The falls in central London’s luxury property prices could make housing even less affordable

Oh good, more of this. Image: Getty.

All the signs point to a slow-down in the London property market. Central London house prices dropped by 6.8 per cent between 2015 and 2016, while the numbers of new homes under construction plummeted by 75 per cent. The problem is located almost entirely at the top of the market, with sales transactions collapsing by 86 per cent for properties worth more than £10m.

Central London property values are eye-watering, far beyond the reach of most working London households. A fall in house prices might be welcome as a way to make housing more affordable.

But unfortunately, the perverse incentives at play in the way housing is built mean that a slow-down in the market for luxury flats in Kensington & Chelsea can mean less affordable housing is built, not more – and the consequences may be felt right across the country. There are three main drivers of this:

  • There will be less money for affordable housing where private developers stop building;
  • The way land is traded reduces incentives to build anything other than luxury flats;
  • Developers will build more slowly, reducing supply.

Let’s consider them in turn.

There will be less money for affordable housing where private developers stop building

Grants from central government used to fund almost all the costs of building new affordable housing. This meant that when private development experienced a down-turn, social development could step in to fill some of the gap, keeping builders building and having a stabilising influence on the market as a whole. Such grants funded 75 per cent of affordable housing development costs in the early 1990s – but now fund just 14 per cent.

The majority of finance for new affordable developments now comes in the form of Section 106 agreements: payments or land given by private developers in return for planning permission from the council to build profitable market housing. So the more private development there is in a local area, the more money there should be to subsidise affordable housing for rent or sale.

As affordable housing has become increasingly dependent on Section 106 agreements rather than grant funding, any decline in new construction affects the whole of housing supply, including the bits we care most about – genuinely affordable homes for ordinary families. This means that, unless the slow-down in luxury property development in central London can be balanced out by other kinds of private developer activity, there will be less finance available for affordable housing in the capital.


The way land is traded reduces incentives to build anything other than luxury flats.

That shouldn’t be a problem: there is a huge need for more housing across the country, and especially in London. If luxury flats are getting harder to sell, developers should be able to build and sell something else and still make a profit. Right?

The problem is land. Landowners, advised by their agents, sell their sites for the highest possible price, based on extracting the greatest commercial value from the land. In the case of central London, this often means more luxury flats. Once developers have paid sky-high prices for land on this basis, the only profitable option open to them is to actually build those luxury flats and sell them for the highest possible price.

In this way, the price of land distorts construction away from meeting housing need. Estate agents Savills estimate that 58 per cent of housing need in London is for homes costing less than £450 per square foot – but such homes represent just 25 per cent of new builds planned between now and 2021. On the other hand, 2015-16 saw a significant oversupply of luxury flats as developers tried to recoup the high cost of land, with 1.6 starts for every 1 sale of a home priced above £1000 per square foot.

Developers will build more slowly, reducing supply

But if the bottom has fallen out of the land market surely developers and landlords will readjust? Sadly not. Most landowners are likely to hold on to their assets in anticipation of recovery in the most profitable luxury market, rather than accepting a lower price that would allow different kinds of homes to be built.

In the current market, developers have invested heavily in land for luxury housing. If they build and sell these homes at a lower price, or if they build something else for a lower sale price, they risk not making back the money they spent on that land. Many developers will now instead choose to hold on to the land, restricting supply in an attempt to bolster prices, waiting out the market and building out slowly when prices start to recover. This will put even more pressure on housing supply and on affordability.

So what do we need to do?

We need to create a situation in which developers are incentivised to build affordable homes, not just luxury flats, to meet housing need across the country.

Shelter’s New Civic Housebuilding report sets out a vision for how we can achieve the new homes we need, based on clearer and lower land values. We’re calling on central government to update the rules on land valuation and enable public bodies to use their land holdings to build more affordable homes.

In these ways, we can provide land at prices which enable development to respond to housing need, not just the highest bidder.

Rose Grayston is senior policy officer at Shelter, on whose blog this article originally appeared.

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What do new business rates pilots tell us about government’s appetite for devolution?

Sheffield Town Hall, 1897. Image: Hulton Archive/Getty.

There have been big question marks about any future devolution of business rates ever since the last general election stopped the legislation in its tracks.

Not only did it not make its way to the statute book before the pre-election cut off, it was nowhere to be seen in the Queen’s Speech, suggesting the Government had gone cold on the idea. (This scenario was complicated further recently by the introduction of a private members’ bill on business rates by Conservative MP Peter Bone, details of which remain scarce.)

However, regardless of the situation with legislation, the government’s announcement in recent days of a pilot phase of reforms suggests that business rates devolution will go ahead after all. DCLG has invited local authorities to take part in a pilot scheme which will allow volunteer authorities to retain 100 per cent of the business rates growth they generate locally. (It also notes that a further three pilots are currently in operation as they were set up under the last government.)

There are two interesting things in this announcement that give some insight on how the government would like to push the reform forward.

The first is that only authorities that come forward with their neighbours with a proposal to pool all business rates raised into one pot across a wider geography will be considered. This suggests that pooling is likely to be strongly encouraged under the new system, even more considering that the initial position was to give power to the Secretary of State to form pools unilaterally.

The second is that pooled authorities are given free rein to propose their own local arrangements. This includes determining, where applicable, a tier split (i.e. rates distribution between districts and counties), a plan for distributing additional growth across the pool, and how this will be managed between authorities.

It’s the second which is most interesting. Although current pools already have the ability to decide for some of their arrangements, it’s fair to say that the Theresa May-led government has been much less bullish on devolution than George Osborne in particular was, with policies having a much greater ‘top down’ feel to them (for example, the Industrial Strategy) rather than a move towards giving places the tools they need to support economic growth in their areas. So the decision to allow local authorities to come up with proposed arrangements feels like a change in approach from the centre.


Of course, the point of a pilot is to test different arrangements, and the outcomes of this experiment will be used to shape any future reform of the business rates system. Given the complexity of the system and the multitude of options for reform, this seems like a sensible approach to take. But it remains to be seen whether the complex reform of a national system can be led from the bottom up. In effect, making sure this local governance is driven by common growth objectives, rather than individual authorities’ interests, will be essential.

Nonetheless, the government’s reaffirmation of its commitment to business rates to devolution and its willingness to test new approaches is welcome. Given that the UK is one of the most centralised countries in the western world, moves to allow local authorities to keep at least some of the tax revenue that is generated in their area is a step forward in giving places more autonomy over how they spend their money. That interest in changing this appears to have been whetted once more is encouraging.

There are, however, a number of other issues with the current business rates system which need to be ironed out. Centre for Cities is currently working on a briefing of the business rates system, building on our previous work in this area, and we’ll be making suggestions as to how the system can be improved.

Hugo Bessis is a researcher for the Centre for Cities, on whose blog this article originally appeared.

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