Planning applications have started to fall at the same time as the London mayor’s affordable housing contributions and planning regulations are starting to bite. Are Khan’s changes leading to declining starts in the capital, or is he the victim of a London-wide downturn in the housing market?
When Sadiq Khan barged into city hall in May 2016 he rode a wave of popular protest against unchecked luxury development under predecessor Boris Johnson’s administration.
This was not unjustified: by the end of Johnson’s tenure affordable percentages were well below 20%. This lead to Khan promising that half of all new homes built from now on would be affordable.
Developers squirmed, and by the beginning of 2017 this figure was negotiated down to a 35% flat rate across all private schemes – something those used to years of laissez faire viability checks said would hit delivery hard.
Fast forward another year to beginning of 2018 and it seems the nay-sayers are being proved right: applications are down and refusals are on the rise.
But this is by no means only attributable to affordable housing policy. Instead, a combination of a referendum-related economic uncertainty and massively stretched affordability are the real culprits for dwindling housing starts.
Against this, annual affordable housing permissions are at their highest figures since before the downturn.
What the numbers say
It’s a complicated issue, so it’s worth firstly looking at what the numbers say.
First, since Khan’s tenure, the number of planning applications has declined – there were 280 applications in Q1 2016, against just 162 in Q1 2018.
Annually, there were 1,259 schemes submitted in the year to Q1 2016, against 897 in the year to Q1 2018: a 28.7% decline.
Secondly, while the number of schemes approved shows a slight trend downwards, refusals as a percentage of those applications have shown a marked rise since the beginning of 2017.
So far so bad: but looking at the number of approvals in terms of unit number paints a more mixed picture.
A steady decline to mid-2017 was reversed in Q4 2017 and Q1 2018, while social unit numbers increased: there were 7,834 social units granted permission in Q1 2018, more than double the 2,875 in Q1 2015.
Over the same period, regardless of Khan’s policies, the London housing market has declined.
Pricing for new builds have fallen 1.7% in the year to Q2 2017 alone according to JLL research, while in the year to Q3 2016, they declined by almost 7%.
In the second-hand market, house price growth and transaction numbers have steadily declined since 2016.
Is it Khan’s fault?
There is no doubt Khan’s policies have made it more difficult to stack up the viability of schemes – it doesn’t take a genius to work out that 35% affordable is harder to achieve than 10%.
But the consensus among commentators is that the market downturn has had far more of an impact.
“It would not surprise me if affordability had an effect on a few sites, but the wider market context is far more important,” says residential analyst Neal Hudson.
“In the period since the EU Referendum, London house prices have become flat and transaction volumes have fallen to circa 90,000pa, from 130,000pa pre-Brexit,” adds JLL residential research director Nick Whitten.
It is this slowdown that has had far more effect on development – although the GLA has borne much of the criticism as an obvious and visible scape goat.
A developer asking not to be named put it another way: “If sales were still strong, we wouldn’t care about the 35%, because we would make the profit off the private. But they are not, so we do.”
Social obligation
There is also the recognition that development cannot continue as it has done, from a social as well as an economic perspective.
Whitten says: “In terms of Khan’s policies, it is a positive that affordable housing approvals are increasing. For the long-term benefit of the capital we need more housing of all tenures to meet the needs of a rapidly growing and diverse population.”
A case in point is that despite London having a well-documented housing shortage and needing more than 60,000 new homes a year, there are thousands of unsold new build flats.
Khan’s London Plan ‘throws baby out with bathwater’
Savills says that between 2013 and 2016, 13,500 more homes were started than sold, while EG research found more than 9,000 flats available in the middle of 2017.
Stretched affordability means only a few first-time buyers can get into the market, and when national policies reduced demand from buy to let investors, the small number of first-time buyers could not replace it.
“It’s the wrong type of homes at the wrong time at the wrong place,” says Hudson.
“The 35% was absolutely the right thing to do: it was nuts in a market like London where prices are so high to have less affordable housing than lower value markets.“
Political instability
However, Khan’s politics have deterred investors politically rather than economically, through mixed messages about where they can develop and a shifting regulatory landscape.
To paraphrase a recent conversation with a developer eyeing the UK residential market, when asked why they were not concentrating on sites within the M25, they looked at the reporter in question and said: “With London’s planning system? Who can reconcile the delays to build out with the need for stable investment returns?”
In a time of severe market slowdown, the political landscape needs to remove as much risk as possible, something which Khan and the GLA’s policies have so far not really done.
One of the key solutions of the draft London Plan was densification around transport nodes: an issue the local political decision makers will find hard to stomach.
“The truth is that over a long period of time the system has become slower and more problematic, but most importantly political,” says Jonathan Vandermolen of IMA Real Estate.
“It doesn’t matter how many new planning policies are created or how many white papers are written, while decisions are made by those whose motives are to safeguard their seat in local government or make sure the school run isn’t impeded by new traffic signals as a development is being built, nothing will change.”
The future of London
Amid that, Khan’s policies have managed to increase affordable housing starts – which is no mean feat.
But the question going forward will be how policy continues to increase housing starts if, which seems likely, the market continues to deteriorate.
“The test for Khan will be the next steps he takes,” says David Churchill, partner, planning & development at Carter Jonas.
“While he has shown a clear desire to work with certain sectors, namely the housing associations and BTR providers, he must also address the needs of the traditional developers and SMEs to continue to incentivise investors in the capital’s housing market.”
While Khan and the GLA have shown that they are sticking to their guns on affordable housing, they need to show an ability to innovate and cooperate with other players to keep the market moving.
To send feedback, e-mail alex.peace@egi.co.uk or tweet @egalexpeace or @estatesgazette
