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Sativa Finance update the blog regularly with comment and opinion on issues relevant to the property finance market.

The Mayoral Race and London's Housing Supply

By sativafin, Apr 14 2016 05:48PM

The London Mayoral Race is now less than a month away and one of the key campaign grounds is housing in the Capital. The campaigning strategy appears to boil down to saying you can build a lot more houses than the other candidate but how feasible are their numbers and how will it impact on the market?

At conferences about development and construction that we’ve attended over the years the capacity of the construction industry seems like the biggest problem facing the new London mayor. Both candidates are proposing to significantly increase volumes of housing stock and Zac Goldsmith has recent been quoted as saying he wants to double the amount of houses London builds to around 50,000 a year. When asked how he’ll do that his reply was:

“We need to free up publicly owned brownfield land. The second thing is to grow the transport network. There’s plenty of land that could be developed but isn’t. So for me transport is as much a ‘getting around’ issue as it is a housing issue. The two go hand in hand. I’m going to protect the TfL investment budget and find new ways of funding transport growth.”

Ignoring the reams of red tape involved with ‘freeing up publicly owned brownfield land’ and the time lag in delivering infrastructure he doesn’t address the main issue which is the capacity of the construction industry. As shown in the DCLG chart at the bottom of this post, new house building completions have steadily increased over the last few years and peaked at 24,610 for the year to Q1 2015 (more even than the peak of the housing bubble in 2006 / 07). However, Mr Goldsmith will have to more than double this figure consistently to hit his targets.

The recent increase in new house building has put significant strain on availability of building materials and skilled labour with costs of both increasing significantly. On the skills front the construction consultancy CAST states that every year 3 times as many workers leave the industry as join taking much needed skills as well as man power with them. Whilst international immigration has helped stem the flow the industry needs to do better and recruiting and keeping skilled workers. The issues relating to construction capacity are complex but it isn’t a tap that can be turned on and off at a moment’s notice.

In terms of finance for these projects, the market is currently fairly well served but most of the funders for private developers are relatively small scale banks and funds so ramping up funding for development projects could be difficult both in terms of man power and balance sheets. The larger housebuilders / plc developers are currently, on the whole, experiencing a cash flow squeeze from slowing sales and rising project costs. These larger developers are typically funded by high street banks who themselves have new banking regulations to deal with that may impact on liquidity – they’re also still relatively cautious as many are still writing off old property deals, so they may not feel inclined to throw lots more debt finance at property companies with deteriorating balance sheets.

Therefore, we feel the areas being address by the mayoral candidates, such as land availability and infrastructure works like Crossrail, don’t tell the full story. The annual delivery of over 50,000 houses in London, more than twice the recent peak, is dependent on a lot of factors aligning and we don’t feel the construction industry or finance markets are currently ready for the challenge.

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