As the previous chapters have argued, the challenges posed by Brexit do not replace but rather amplify the growing pains that London has been suffering as a world city.  In many cases, they make tackling London’s chronic problems more urgent: if immigration and trading become more complex, will businesses and skilled workers be prepared to put up with London’s high costs of living, and congested public transport, for all its attractions?

As Chapter One set out, for 25 years the city’s mixture of openness, economic specialisation and cultural richness has proved an enticing blend. In recent years, however, the rise in living costs, and in particular the cost of housing, has begun to sour this mix. Brexit adds further uncertainty. While other push factors – including transport costs, congestion and air pollution – should not be discounted, housing costs loom largest in opinion polls on the biggest challenges facing Londoners and London businesses, so the next two chapters focus on what can be done to boost housing supply, and how a radically reformed local property tax system can raise funding for services and infrastructure, while moderating price inflation in London’s housing market.

London’s housing and infrastructure challenges

London’s house prices quickly recovered from the 2008/09 recession, increasing by 67 per cent over the past five years, five times faster than wages.[1] Buying or renting a home on the open market is becoming affordable to fewer and fewer Londoners, and more than three quarters of employers report concerns about the impact of housing costs on recruitment and retention[2]. Centre for London’s previous research identifies housing costs as the principal factor in widening disparities of income and wealth in the capital.[3]

The causes of this runaway growth, increasingly viewed as a cause for concern rather than celebration, have been much discussed. There has clearly been a shortfall in housing supply, which has generally added 20-30,000 net additional dwellings per year[4] against targets that have been raised from 32,000 to 50,000 since the first London Plan was issued in 2004.  Many culprits have been identified: the business model and structure of the housebuilding industry, complex and constrained sites, speculation and landbanking, or supply restriction by planners.

The other side of the equation has been demand; London residential property has looked like an excellent bet for domestic and international investors for some time. The property market is open and accessible, borrowing rates are extremely low, and the property tax system is a speculator’s dream. Property transactions are taxed heavily, but holding property is treated much more lightly. In addition, capital gains on principal residences are tax free for private individuals, and buy-to-let investors have been able to offset borrowing costs against rental income for tax purposes, while benefitting from annual capital appreciation of 10 per cent or more.

At the same time, London’s infrastructure is under increasing strain. Roads are as congested as they were before congestion charging was introduced, air quality is notoriously poor, and crowding on public transport is increasing – as a result of population growth, reducing private car use, and changing work and commuting patterns.[5]

While a number of improvements to London’s rail infrastructure– including Crossrail – are planned, the extra capacity these will create will be used up by 2020, and a significant increase in crowding on London transport is anticipated by 2031. The National Infrastructure Commission has recommended the implementation of Crossrail 2, connecting Northeast to Southwest London, to address this level of congestion, and open up capacity for 200,000 new homes. The scheme is estimated to cost £30 billion,[6] with Transport for London suggesting that 50 per cent of the costs could be met from London sources such as fares, business rate supplement, community infrastructure levy, council tax and property sales.[7] The scheme is awaiting government sign off of its business case.

Crossrail 2 is the most significant single item in London’s infrastructure needs. Analysis undertaken by Arup on the then Mayor of London’s 2050 Infrastructure Plan estimated that the total bill for infrastructure improvements would be £1,324 billion. Of this, around £1,000 billion would be for transport and housing, with around £135 billion ‘unfunded’. Other infrastructure costs – for energy, schools, water, waste, green and digital infrastructure – were assumed to be largely ‘unfunded’.[8]

Arup’s report concluded that unpredictable grant regimes were not capable of providing the certainty for long-term infrastructure planning, and recommended exploration of alternative funding models, including fiscal devolution: “As would be the case for Britain’s other major cities, London is likely to benefit from fiscal autonomy that matches continuous, stable funding streams with the ability to determine local need. Greater local control similarly should enhance political accountability, fiscal discipline and responsibility.”

How devolution can meet the infrastructure challenge

Meeting London’s infrastructure challenges will be essential if London is to retain its position as a leading global city that tackles chronic problems of poverty and exclusion as well as maintaining economic growth. The Mayor of London’s powers – of taxation and regulation – are limited, meaning that the city is reliant on making the case to the UK government for infrastructure investment. While London infrastructure schemes typically score well against HM Treasury business case metrics, the concentration of investment in the capital is politically contentious, especially given the perceived strength of London’s private sector.[9]

Debating the relative merits of investment in London and other parts of the UK risks being a zero-sum game, especially when fiscal constraint is continuing to put pressure on budgets as a whole. Centre for London has argued that, across a range of issues, devolution rather than central government diktat is the key to unlocking London’s potential without disadvantaging other regions.

Recent Centre for London reports have pushed for further devolution:

• Going Large, our report on bringing forward large sites, suggested that new types of partnership were required to enable up front infrastructure investment, and rapid build-out of schemes, and recommended clarity on local authorities powers to enter into new partnerships.[10] Our report on estate redevelopment, Another Storey, made an estimate of what could be achieved through redeveloping London’s estates, but also emphasised the need for consultation processes and compensation packages that treat all residents fairly and ensure adequate levels of social and affordable housing are built.[11]
• A number of reports have addressed the challenges of building sub-market housing, in a policy context that relies on developer contributions and the vagaries of viability assessments, rather than grant regimes, for the bulk of its funding. Our Intermediate Housing Commission report, Fair to Middling, looked at housing policies aimed at modest earners and found that many of these had little bite in London, recommending devolution of funding for Help to Buy, alongside the development of products that fitted London’s circumstances better.[12]
• More recently, Strength in Numbers argued for greater flexibility for local authorities in their ability to borrow and redeploy capital receipts to build more social and affordable housing, and for more collaboration between local authorities to maximise the numbers of homes built. [13] And In No Uncertain Terms argued that devolution of housing benefit to the Mayor of London, coupled with backing for a guarantee that rates would rise with inflation, could build another 250,000 affordable homes to rent.[14]
• Turning South London Orange made the case for the Mayor of London taking over suburban rail services in south London, enabling integrated management and investment in improvements that would unlock 13,000 new homes around stations. [15]

We are planning to further work, on the scope for increasing density in London’s established residential neighbourhoods, on the role that boroughs can play in leading the construction of new homes, and on the scope for precision off-site manufacturing to improve the speed and quality of house building in London.

Beyond these approaches, London may need to think more radically about land. For many years, de-industrialisation was seen as a plentiful source of ‘brownfield’ land, but London has lost such sites much faster than anticipated, and the next London Plan is expected to seek to restrain further loss. Another option is remodelling of the green belt, which has a growing number of advocates. Centre for London has not undertaken research on this issue, but any proposals for remodelling would need to be carefully managed to avoid land becoming the used for speculation or suburban sprawl rather than planned urban development. The current Mayor of London has ruled out greenbelt remodelling, though government policy is against it in any case; there is certainly a strong argument for future mayors of London being empowered to review the greenbelt, whether or not they use this power.

Finally, the Mayor should be enabled and encouraged to work more closely with London’s satellite towns and cities.  Since the abolition of regional planning in 2010, discussions between London and its neighbours have relied on the “duty to co-operate”. As London continues to grow, the potential for more formal and collaboration arrangements addressing a wider range of issues should be considered.

The next chapter reviews how a devolved and reformed tax system could be more progressive, productive and positive in terms of its impact on London’s property market, and its ability to support London infrastructure investment.

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Footnotes

[1] ONS. House Price Index, December 2016.

[2] Social Market Foundation (2016). London employers and assistance to employees with housing, 2016.WIPissuess receiving EU funding, allndon.and Inequality in London. Centre for London.

[3] Travers T., Sims S., Bosetti N. (2016). Housing and Inequality in London. Centre for London.

[5] DCLG (2016). LiveTable122: Housing supply; net additional dwellings, by local authority district, England 2001-02 to 2015-16.

[5] Martin E. (2016). Just how overcrowded has transport in London become? Business Analytics Blog. Capgemini.  WIPissuess receiving EU funding, allndon.and Inequality in London. Centre for London.

[6] WIPissuess receiving EU funding, allndon.and Inequality in London. Centre for London.Crossrail 2. Funding. How would Crossrail 2 be funded?

[7] National Infrastructure Commission (2016). Transport for a World City.

[8] Arup (2014). The cost of London’s long term infrastructure.

[9] Blakely, G. (2017). Paying for our progress: how will the Northern Powerhouse be financed and funded? IPPR North.

[10] Brown R. and Wilson B. (2016). Going Large: making the most of London’s large sites. Centre for London.

[11] Hanna K., Oduwaiye A. and Redman P. (2016). Another Storey: the real potential

 for estate regeneration. Centre for London.

[12] Hanna K. (2015). Fair to Middling: report of the Commission on Intermediate Housing. Centre for London.

[13] Barrett S. and Dilke T. (2017). Strength in Numbers: funding and building more affordable housing in London. Centre for London.

[14] Ratcliffe J. (2016). In No Uncertain Terms: securing long term investment for genuinely affordable homes. Centre for London.

[15] Sims S., Roberts J. and Wilson B. (2016). Turning South London Orange: reforming suburban rail to support London’s next wave of growth. Centre for London.