Yesterday, London First released the latest round of their analysis of planning and housebuilding in London. The headline is stark – almost one in two planning permissions in London aren’t turning into actual homes.
The scale of the problem
A total of 54,941 new homes received planning permission in London during 2014. Planning permissions generally last three years before they expire – so we would expect these to have been built or at least started by the end of 2017. The reality is that just 29,701 of these homes were actually completed or underway – 54% of the permissions granted in 2014.
To be clear, London First’s research is not simply comparing the number of starts or completions in 2017 with the number of permissions in 2014 – it’s following the actual schemes permitted in 2014 to see if they have materialised before the permissions expire.
At a time when London – and the rest of the country – faces a severe housing shortage this is an outrage. Unfortunately, it’s a story we’ve seen before, as any regular reader of this blog will know. Our Phantom Homes report found that between 2010/11 and 2014/15, there were full planning permissions for 324,000 homes that hadn’t yet been built.
So, how do we get more of these permissions built out? Encouragingly the government is also asking this question, and has commissioned the Letwin Review of build out rates to answer it. We’ll be submitting detailed evidence to the Review in due course, but here are some initial thoughts.
Not building houses
It seems counter-intuitive that developers and landowners wouldn’t build homes as fast as they possibly could, especially when house prices are so high: how can not building homes be more profitable than building them? Inevitably there are a few different things going on here.
Not building is surprisingly lucrative. Land with planning permission is valuable in and of itself: in a rising market it can make good financial sense to hold onto permitted plots and watch the value rise – or sell.
Lots of potential development sites are held by companies that don’t build homes. We don’t know exactly how many – more land market transparency would help, as John Penrose MP argues – but consultants Molier have estimated that between 25% and 45% of sites with planning permission in London are owned by companies that have never built a home. Presumably they plan to sell them on to a developer at some point – but this adds time and cost to the already protracted development process.
Developers have to build slowly. It’s pretty simple, we’ve said it before: developers can only build as fast as they can sell without lowering the sale price. Having paid a lot to get land, the developer then has to hit their sale price targets to make their money back – so they match build out rates to housing market transaction levels to avoid flooding the market.
Land is at the core
The common thread here is the cost of land. While land prices keep growing it can make good business sense to build slowly, or not at all. And when prices are falling, it makes sense to wait for the market to bounce back. We’ve explored these issues in more detail in our New Civic Housebuilding report.
New data from the Office for National Statistics (ONS) shows that since 1995, the value of land held by households has risen by 544%. Meanwhile, the value of assets overlying land (i.e. homes themselves) has risen by only 219%. The land market isn’t just stifling housebuilding – it’s sucking up much of the value in our entire economy.
The Letwin Review can help
The Letwin Review is a major opportunity to secure reforms that can get more homes built faster, to higher standards, and at more affordable prices. To succeed, it needs to zero in on the workings of the land market. As his Review progresses, we hope to see Sir Oliver recommending bold measures to start fixing these deep-seated problems.
- For more information on the Letwin Review read our blog.
