An unattractive environment for investors
Tax changes and regulation have made matters worse. Previously, an investor buying a block of 10 flats was able to pay stamp duty based on the average price of each unit, rather than the total value of the entire building, thanks to multiple dwellings relief.
But in 2024, the Treasury scrapped this, and now a developer buying a £5m block of flats is taxed as if they are buying one £5m mansion, pushing them above the highest stamp duty threshold. This single change wrecked the viability of many London housing projects, wiping billions from the sector overnight.
The Renters’ Rights Act and the abolition of Section 21 “no-fault” evictions have also introduced fresh uncertainty about underwriting rental income, as tenants gain the right to challenge increases through a tribunal system that is already under strain.
“How you’re able to underwrite or predict any rental growth that you’re going to get is another [challenge],” says Butler.
Underlying all of this is a land market that refuses to correct.
In theory, when the cost of building goes up, landowners should drop their asking prices to keep development viable. In practice, those who don’t need to sell simply don’t – they hold on for better prices, or pass the land down to the next generation.
Pocket Living ran the numbers on what land would need to cost today for it to be able to build on the same financial terms as in 2020. Accounting for doubled finance costs, rising build prices and new regulatory levies, the answer was a 78pc fall in land values.
In reality, Rickard says that prices have dropped by around 40-50pc. While this is a meaningful correction, it is still far short of what developers need to make the sums work.
Inadequate support for first-time buyers
For the first time in 60 years, there is no government first-time-buyer support scheme. This is yet another obstacle for developers because it is much more difficult for aspiring buyers to purchase homes.
Mortgage rates have also jumped in recent years, making it even harder to borrow for a home purchase, and London rents have risen to levels at which saving a deposit is, for many working Londoners, simply out of reach.
