The Supply Conundrum

jll.co.uk/residential

March 2014UK Research, November 2014 UK Residential Forecastsjll.co.uk/residential

RESIDENTIAL

THE SUPPLYCONUNDRUMAre policymakers finally getting to grips with

Britain’s housing supply issue and how will this affect the outlook for the UK housing market?

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IN THIS ISSUE

PAGE NO.

04POSITIVE DRIVERS

A stronger economy will be the main driver of UK house price growth

PAGE NO.

08UNDERSTANDING OUR FORECASTS

Positives will outweigh negatives to force house prices higher

PAGE NO.

18

Another new phaseThe UK housing market is entering another new phase. We have passed through the boom, bust and recovery stages and are now heading into a more stable but still challenging era.

Many undesirable features persist in the UK housing market. These include high house prices, overly-onerous deposit requirements, difficulties in obtaining a mortgage, too much housing equity with the over 50s and not enough housing, to name but a few. Outsiders to the UK in particular are befuddled with the mess we find ourselves in.

However, the answers are not simple. Do we allow market forces to run their course or is more state intervention required? This is a tricky balance to strike. But radical actions are needed to solve our riddle. Tinkering at the margins has usually been beneficial but more is now required.

The underlying problem is that we have too little housing which in turn creates many other issues. The special feature of this report looks at the supply conundrum, the various solutions available and considers their likely success.

Solving supplyThere are many potential supply solutions. Those currently circulating include Help to Buy, Garden Cities, Housing Zones, Build to Rent, a small developer fund and higher density delivery.

We conclude that individually none will solve our supply issues, but that collectively they could take huge strides towards alleviating our chronic undersupply. However, even this will be insufficient to meet targets, as supply chain constraints suggest the UK does not have capacity even if we could galvanize this momentum.

More buyers expectedOverall, we expect home buying demand to rise over the next few years. There are clear headwinds, led

by affordability, but there are many reasons to believe that turnover will increase and that prices will rise.

An improving and stable UK economy will be the key driver. Employment will pick up, job security will improve and real incomes will begin to rise. These will all lead to a greater willingness and ability to buy or move. True, many will not be able to buy, but this could be countered by a release of buyers who have not moved over the past six years or so.

Our forecastsOn balance we believe that UK house prices will rise steadily over the next five years, in the order of 3-5% pa. We forecast that transactions across the UK will increase from current levels and then stabilise at around 1.31m pa. And finally, we expect housing completions in England to grow from around 120,000 to 150,000 pa in the next five years.

PAGE NO.

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PAGE NO.

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PAGE NO.

23THE FINAL WORD

SUPPLY CONUNDRUM

Adam Challis, JLL Head of Residential Research asks

PAGE NO.

06MARKET DAMPENERS

Consumers and policymakers are worried about interest rate rises

4%

SEGREGATING LONDON

London is now a set of sub-sectors each with different prospects

EXPANDING RENTAL SECTOR, BUT LITTLE ROOM FOR RENT RISES

This is our New Residential Thinking. Join the discussion on twitter @NeilChegwidden / @Adam_Challis / @JLLUKResi

“Do the big ideas add up?”

“Even in calmer waters, a level of uncertainty always lurks beneath.”

OUR VIEW

NEW GOVERNMENT, NEW MARKET?

A new Government will take office for a five year term from 2015, but what will this mean for the UK housing market? The big question is whether we will we

be any further forward in solving the country’s housing supply crisis.

JLL RESIDENTIAL RESEARCH

NEIL CHEGWIDDEN

UK house price rise in 2015

250,000 Additional homes needed a year

?

2.6% paUK rental growth 2015-2019

Sub£300k

£1-1 1/2m

£5m+

4%Increase in UK house prices in 2015

150,000Additional homes a yearin England by 2019

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Strengthening economyThe UK economy has recovered pretty strongly over the past few years but it has now entered a new stage. It is no longer in recovery mode and is now closer to cruising speed (see chart). Importantly for the housing market, both employment levels and, more particularly, wage growth are set to improve (see chart).

Overall, the UK economy will be in far better shape over the next five years than it has been in recent years, which will instil greater confidence for many households. Ultimately, this will lead to heightened housing demand from both existing and new homeowners.

It is also notable that London will remain the engine room of the UK economy, in terms of GDP growth (see map opposite), job increases and population growth.

Home buying supportA driver of higher house prices in the past decade has been encouragement for those wishing to buy a home. This has ranged from 100% and interest only mortgages from lenders to Help to Buy from the Government.

From whichever quarter this derives, there seems to be a belief in Britain that people have a right to own their

own home and that support should be given to achieve this goal.

The latest Conservative initiative, to sell homes to the younger generation at a 20% discount to market value where brownfield public sector sites can be developed, is a case in point.

Moving forward, it is likely that any new Government will continue to cultivate policies that support home ownership. For better or worse, this will provide a fillip to price growth.

Wealth factorProperty ownership is becoming increasingly restricted to the wealthy. Homeowners of the past 10-20 years have seen their properties soar in value, increasing their ability to buy, their desire to own more property and topping up their pension and inheritance pots.

7.2mHouseholds in England own their home outright, 33% of all households

While further research needs to be undertaken in this area, there are so many people in this equity-laden group who can buy property either for their own occupation, to help their children onto the housing ladder or to buy for

investment, that they keep prices high. And without a huge flood of new property to deflate prices, this cycle can form a self-fulfilling prophecy.

Supply driverAlthough it has been cited many times before, no analysis of positive house price drivers would be complete without mentioning the lack of housing, across the board, in the UK.

23%Increase in housing starts in England in year to Q2 2014

It is true that housing starts in England have increased to 137,000 units in the year to Q2 2014, but with the number of households set to rise by over 220,000 a year in the coming decade, even this escalation in housebuilding activity is woefully insufficient.

POSITIVE CONTRIBUTORSNumerous factors are contributing to high house prices in the UK. We highlight the main drivers for further price growth and activity

over the next five years.

POSITIVE HOUSING MARKET DRIVERS

ECONOMIC EXPANSION MORE SECURE UK GDP growth % pa

LONDON & SOUTH LEAD ECONOMIC DRIVE Average Gross Value Added (GVA) growth 2015-2019 % pa

STRONGER ECONOMY AND JOBS MARKET

RISING EARNINGS AND REAL

DISPOSABLE INCOMES

HOUSEHOLDS HAVE MORE SECURE AND

POSITIVE OUTLOOK

HOME BUYING SUPPORTS SUCH AS

HELP TO BUY

HOUSING WEALTH

AND FAMILY FINANCIAL

HELP

UK AVERAGE EARNINGS ENTER NEW PHASE Average earnings growth % pa

LAST 20 YEARS

LAST 5 YEARS

2015 2016-

2019

3.3%

2.0%

3.4%

4.2%

3.2%

2.8%

2.7%

2.3%

2.4%

1.6%

2.3%

2.4%

1.9%

2.2%

2.3%

London

Eastern

South East

South West

Wales

WestMidlands

EastMidlands

Yorkshire& Humber

NorthWest

NorthEast

Scotland

LAST 20 YEARS

LAST 5 YEARS

2015 2016-

2019

2.3%2.4%

0.6%

2.6%

Source: JLL, Oxford Economics

Source: JLL, Oxford Economics Source: JLL, Oxford Economics

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Underlying issuesWe are all too well aware of the underlying problems facing the UK housing market.

These fundamentally derive from high house prices relative to incomes and include raising a sufficient deposit, mortgage affordability and a lack of housing. Unfortunately, all of these issues have some form of dampening effect and look likely to remain with us for many years.

Interest rate worriesA potential increase in mortgage rates over the next few years is a key concern for new and existing homeowners as well as for the stability of the UK housing market and economy.

There has been plenty of conjecture and some scaremongering about the impact of interest rate rises but all the evidence seems to suggest that, in the main, most households will cope.

The first point to note is that mortgage rates will not rise by the same amount as increases in the base rate, so there will be an automatic cushion effect to any base rate increases (see chart).

A recent JLL and Ipsos MORI survey asked households which costs they were worried about over the next three years. The results are shown in the graphic opposite and reveal

that households are most concerned about the basics such as food and household bills with mortgage and rent costs down as only the fourth greatest concern. This suggests that household finances will flex to ensure mortgage and rent costs are paid with compromises made elsewhere.

A recent CML and YouGov survey also supports this view. This survey revealed that only 6% of households thought they might be in serious financial difficulty over the next three years (see chart) and that 60% of mortgagees expected their finances to be in a similar or improved state in three years time despite anticipating interest rate rises.

So although interest rate rises are likely over the next few years, evidence suggests that the vast majority of households will more than manage.

Irresponsible lendingTighter lending criteria have been introduced following the Mortgage Market Review (MMR) in order to ensure that the problems encountered during the recent global financial crisis are not repeated. A more recent restriction on the proportion of high loan to income lending written by lenders has also been implemented.

The principal target is lenders themselves but the ultimate impact will be on borrowers. We expect a clearer picture to form over the next 6-12 months as to how these are affecting house prices and transactions.

The Government has a difficult task in balancing the desire to discourage irresponsible lending and households becoming overstretched with the risk that not enough people will be able to afford to buy with house prices at current levels.

Recent behaviour suggests, however, that despite tighter lending rules, the Government is still intent on encouraging more new buyers.

Buying costsHigh home buying and home moving costs are certainly dampening activity in the UK housing market. The key culprits are deposits and stamp duty.

This problem has escalated over time because, along with house prices, stamp duty and deposit costs have soared disproportionately compared with incomes.

Perversely, a key consequence of high buying costs is that the number of properties on the market is lower and, ultimately, house prices are higher due to an exaggerated imbalance between demand and available supply.

DAMPENING INFLUENCESVarious influences are likely to constrain UK house price growth and restrain turnover over the forthcoming five years. These range from

underlying issues like high house prices relative to average incomes to more recent tighter lending initiatives.

DAMPENING HOUSING MARKET INFLUENCES

Source: JLL, CML & YouGov

RISING INTEREST

RATES

LENDINGCONSTRAINTS

RAISING ADEPOSIT

HOUSE PRICES

TOO HIGH

HIGH HOME BUYING AND

HOME MOVING COSTS

Source: JLL, Ipsos MORI

34%

29%

26%

21%

20%

MORTGAGE OR RENT

LEISURE & HOLIDAYS

HOME MOVING OR BUYING COSTS

MAJOR PURCHASES

SAVINGS

HOUSEHOLD BILLS & FOOD

MORTGAGE RATES WILL NOT RISE AS FAST AS THE BASE RATE

Source: JLL, Oxford Economics

AVERAGE MORTAGE RATE BASE RATE

HOUSEHOLDS MOST WORRIED ABOUT BASICS % of survey respondents stating which costs they are most worried about over next three years. (Does not sum to 100% due to multiple selections).

HOUSEHOLD FINANCES LOOK QUITE FLEXIBLE A CML & YouGov survey asked households how they expected their finances to be in three years time. (Remaining 8% said “Don’t know”).

15%

INT

ER

ES

T R

AT

E %

0

1

2

3

4

5

6

2014 20172015 20182016 2019

1

4

5

2

3

6%6%

21%

41%

18%

1 Serious difficulty

2 Slight difficulty

3 Neither in difficulty nor healthy

4 Healthy

5 Very healthy

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2015 election yearAs we enter 2015 we expect external factors to be broadly supportive of the UK housing market.

The UK economy will start to look more stable. Employment levels will improve, people will feel more secure in their jobs and more comfortable about moving jobs, while meaningful wage increases will become the norm. Households will be more confident in their futures and this will encourage them to buy homes.

The general election in May will obviously draw attention away from the housing market, but our research of past elections reveals that the housing market generally continues along its existing path. For the majority, perhaps with the exception of higher value properties in London in recent times, the outcome of a general election will not govern whether people buy, sell, upsize or downsize, and because the house buying process is long, most households will not defer their actions based on the outcome of an election.

The main dampener for the UK housing market in 2015 will be the likelihood of a base rate rise. Current projections are that the base rate will rise from 0.5% to 1.5% by the end of 2015. The problems of affordability,

raising a deposit and being able to secure a mortgage, given the new regulations, will also rein back activity and price growth.

We anticipate that the UK housing market will be approaching 2015 in a pretty healthy state. The buoyancy from early to mid 2014 will have subsided and been replaced by a more subdued and stable marketplace. Our 2015 forecasts are shown in the charts opposite.

2016-2019 outlookCome 2016, a new Government will be firmly established with the next four years pretty well mapped out in terms of policy direction.

The UK economy will be at cruising speed, so barring any ad-hoc external events, the medium-term outlook should be looking more secure and positive.

This should encourage yet further activity in the UK housing market and result in upward price pressures too, especially given an insufficient housing supply response. There should be more home movers as well as first-time buyers.

There will still be external support in the form of Help to Buy, which is not scheduled to run out until 2020, but

with MMR, LTI ratios, affordability and deposit issues continuing to apply the brakes, price growth and a strong rise in transactions is likely to be contained.

Regional variationsThe three broad regions which will see differences are the various sub-markets of London, south east locations and the rest of the UK.

We address London in detail a little later in this report, but the outlook for the south east regions is better than the UK. Affordability is less stretched than in London but these locations are still driven by the strong London economy given that so many residents work in the Capital.

In the remainder of the UK, employment markets will certainly be improved from crisis levels but wage levels and growth will be more subdued. However, households will be feeling more positive and confident about the future. Affordability will be less stretched for the majority, especially compared with London, so we expect modest positive price growth over the next few years (see page 22).

There will also be regional outperformers with prosperous urban centres such as Manchester, Leeds and Bristol worthy of particular note.

OUR FORECASTSWe are forecasting a pretty steady UK housing market over the next few

years. The recent highs and lows should be behind us with a stronger and more stable economy the bedrock to housing market fortunes.

UK HOUSE PRICE GROWTH FORECASTS% change pa

UK HOUSING TRANSACTIONSNumber pa

5.1%LAST 20 YEARS

1.4%LAST 5 YEARS

5%5% 4%4% 3%2015 2016 2017 2018 2019

ENGLAND HOUSING COMPLETIONSNumber pa

1.23mLAST 20 YEARS

0.93mLAST 5 YEARS1.32m

2017

1.31m

2018

1.31m

2019

1.30m

2016

1.28m

2015

Source: JLL

Source: JLL

Source: JLL

2015

135k2016

145k

20192017

150k

2018

150k

140kLAST 20 YEARS

114kLAST 5 YEARS

150k

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2014 has seen an important shift, both in rhetoric and in policy terms, towards solving the UK’s housing supply problem. Specifically, this is a crisis of affordability and it is a messy and emotive issue that pits economic success, with a global orientation, against the need – some would say ‘right’ – for decent homes for local people.

As we noted in our mid-year market update, the blame game that at various times has targeted housebuilders, the planning system, political antipathy and NIMBYist activism, amongst others, has moved on towards solutions.

Public polling has consistently placed housing affordability at or near the very top of the voting agenda and politicians seem to have collectively taken notice. Looking towards 2015 and beyond, solutions are being proposed, promised and in some cases already enacted.

However, there is a problem.

The scale of the UK’s supply challenge – something close to 250,000 homesper year – means that much of what is being proposed is merely a brick in the wall. However, collectively, and with cross-party support, the range of supply solutions may actually make a real difference.

We examine the main supply solutions for their efficacy and challenge the lofty sums attached to these ideas. Some, as you will see, can make a material difference. Others look more like the emperor’s new clothes and will fall well short of aspiration.

RESIDENTIAL RESEARCH

ADAM CHALLIS

THE SUPPLY CONUNDRUM

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2 Help to BuyHas performed well ahead of expectations and is a good example of Government acting decisively with policy to good effect. Close to 35,000 homes have now been transacted through the programme, supporting both first-time buyers and the housebuilding sector. It will run until 2020, at which time our forecasts suggest close to 110,000 homes could be enabled by the programme, circa 15,000 per annum.

3 Garden CitiesThe 2014 Wolfson Prize centred on the opportunity to reimagine Garden Cities to solve today’s housing crisis. With 279 entries, the £250,000 competition attracted widespread interest and media coverage. However, immediately following the winner’s announcement, Housing Minister MP Brandon Lewis publicly stated that the Government was unwilling to take forward the winning proposal for a

doubling of up to 40 existing towns under Garden City principles, despite having declared open support for a new Garden City at Ebbsfleet.

This decision weakens the perception that the current Government has the resolve to take on a new generation of new towns, avoiding the failure of Labour’s ‘Eco-towns’ under the previous Government.

As a delivery model, Garden Cities are land-hungry and it would take considerable political resolve to impose this on what consistently proves to be an extremely vocal local electorate.

1 Permitted development rightsOffice to residential conversions have been increasingly popular in locations where the arbitrage between the two uses has been widest. However, a paltry ten schemes are either under construction or have been delivered so far in London. Although we expect over 10,000 units may be delivered across the UK through

this route, there are fears that it is merely a method to circumvent the full planning process. Consultation to extend, potentially permanently, the PDR programme has been met with widespread concern as it represents an erosion of the role that the planning system undertakes to control appropriate development.

CUMULATIVE HELP TO BUY EQUITY LOANSEquity loans (April 2013 to August 2014)

2,019

4,090

5,388

3,983

3,258

2,535

3,9613,510 London

Eastern

South East

South West

Wales

WestMidlands

EastMidlands

Yorkshire& Humber

NorthWest

NorthEast

Scotland

3,524

Schemes under construction*

10

Schemes in planning pipeline*

*London only

150

Source: JLL, DCLG

THE BIG IDEAS: DO THEY ADD UP BASED ON CURRENT CAPACITY AND PLANS?

Solution Party support

Target delivery (total units)

Estimated delivery (total units)

Comment

1 Office to residential/PDR

No specific target 10,000 - 11,000 Conversion rate of PP to U/C suggests scheme not working; at least not yet

2 Help to Buy No specific target 110,000 35,000 in first 18 months; rate will slow

3 Garden Cities Conservatives; 10,000 at Ebbsfleet, Lib Dems;

45,000 over 3 locations, Labour; believe 500,000

can be enabled

Negligible on genuinely

‘new’ sites

Wolfson Prize winner ‘will not be adopted’ by

Government

4 Small developer fund

15,000 5,000 £500 million fund; take-up has been slow

5 Build to Rent No specific target, up to 30,000 in planning

pipeline

20,000 £1 billion fund; high % independent

of scheme

6 Housing Zones 50,000 in London, additional 50,000

across UK

10,000 £400 million in London, £200 million for 30 zones

outside London

7 Densities & towers

No specific target 50,000 Big contribution, but narrow product mix

(ie flats)

Conservatives Labour Liberal Democrats UKIP

Source: JLL


THE SOLUTIONS - UNPICKED

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4 Small developer fundThis £500 million programme gives support to small and medium-sized enterprises (SMEs). It will provide loans to smaller developers that will unlock 15,000 housing units currently stalled due to difficulty in accessing finance.

Funding will run over two years to 2017, but this short window is far too narrow to address any of the systemic challenges that are reflected in the high barriers to entry for small builders in the sector.

Unfortunately, the loss of SMEs in the sector has been staggering and impacts on competition and product diversity as well as net contribution to supply.

125B2R planned or U/C schemes

20,000 Planned or U/C units

30,000 Potential B2R units

5 Build to RentThe ambitious £1 billion fund was launched as a direct result of the Montague Review, which looked at institutional investment in the private rented sector.

The HCA confirms that all of the monies will be allocated to projects from the Round 1 and 2 bid process by the end of 2014. Funds are being administered and bids evaluated by the Private Rented Sector Task Force, which has a mandate that will conclude in March 2015.

In addition to the Build to Rent fund, a wider programme of development is being supported by what is estimated to be well over £10 billion of capital that is targeted at the sector.

As the sector has evolved, it is clear that the real opportunity for patient capital seeking stronger yields is outside Central London and, in many cases, outside London altogether.

Yields can be significantly enhanced in regional cities and, as values improve, we are seeing considerable momentum behind a move ‘beyond the M25’. Recent JLL research suggests that there are as many as 125 schemes representing as much as 20,000 units on the basis of Build to Rent which are either planned or under construction in the UK.

DECLINE IN NUMBER OF SME HOUSEBUILDERS6 Housing Zones

The GLA’s newest scheme to enable greater volumes of housing delivery on large sites is the creation of up to 20 Housing Zones, each capable of delivering at least 1,000 units. London local authorities are obligated to bid for funding, with a total of £400 million being made available for viable masterplans that require further enabling investment.

This could include new or enhanced public transport infrastructure, Compulsory Purchase Order (CPO) funding, or other investment where deliverability and value for money can be maximised. At least half of this funding will be in the form of repayable investment, with the remainder on flexible terms including, potentially, some grant funding.

It is expected that the Housing Zones will enable the delivery of up to 50,000 homes over the next decade. Currently, local authorities are being invited to tender bids for the designation of a Housing Zone.

The HCA Housing Zones programme seeks to achieve a similar number of new homes outside London, with a funding pot of £200 million.

7 Densities & towersPart of the solution, particularly with the renewed drive to deliver homes on brownfield land, is increasing densities in appropriate locations. This is not without its controversies as some view the emergence of tall buildings as a blight on urban viewlines, particularly near historic sites.

By definition this means a reliance on flats to make up the vast majority of units, narrowing the mix and choice for consumers, particularly with larger households.

In London, the industry has responded, with 39 schemes under construction but over 100 with planning permission. Elsewhere, tall buildings will make up part of the delivery mix in major centres, but are proving challenging from a viability perspective in many locations.

39Towers underconstructionin London

104Towers withplanning permissionin London

“In principle, cities have enough brownfield land

to accommodate housing need, but residents would have to get comfortable with a much more dense

urban environment.”

0

20

40

60

80

100

120

140

1-30 units* 31-100 units* 101-500 units* 501+ units*

IND

EX

(20

06

= 1

00

)

20132012201120102009200820072006

Source: JLL, NHBC *annual delivery

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Plenty of possible solutionsCross-party resolve will be one of the most important parts of any long-term housing supply solution for the UK. Many of the programmes noted on the previous pages are hampered by a time-limited approach; they address short-term constraints but do not provide the industry with structural support that will enable higher rates of supply in the long-term.

Housing Zones are perhaps one of the stronger programmes, with a combination of central Government support but with bespoke solutions for each location. There are many more initiatives that could have been included; for example, an opening up of the greenbelt or the Conservatives’ new programme to support first-time buyers with 20% discounts.

The NPPF is already widely believed to have made improvements to the speed of the planning system; releasing public land somewhat less of a contribution to future supply thus far. Each could be a part of the overall solution but, as ever, political commitment over successive Governments will be the determining factor of any long-term success in improving the UK’s ability to deliver new homes.

In that context, decentralisation appears to be creeping onto the political agenda for the next parliament, meaning local authority support and capacity will be a vital part of any delivery programme that genuinely works. And this perhaps will be the most important issue for any new Government. The range of initiatives to boost supply are

producing, or will produce, a net gain. However, it remains unclear whether communities will appreciate or even want this activity.

More questions than answers?A more localised framework for housing delivery will increasingly mean that local politicians, with more personal connections with voters, will need to build support for new housing initiatives.

Our JLL and Ipsos MORI commissioned survey suggests that the job may get harder, not easier, in the short-term.

As an industry are we doing enough to demonstrate the benefits of new housing investment for local communities? Are we prepared to shift from a Westminster battleground to Town Hall engagement? This will be the landscape of housing delivery that begins in 2015.

Or is it a monkey puzzle?The good news is this ever-changing swill of delivery-focused housing initiatives will be upheld in principle by whatever form of Government we see after May 2015. The bad news is this probably won’t help much; certainly not in the long-term.

Private housing build cost inflation is reportedly running at circa 6-8% pa (Source: JLL, ONS) and while this persists, there will be limited industry appetite to significantly raise the bar on volume. In short, the housebuilding industry is now biased more towards margin preservation than volume of delivery and there is no way that the larger housebuilders can make up

the slack. Supply chains will take up to 24 months to normalise, meaning Government programmes may be forcing the entire industry to tilt into the wind.

Building resilienceUnfortunately, this all means that our forecasts for new home completions make for disappointing reading. Structural market challenges tend to be the harbinger of innovation and this may be the time for modern methods of construction to really make changes to the UK’s delivery landscape. Could it be that by trying to build more, building better is one of the outcomes? There is no question that sustainability in housebuilding needs to become fashionable again; all the better if there is a strong commercial imperative to support it.

Political ambitions are one thing, but market realities are never far away. Right-sizing the industry to meet England’s need for a quarter of a million homes each year must be about more than throwing ideas and money at the problem. A lasting solution needs to address the skills shortage and to find a way for housing delivery to be more resilient from market cycles. There is a big potential role for Registered Providers here, many of whom are becoming ever more commercial and ambitious with private market delivery programmes.

It took the country a long-time to recognize the scale of the housing delivery problem. The solutions need to be quicker at being forthcoming - and they largely aren’t the ones currently on the table.


SOLVING THE RIDDLE

NIMBYISM ALIVE AND WELLResidents were asked whether they thought enough housing was being built locally and nationallyFigures show % of respondents who agree we are not building enough homes

This sentiment is highest amongst Londoners (59%) and amongst renters (60%)

61%52%LOCALLY NATIONALLY

ENGLAND HOUSING COMPLETIONSNumber pa

Source: JLL

2015

135k2016

145k

2017

150k

2018

150k

2019

150k

1

428%

5

20%

2

31%

330%

47%

14

2

3

27%35%

32%

28%

THE MOST IMPORTANT PROBLEMS FACING THE HOUSING MARKET IN BRITAIN TODAYDoes not sum to 100% due to multiple selections

THE HIGHEST HOUSING MARKET PRIORITY FOR GOVERNMENT SHOULD BEDoes not sum to 100% due to multiple selections

1 House prices too high

2 Size of deposits/cost of mortgages

3 Lack of social housing

4 Rents too high

5 Not enough new homes being built

1 Building affordable homes

2 Reducing the number of empty homes

3 Making it easier for first-time buyers

4 Improving run-down estates and neighbourhoods

Source: JLL, Ipsos MORI Source: JLL, Ipsos MORI

Source: JLL, Ipsos MORI

This sentiment is higher amongst people aged 55-75 (67%), Greater London (72%) and social tenants (73%)

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LONDON OUTLOOK

The London housing market has become very complex. There have always been sub-sectors, but never a time when so many

segregations are needed to analyse current and future prospects.

Higher or lowerThe key initial question is whether London will see higher or lower house price growth compared with other parts of the UK.

The principal argument for weaker price growth is that London property is already expensive, especially relative to average incomes, and that further gains will eventually take prices beyond the reach of too many Londoners, ultimately constraining further increases.

The main counterargument is that London is the engine room of the UK economy and will see the strongest employment and population growth.

Both are valid, but we tend to think that London’s powerhouse economy will be the dominant factor over the next five years.

Different LondonBroadly speaking, London needs to be segregated into four main areas. Firstly there is outer London, where pricing is generally lowest and most affordable for ordinary folk. Then there is inner London which is more expensive and predominantly the domain of the reasonably affluent. The third area is Central London, which is pretty expensive and homes the wealthy and upwardly mobile, and finally there is Prime Central London, the enclave of the super-rich.

With affordability, wealth, demographics and taxation key differentiators, these markets hold different prospects.

Inner and outer LondonWe see the most significant impact on London housing over the next few years coming from the sheer volume of ‘ordinary’ people who will benefit from an expanded labour force and higher salaries. London’s population, for example, is expected to grow by around half a million over the next five years.

With affordability becoming increasingly stretched, many first-time buyers are being forced to look further afield to find suitable accommodation, while existing homeowners wishing to trade-up are also having to look outward. Parental support for those fortunate enough ‘ordinary’ people will also boost demand, especially in outer London.

Consequently, we are expecting housing demand to be particularly strong in outer London where property is most affordable, and although housing delivery will also be greatest here, we believe that upward price pressures will be highest in outer London over the next five years.

Housing demand in inner London will also be strong, benefiting from a combination of new buyers able to purchase in these locations as well as households displaced from the more expensive markets in Central London, but price growth may be a little below outer London.

Central and Prime Central LondonTaxation issues have dominated the Prime Central London and Central London development markets over the past few years. A crackdown on corporate envelopes, higher stamp duty, capital gains tax for overseas sellers, and now mansion tax proposals, have all infiltrated the market.

Whether a mansion tax, in whatever form, is implemented or not it is likely to stay on the political agenda for several years and will therefore play a part in decision-making. Because we do not know the exact details of any of the political party’s intentions, nor which party will form the next Government, it is impossible to forecast what the impact will be on the market.

In our forecasts we have assumed some detrimental impact from the mansion tax, whether imposed via a not too onerous council tax change or because it lingers despite not being implemented. If Labour comes to power and imposes high rates of mansion tax, our forecasts for price growth in the £2m+ market will have to be lowered.

In the mind map opposite we present some of the factors and influences that might play a part in the Central London market over the next few years.

Aggregate demand to hold firmVery importantly, we do not see an aggregate decline in demand for London residential property. What we do anticipate is heightened demand in the sub £2m market with a little less in higher price ranges (see mind map).

Importantly too, and despite all the recent tax issues, there are still many very good reasons to buy and invest in London. The wealth preservation and safe haven benefits will still be key for many.

In summary, we expect house price growth in Central London will be highest in the sub £½m, £½-1m and £1-2m brackets, weakest in the £2-5m range, with the £5m+ market somewhere in-between. A full set of our forecasts is shown on page 22.

AGGREGATE DEMAND LARGELY

UNAFFECTEDBUT

SHIFT TOWARDS LOWER VALUE

PURCHASES

Overseas buyers prefer flats to houses

‘English’ buyers prefer

housesMost renters

will be in the sub £2m

bracketInvestors

favour flats over houses

Investors prefer sub £2m

properties

Pied-à-terre buyers favour

sub £2m properties

Investors will be more opposed to

higher annual taxation

Sub £2m market adversely

affected where price could push

above £2m

Sub £2m market boosted

by displaced demand from £2m+ market

Some £2m+ properties may

be split into multiple,

smaller units

Developers will limit the

proportion of £2-5m units

Disputes over property

values

Lower turnover as transaction levels decline, especially

in £2m+ market

BUYER PREFERENCES

£5-10m market partially affected

£10m+ properties owned by

HNWIs largely unaffected

£2-5m available supply increased

as cash-rich, income-poor owners sell

SEGMENT C

ON

SE

QU

EN

CE

S

BR

OA

D M

AR

KE

T CO

NSEQUENCES

CENTRAL AND PRIME CENTRAL LONDON INFLUENCERS AND DIFFERENTIATORS

What will be the influences and implications over the next five years?Where we mention “sub £2m” this refers to property that is unlikely to move into the £2m+ bracket over the next 5-10 years.

UK

RE

SID

EN

TIA

L FO

RE

CA

ST

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20

RENTAL FORECASTSThe private rented sector will continue to be the most active housing tenure in the UK over the next five years. However, we do not expect

rental growth to be particularly aggressive since many renters have little capacity to pay more and many will also endeavour to keep housing

costs to a minimum in order to save to buy.

Activity shiftThe private rented sector has expanded significantly over the past 10 years, now accounting for around 4.0m or 18% of England’s households (see chart).

The reasons for this escalation have been well documented and are led by the arguments that housing is too expensive to buy for new entrants, especially given mortgage constraints and deposit requirements. The Help to Buy Equity Loan scheme has helped almost 35,000 people buy a home since April 2013, but this has barely affected the need for rental accommodation.

The lack of activity in the sales market in recent years, especially from first-time buyers, has combined with the rise of renters to such an extent that the private rented sector is now by far the most active housing sector in England.

Until the mid-2000s, around 40% of all house moves were people buying a home, with a similar proportion renting. But this balance has shifted so that almost 60% of all home moves in 2012-13 were private renters with less than 25% homeowners (see chart).

Demand set to riseOver the next five years we expect aggregate demand for rented properties to increase further. A key driving force will be an improved economy and a rise in jobs. With the

difficulties of getting onto the housing ladder not abating, a significant proportion of these new jobholders will have to rent.

The supply of rental property is difficult to track, so an analysis of demand versus supply is also tricky. Overall, the availability of rental product is quite responsive to market forces. If landlords are struggling to find tenants or are not happy with their investment returns then they will choose to sell, when possible. Similarly, if returns are favourable and rental demand strong, this will encourage more investors to buy.

So, broadly speaking, a lack of or an abundance of available rental supply rarely lasts more than a few months so there is unlikely to be any medium-term supply-side boost to rental values.

Modest upward rental pressureThese demand and supply forces suggest that there will be some upward pressure on rents. However, rental levels are far more flexible than house prices. A trend in recent years has been that households have relocated to cheaper areas while others have downsized, all with the aim of keeping their rental costs low, often with the ultimate goal of saving more towards a home deposit.

Also key is that renters typically pay a higher percentage of their income in rent than home owners do in mortgage costs. This factor leaves less scope for significantly higher rents despite a rise in demand and spending capacity.

This dynamic has already been evident over the past few years with the number of renters increasing but rents rising by less than 4% pa.

We believe that these dynamics will continue in the short to medium term and we are forecasting rental growth of 2-3% pa across the UK.

LondonWe expect London to see slightly stronger rental growth than the UK as a whole. This is principally because London will see a higher rate of job and population gains, but with the constraint that Londoners are prepared to move to save on housing costs. This should restrain rental growth as a whole, but will also mean that rental growth in outer London locations is likely to be stronger than areas closer to the centre.

40%Of renters pay more than 40% of their income in housing costs compared with just 7% for mortgagees

CE

NT

RA

L LON

DO

N D

EV

ELO

PM

EN

TPRIVATE RENTED SECTOR EXPANDING Number and % of English households in the private rented sector

4.0m

2013

(18%)2.2m

2003

(11%)1.8m

1993

(9%)

UK RENTAL GROWTH FORECASTS% change pa

LITTLE ROOM FOR FURTHER RENT RISES

Source: JLL, English Housing Survey

Source: JLL

PRIVATE RENTALS NOW THE MOST ACTIVE HOUSING SECTOR


PRIVATE RENTERS OWNER-OCCUPIERS SOCIAL RENTERS

0

10

20

30

40

50

70

60

1996-

1997

2000-

2001

2004-

2005

2008-

2009

2012-

2013

% O

F R

EC

EN

T M

OV

ER

S


RENTERS MORTGAGEES

0

10

20

30

40

50

70

60

% O

F H

OU

SE

HO

LDS

0-20%of income

20-40%of income

40%+of income

2 %21⁄2015

2 %21⁄2016

3%2017

2 %21⁄2019

2 %21⁄2018

Increase in UK rental values forecast in 2015

2 %21⁄

UK

RE

SID

EN

TIA

L FO

RE

CA

ST

S

23

UK

RE

SID

EN

TIA

L FO

RE

CA

ST

S

HOUSE PRICE GROWTH (% pa) 2015 2016 2017 2018 2019 2015-2019*

Prime Central London 1.5 4.0 4.5 4.5 4.0 19.9

Central London Developments 4.0 5.5 5.5 5.0 4.0 26.4

Greater London 5.5 6.0 6.0 5.0 4.0 29.4

South East 5.0 6.0 5.5 4.5 3.5 27.0

Eastern 5.0 5.5 5.5 4.0 3.5 25.8

South West 4.0 5.0 5.5 4.0 3.5 24.0

East Midlands 3.0 5.0 5.0 4.0 3.0 21.6

West Midlands 3.5 5.0 4.5 3.5 2.5 20.5

Yorkshire & The Humber 3.5 4.5 4.5 3.5 2.5 19.9

North West 3.5 5.0 5.0 4.0 3.0 22.2

North East 3.0 4.0 4.0 3.0 2.0 17.0

Wales 3.0 4.0 4.5 3.0 2.5 18.2

Scotland 3.5 4.0 4.0 3.5 3.0 19.3

UK 4.0 5.0 5.0 4.0 3.0 22.8

RENTAL GROWTH (% pa) 2015 2016 2017 2018 2019 2015-2019*

Prime Central London 2.5 3.0 3.5 3.0 2.5 15.4

Central London Developments 3.0 3.0 3.5 3.0 3.0 16.5

Greater London 3.5 3.5 4.0 3.5 3.0 18.8

UK 2.5 2.5 3.0 2.5 2.5 13.7

ACTIVITY AND DEVELOPMENT (000s) 2015 2016 2017 2018 2019 2015-2019*

UK transactions 1,280 1,300 1,320 1,310 1,310 6,520

England housing completions 135 145 150 150 150 730

London housing completions 21 24 24 23 23 115

OUR FORECASTS

* 2015-2019 cumulative figures

THE FINAL WORD

“An improving economic backdrop, a generally supportive Government and demand that seems inclined to carry on driving transactions - despite affordability challenges looming - all suggest that the market is leaning towards a period of sustained, stable improvement. But unless we can make serious inroads into meeting the UK’s long-term supply requirements, that stability will be on shaky ground.

And here’s the rub. Despite a range of supportive Government programmes, builders ultimately need to build and supply chains are likely to take another couple of years before ‘normality’ can resume. Will this choke off supply growth? Will this spur innovations like off-site construction or the use of new materials? Where will sustainability fit in; squeezed as ever between regulation and profitability?

Even in calmer waters, a level of uncertainty always lurks beneath.”

Adam Challis JLL Head of Residential Research

26.4%

4%

5.3%pa

150,000pa

Central London Developments cumulative price growth

UK price growth in 2015

Greater London five-year average price growth

England housing completions by 2017

STANDOUT STATISTICS

2015 weak pending election outcome; slow return to price growth returns as policy turbulence settles.

Improved employment and income growth; interest rate rises and mortgage constraints all frame improving but stable market conditions.

Strong housing demand as London economy improves. Outer London locations benefiting; most as buyers seek more affordable areas.

Improving but aspiration constrained by supply chain challenges.

With 300 professionals operating from a comprehensive network of UK regional offices, the Residential team at JLL is the most comprehensive full service advisor in the market.

This is our New Residential Thinking.Join the discussion on twitter @NeilChegwidden / @Adam_Challis / @JLLUKResi

jll.co.uk/residentialCOPYRIGHT © JONES LANG LASALLE IP, INC. 2014. This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Jones Lang LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.

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ADAM CHALLIS


HEAD OF RESIDENTIAL

ANDREW FROST



NEIL CHEGWIDDEN

Documents

The Supply Conundrum