May 13 (Bloomberg) -- In 2010, Nick Williams oversaw construction of luxury apartments at London’s One Hyde Park, where a penthouse valued at 175 million pounds ($297 million) sold last month.
Now he works at the other end of the property ladder, building discounted homes for those shut out of the boom.
Local officials have “realized the housing crisis for people who are neither rich nor poor is massive,” said Williams, operations director at Pocket Living Ltd., which uses interest-free credit from the city to build homes selling for about 20 percent below market value. “There’s a lot of pressure on us to deliver.”
In contrast to the $41.1 billion affordable-housing initiative announced this month by New York Mayor Bill de Blasio, London has opted for a piecemeal approach to taming home prices that have spiraled to records. The method has so far failed to meet Mayor Boris Johnson’s own expectations.
“The very fact that people above the median household income in London require subsidized housing is a strong indication of market failure,” said Andrew Heywood, a consultant who has researched housing for the Smith Institute, an organization that describes its mission as promoting a fairer society. “The housing market is fundamentally dysfunctional.”
Central London is the second-most expensive place in Europe to put a roof over your head after Monaco, according to broker Knight Frank LLP, and it’s getting worse.
Home prices in the U.K. capital rose about 17.7 percent in the year through February to an average of 458,000 pounds, the biggest increase since July 2007. That compares with an average of about 347,000 pounds in Sydney in March and 476,000 pounds in New York in the first quarter.
To fuel development, Johnson wants the U.K. Treasury to hand over surplus land for new construction. He’s advocating new infrastructure such as rail lines and an airport to the east of London that would facilitate homebuilding on the Heathrow Airport site and on hundreds of acres in Barking Riverside in the east and Old Oak Common in west London. He wants to set up a bank to lend as much as 200 million pounds to developers for about 3,000 homes to be leased at below-market rates for 10 years before being sold at their full value.
London’s mayor has set a target of building 42,000 homes a year, 17,000 of which would be sold or rented at a discount to market value, or for tenants receiving government assistance, according to a draft local government development plan. A shortage of properties is London’s biggest problem, he says.
The number of affordable and government-subsidized homes completed in London that were funded by the Greater London Authority fell about 45 percent to 8,709 in the year through March from the same period two years earlier, according to data compiled by the authority, which oversees spending by the mayor.
The city has “huge pressures and we need to meet them by building more homes,” Johnson said in an interview at a former hospital in the eastern Mile End district that will be developed to include homes for low-income workers.
London has 200,000 plots of land with approval for homes that haven’t yet been built, according to the mayor’s office.
New-home registrations -- a notice of intention to build -- rose 60 percent last year to 26,230, the highest in at least 26 years, according to the National House Building Council, a new home insurance and warranty provider. That’s still almost 16,000 below Johnson’s target.
The number of homes being built in the U.K. “has halved since the early 1970s -- largely due to local government all but ceasing housebuilding activity,” said Grainne Gilmore, head of U.K. residential research at Knight Frank. About 2,000 homes were completed by boroughs in the U.K. last year, a 99 percent drop from the 185,000 built in 1970, she said.
A lack of government-owned housing projects means “the majority who are lower income and employed will be in the private rented sector,” said London School of Economics professor Christine Whitehead, who studies housing. “They will be sharing, they will be living in significantly worse conditions and they will be paying 40 percent or more of their income in rent.”
At the national level, Prime Minister David Cameron’s coalition has encouraged home buying, providing mortgage guarantees and interest-free loans and allowing down payments as low as 5 percent. The plan has drawn warnings from the International Monetary Fund for fueling a possible bubble.
Four out of five Londoners think there’s a housing crisis, according to a London Councils’ poll in January. The city faces a shortfall of 21,500 homes a year for the next five years, most of it at the cheaper end of the market, broker Savills Plc said in a November report. Households earning less than 50,000 pounds a year make up 57 percent of the demand for homes, the broker said.
The median salary for a full-time worker in the city last year was 34,200 pounds, reflecting an increase of less than 1 percent. One in four households receives welfare payments to cover some or all of the cost of their housing costs, the Greater London Authority said in an April 8 report.
Just 155 affordable and government-assisted homes funded by the Greater London Authority in Westminster and the Royal Borough of Kensington and Chelsea, the U.K capital’s two most expensive boroughs, was completed from April through February, according to data compiled by the authority. That compares with 136 in the year through March 2013.
Mayfair, St. James’s
In Westminster, which includes the upscale districts of Mayfair and St. James’s, the average buyer of an affordable home in 2012 had a salary of about 40,000 pounds, according to a Freedom of Information Act request by Bloomberg News. Homes there sold for an average of about 910,000 pounds in February, more than 22 times the average salary of an affordable-home buyer there, according to the Land Registry.
The average applicant for an affordable home in the Royal Borough of Kensington and Chelsea, the U.K.’s most expensive area for housing, in 2012 earned almost 32,400 pounds, according to a separate Freedom of Information Act request. The average home in the borough sold for 1.24 million pounds in March, according to the Land Registry.
That’s where Pocket Living comes in.
The maximum price for a one-bedroom unit it builds is set by Johnson at 3 1/2 times the 66,000-pound earnings limit for eligibility, Williams said. The homes can be sold only to another eligible buyer, limiting value gains.
The 32 one-bedroom apartments Pocket Living built at Fermoy Road in the borough of Westminster went on the market for 230,000 pounds. That’s a saving of 170,000 pounds compared with the 400,000 pounds value for the average one-bedroom home on the street, according to property website Zoopla Ltd.
Working for developers CPC Group Ltd. and closely held Waterknights at One Hyde Park “is cutting edge in a certain sector,” Williams said. “Pocket Living is cutting edge in another part of the market.”
In Kentish Town, a neighborhood in north London, Pocket Living developed 22 apartments on the site of a former taxi- maintenance depot. Each home is about 38 square meters (410 square feet) with underfloor heating rather than radiators to maximize the living space.
Buyers of the affordable homes are more likely to be working for technology companies than financial-services firms, Williams said. “They’re not investment bankers.”
Still, Williams says the company is only a partial answer to the supply shortage. The developer already has 13,000 potential buyers on its database and only plans to complete 4,000 homes over the next decade using a 21.7 million-pound interest-free loan from the Greater London Authority.
London needs homes that fall between a college dormitory and a first apartment, former City of London planner Peter Rees said in a March interview. Developers could use Pocket Living’s model to provide homes that would be rented for less than the market value, he said.
“Returning to mass public housing isn’t going to work,” he said. “We do need to bring in a commercial private rented sector; it’s no good leaving it to just individuals to buy apartments and then rent them on to somebody else.”