By Victor Alarsa (firstname.lastname@example.org)
& Maria Wiedner (email@example.com)
We are living in the age of the City. Larger and denser cities are likelier to be more innovative and generate more wealth. For instance, as the population of a city increases by 100%, its residents get 115% more innovative, productive and hence 15% wealthier1. This attracts more people, which, in turn, makes the city larger, denser, more innovative, wealthier. This cycle continues up until a point when pollution, house unaffordability, traffic and crime outweigh the benefits of agglomeration, i.e. when a city becomes too large for its own sake.
Density in general is massively beneficial, for example in 2015, London represented 14% of the UK population but was responsible for 23% of its GDP. However, the virtuous cycle of agglomeration needs to be accompanied by a housing expansion, which many cities struggle with. In London, finding housing accommodation is a challenge; land is scarce and restrictions in planning permission deter new constructions. Demand, on the other hand, is further growing as people want to move to London where jobs are available and the clustering of people has made public goods such as entertainment, health and transport more accessible.
A few consequences of the shortage of supply for this high demand are2:
- The recorded number of rooms per person in London fell for the first time in the last hundred years, the turning point was in 2001
- In 2016, PwC produced regional tenure projections for 2025. Private renting is projected to catch up with owner occupation by 2025, going from 26% in 2011 to 39% in 2025
- The number of empty homes in London is far below its long-term average, from 5% in the 90s to a current rate of 1.7% out of the total stock
- Average house prices in London are five times greater than in the 1970’s, after adjusting for inflation
- London needs a minimum of 49,000 additional homes a year between 2015 and 2036 to meet its housing needs, but less than half of that is being delivered
The scarcity of new areas for developments in key zones of London is massive, but when we break down the housing price in more detail that is even more acute.
In 2008, the land in the UK accounted for 70% of the average house price, rising from 25% 50 years ago. In real terms, there has been a 1,500% increase in the cost of land since 1959, whereas, the average price of building a house, excluding land, rose by only 25% over the same period3, see graph below:
Source: New Economics Foundation
Due to the high level of demand for houses in London, the price is very high and continues to rise. Accordingly, the average house price increased from £83k in 1997 to £472k in 20164, an annual rate of 9.6% or accumulated growth of 469%. However, over the same period gross disposable income grew only 3.9% per year, totalling 106%. Therefore, house unaffordability has become one of the biggest constraints of future economic growth.
Source: Land Registry
The final question is: How to increase London supply given increased land values?
Increased density seems to be one of the answers, along with more relaxed provisions for residential conversions. Higher density on existing residential zones will mean lower house prices as supply will increase. However, this will also increase the need for demolitions which given the fragmented ownership of homes in London may be difficult to achieve. Another alternative would be building on top of existing residential buildings. A research by Knight Frank suggests that there is scope to build 41,000 rooftop homes in central London alone6 and upwards extensions have even received support from the local government in recent years.
 M. Batty, ‘A Theory of City Size’, Science, 21 Jun 2013: Vol. 340, Issue 6139, 1418 (http://science.sciencemag.org/content/340/6139/1418)
 Greater London Authority, “Housing in London 2018: The evidence base for the Mayor’s Housing Strategy”, July 2018, www.london.gov.uk (accessed on 01/12/2018)
 New Economics Foundation, ‘How the Broken Land Market Drivers our Housing Crisis’, 11 Apr 2018, https://neweconomics.org/2018/04/broken-land-market/
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