealthy investors is unlikely to meet the needs of Londoners even in good times – and is likely to make the whole system vulnerable to damaging booms and busts.
London is a global city, and no Mayor could control all of the external macroeconomic influences on its property market. But the next Mayor will be able to use their planning powers, land assets and budgets to prioritise the building of homes for low and average income Londoners. Over the course of the next Mayoralty London needs to see a much greater focus on homes for ordinary people – not just luxury properties targeted at the unpredictable investment market.