Housing supply side measures cannot reduce house prices in London on their own


I have been reading ‘Growing London’, a report by The (London) Mayor’s Design Advisory Group, and the following numbers in it stand-out:

  • London’s Population is expected to growth by 1.5 million people by 2030 from its current level of 8.5 million (I shall ignore, for now, the question of whether we should just accept that London is allowed to grow without limit).

    That works out at an average of 70,000 additional people per year.


  • To house this new population London has to provide around 50,000 new homes per year over 20 years, and even more if it is to deal with the historic shortfall.


  • Currently Planning Permission is given for 59,000 new homes per annum in London.


  • But only 23,000 new homes are actually built per year (on average 2009-2014).


  • The total housing stock in London is currently 3,428,000


So, if we do some simple number crunching we see that currently we are adding to London’s housing stock by around 0.67% per year.

If we assume that the required 50,000 new homes per year is delivered will increase the housing stock by 1.46% per year.

So, I think it can be seen that London’s housing market is dominated by the existing stock, and that this existing stock sets the sales price of homes not the tiny increase in the supply. I can’t readily find the number of second-hand homes in London which are sold each year but I know, again, that they vastly outnumber the number of new homes which are added to the market.

Of course, there is not one housing market (not even in London): there are a multitude of local housing markets and generally it is the existing homes which set the sales price as usually the existing stock vastly out-numbers the new stock which is added to the market each year. Of course, there may be a slight premium for a new home; and even more of a premium in areas where a lot of new homes are being built and where there is a lack of supply of second hand homes; but their prices are set via comparison with the sales prices of the existing stock in that local housing market. This is a simplification, but you get my drift – the sales price of new homes is not set by what it costs to build a new home plus a percentage for profit but via comparing with what the market is paying for second- hand homes.

So, it seems to me that the problem of high prices in London will not, and cannot, be solved through increases in supply on its own- we just cannot build enough to swamp the market – and that prices will only come down through other, non supply side, measures. I have mentioned what some of these other, non-supply, measures, may be in some of my earlier blogs (such as that of 12th June 2014).

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