The number of new homes being built in London could halve in the coming years as a result of rising construction costs and development taxes, worsening an already severe supply crunch, according to the boss of the capital’s biggest developer.
“[New-build housing] starts have halved since 2015 and could halve again . . . with the inflation in build costs that we have seen, it makes schemes very hard to bring forward,” said Rob Perrins, chief executive of FTSE 100 developer Berkeley Group, which announced on Wednesday that its full-year profits had increased.
According to Molior London, which monitors construction in the capital, work started on 34,000 private housing units in 2015, and 17,000 last year. Those figures do not include affordable homes, the construction of which has increased in recent years.
A dwindling supply of new homes is the result of developers backing out of the capital, deterred by a competitive land market, cooling house price growth since 2015 and a directive from London mayor Sadiq Khan to build more affordable homes.
New challenges have emerged in the past year: the cost of some building materials has increased sharply because of supply chain disruption and Russia’s invasion of Ukraine, and the housing secretary Michael Gove has hit developers with new levies to pay for safety measures on flats.
Those additional costs are already causing some developers to pull out of projects and threaten to make future schemes unviable, said Perrins. He added that housebuilders were increasingly losing out in land auctions to warehouse developers, which have benefited from a boom in ecommerce during the pandemic.
“We’ve got sites we had hoped to bring forward in 2026-28. We have to think about how we make those viable . . . it’s very challenging. Property prices have risen but this [build cost inflation] can’t keep being passed through,” he said.
So far, extra build costs are being offset by rising house prices, he said. Berkeley posted a pre-tax profit of £552mn for the 12 months to the end of April, a 6.4 per cent increase on the previous year, even as operating expenses rose 18 per cent to £157mn.
The company, which claims to be responsible for one in 10 new homes built in London, said house prices in the city were unlikely to fall despite rising interest rates and inflation because of a chronic undersupply of housing.
“The economic and operating environment remains volatile with inflation, labour and materials shortages, interest rates and regulatory costs of development all having the potential to impact supply and demand,” said Berkeley.
But “the ongoing undersupply of housing” meant that, even in such a challenging environment, demand was outstripping supply, added the builder.
Shares in the company fell 2 per cent on Wednesday morning.