Sadiq Khan has known for a while that he has a problem with housebuilding in London. But last week a consultancy published figures about the scale of the problem, which prompted full-scale alarm in City Hall and Whitehall.
The analysis from Molior showed that new housebuilding in the capital had collapsed. Only 40,000 homes are under construction – two-thirds the normal rate – and in the first three months of the year builders started work on just 3,248 private sector units.
“It is a perfect storm of economic conditions impacting housebuilding,” said one City Hall source. “It’s an emergency, we cannot wait to act,” added a senior Whitehall official.
The reasons behind the sudden collapse in new building are complex.
When Khan became mayor he increased the amount of affordable housing that developers had to include to qualify for the fast-track approval process from 20% to 35%, or 50% for developments on industrial or public land.
He also tightened the definition of affordable housing so it applied mainly to the cheapest rented homes and those being sold under shared ownership schemes.
For a while it worked. Although overall housebuilding levels fell, the number of social and affordable homes went up. In 2023, builders began work on more than 116,000 affordable homes in London and more council houses than at any time since the 1970s.
But then economic conditions began to take a toll.
Building in the capital has always been expensive given there is not much undeveloped land and developers often have to knock down existing buildings first. But when inflation spiked in late 2022, followed by a sharp rise in interest rates throughout 2023, it became much harder for developers to make a business case for starting new projects in the city.
An analysis of government figures by Ben Hopkinson, the head of housing and infrastructure at the Centre for Policy Studies (CPS), shows that between 2021 and 2023, the cost of building homes rose by 21%.
Added to this, builders were facing a host of new costs and regulations following the Grenfell Tower fire.
The biggest companies have agreed to pay to remove and replace cladding on their buildings, and from next year will have to contribute to an additional building safety fund to pay for those companies that have not made such agreements. A tax on landfill is also increasing steeply.
However, the biggest problem could be that many developers cannot get their plans through the new Building Safety Regulator, which has to approve any projects over 18 metres tall but is struggling to process applications. Data from the BSR shows 92% of applications are being held up, with companies having to wait an average of 36 weeks for a decision.
This all contributes to London’s housing affordability crisis.
The CPS found the median home in London was more than 11.5 times the median salary. That is compared with a ratio of 7.6 across England, and far above the level of 5, which is deemed unaffordable by the Office for National Statistics.
The report found the average renter could expect to pay between 40% and 50% of their income on rent.
The city also has a homelessness crisis. Official figures published on Thursday showed there were a record 74,720 London households, containing 97,140 children, living in temporary accommodation at the end of June. A third of these households had been waiting for secure and affordable housing for at least five years.
London’s 32 boroughs spent an estimated £5.5m a day funding emergency housing last year, an increasingly unsustainable bill that threatens to push some councils to the verge of effective bankruptcy.
It is against this backdrop that Steve Reed, the housing secretary, and Khan are trying to find a solution. But their proposals are facing pushback even before they are launched.
While plans to increase subsidies to developers for affordable homes and to allow councils to offer greater tax breaks are causing some consternation, it is the idea of reducing affordable housing quotas that has infuriated many Labour MPs and campaigners.
One Labour MP in London said: “My council will just use this as permission to build more yuppie flats and bring more people to the area so the current population can pay higher rents.”
Matt Downie, the chief executive of the homelessness charity Crisis, said it would be “really concerning” if ministers were to water down affordable housing targets. “Only a few months ago ministers set out ambitious plans for a new generation of social and affordable housing. We urge them to stick to this focus, and work with organisations on sensible options to make this a reality, without rowing back on ambition,” he added.
But others believe the scale of the crisis warrants such measures. One government official said: “This is an extreme problem, and we make no apologies for looking at extreme solutions.”
