London review

London’s new-build homes will remain a challenge

Robin Johnson

MD, KFH

Against a backdrop of rising interest rates, international inflationary pressures, and mass employment, the government launched its own fiscal Exocets to stimulate growth. Everyone gets something – the question is, will they use it the way the government hopes? The markets gave their verdict, crashing the GBP to near-record lows at the time of writing. The chancellor doubled down on tax cuts. A weaker pound is, of course, inflationary, but also offers foreign buyers a significant discount on the capital’s property prices.

[I]n July ... the Greater London Authority told developers it would be a decade before electricity grid capacity would be high enough to sustain new homes being built in west London

Earlier last week, the chancellor specifically referenced the importance of London as a global centre for finance, and the well-trailed abolition of the cap on bonuses for bankers was reiterated as evidence of this. Indeed, the agenda for growth will arguably support much of London’s economy and international attractiveness and competitiveness. Changes to corporation tax, income tax, and stamp duty will also play a significant part in this.

But for homebuyers, we should not ignore the likely event of further inflation as a result of these measures stoking higher interest rates to support the pound – which, of course, will translate into higher mortgage rates and put a further squeeze on affordability.

That the threshold of how much a property has to cost before stamp duty is paid has been changed from £125,000 to £250,000 is welcome, as is the raising of the amount on which first-time buyers currently pay no stamp duty from £300,000 to £425,000. Discounted stamp duty for first-time buyers will apply up to £625,000, an increase from the previous £500,000.

It’s clear to most that homebuyers in London and the South East of England will benefit the most from this. They pay 65 per cent of all stamp duty, as prices are higher in this region and the tax is particularly focused on homes of more than £500,000. Three-quarters (76 per cent) of stamp duty came from homes priced at more than £500,000. But we should remember again that interest rates are rising, and with them the cost of borrowing, which will provide a break for many. This move will be reflected in house-price growth as per previous tax cuts, so affordability will continue to be an issue.

The London market has always changed because of policy interventions, and in his mini budget then-chancellor Kwasi Kwarteng went further when he announced full stamp duty relief for land and buildings bought for use or development for commercial purposes, and for purchases of land or buildings for new residential development. The hope is that this will stimulate housebuilders into overdrive, encouraging investment and spending on development and the ancillaries that go with it.

Clearly, it’s a welcome move by the new government given the shortage of new-build homes in the capital, but I’m more reserved on whether (and when) it will really alleviate stock shortages. There are too many other factors affecting construction – the lack of bricks, the cost of construction materials, a shortage of skilled builders, electricians, and plumbers – and now, increasingly expensive borrowing costs.

Even where the infrastructure does exist, there’s still the question of sufficient resource. This was highlighted in July, when the Greater London Authority told developers it would be a decade before electricity grid capacity would be high enough to sustain new homes being built in west London.

Ironically, it’s the development of new infrastructure that is exacerbating the pressure on grid capacity. West London has seen massive investment from big technology companies in recent years, with firms such as Google, Microsoft, and Amazon basing new and increasingly large data centres in the area.

I hope the government’s stamp-duty cuts may well reverse homebuilders’ decision to cut back on new developments, particularly with the closure of the help to buy scheme at the end of October. The starter homes scheme should support firsttime buyer demand and ease affordability challenges, too. There are a lot of reasons to support some of these initiatives, but even so, they are happening at a difficult time when other inflationary considerations may take the wind out of their sails.

It may, in this climate, not be enough to boost activity significantly. Every little bit helps, of course, but my guess is the market for new homes will continue to evolve more gradually than government might hope. M I