London’s Rent Crisis, Continued

Sevin Karabulut

The previous blog largely centred around the increasing gap between demand for housing in London relative to supply, which in turn, has drastically increased rent for tenants in London. This blog will continue to develop the issue of London’s rent crisis and explore the potential solutions through supply-side and government policies. Content from Week 1 on BUS208 Microeconomics for Managers will be used to discuss how increasing the supply of housing would create a balance between demand and supply, and thus alleviate the issue at hand.

Before discussing potential solutions, this blog will first begin by explaining how an increase in supply will reduce the prices of rent in London, using economic theory. 

As discussed previously, Graph 1 illustrates a shift in demand from D to D1, which moves equilibrium from E1 to E2. This is precisely the issue in London’s rental market; demand is increasing yet the supply of housing fails to increase. Moreover, the previous blog briefly discussed how interest rates have been reduced, which in theory should increase demand for mortgages and, consequently, reduce demand for renting. However, this is still far from the case since the demand side is only part of the issue, the main issue is supply as it is still constrained.

Graph 2 illustrates an increase in supply in response to the increase in demand. Equilibrium was last at E2 which gave price at P2 and quantity at Q2. Given that government policies focus on increasing output, supply could shift from S to S1, which would move equilibrium from E2 to E3, increasing quantity to Q3 and lowering price to P3.

Moving onto supply-side policies, the government could explore subsidising construction companies to increase incentives for them to increase the output of new homes built. The Building Cost Information Services Construction Data (BCIS) reports the the issue of construction companies’ lack of incentive to increase their output, following the findings from a survey of small, medium, and national housebuilders. They highlight how the ONS construction output figures record that in the second quarter of 2024, private new housing output saw a quarterly decrease of 0.8% and that the sector was down by 8.4% in the same quarter a year earlier (BCIS, 2024). Additionally, they record that the respondents of their survey largely attributed this to a change in costs; 38% pointed to an increase in material costs, one-quarter reported an increase in subcontractor costs, and 13% said they had experienced increased labour costs (BCIS, 2024). Therefore, subsidising these construction companies could address the lack of incentives as the subsidies would reduce the burden of the rising costs to the developers, making it more profitable for them to increase the output of new homes.

In conjunction with subsidies, the UK government must revise their Development Management (DM), formerly known as planning control. DM is the UK’s system of regulating land use and new buildings, where local authorities assess applications for new developments, land use changes, or building modifications. Its primary motive is to constrain development, for other motives, such as preserving green space. Currently, the UK government has very stringent rules concerning DM and who to give planning permission to, which in turn, discourages construction companies and developers from building new homes.

Map illustrates the designated Green Belt area surrounding London (Urbanist Architecture, 2024)

As mentioned, the UK government places great emphasis on preserving green space. Simply stating that the government should subsidise construction companies and reduce restrictions on DM to tackle London’s rent crisis would be too abstract as it overlooks the trade-offs involved in balancing environmental protection and infrastructure. The existence of the ‘Green Belt’ means that large cities, such as London, are restricted from not only expanding horizontally but also vertically (ie height restrictions on buildings). This is because, to protect the rural views from urbanism, construction companies find it difficult to get planning permission to build higher buildings. This ultimately means that the supply constraint in new homes will persist.

While the existence of the Green Belt protects valuable rural land, it also results in a clear opportunity cost. Fewer homes are built to preserve green space, thus it results in higher property prices, inevitably leading to increasing rent prices. Therefore, to tackle London’s rent crisis, policymakers should find solutions that respect both the environment and allow for urban growth.

References:

BCIS (2024) Latest movement in the private housing construction price index. Available at: https://bcis.co.uk/news/latest-movement-in-the-private-housing-construction-price-index/#:~:text=At%20the%20same%20time%2C%20ONS,same%20quarter%20a%20year%20earlier (Accessed: 02 October 2024).

Urbanist Architecture (2024) Green belt rules: What you need to know about the NPPF. Available at: https://urbanistarchitecture.co.uk/green-belt-rules-nppf/ (Accessed: 03 October 2024).

About the author

Sevin is a Business with Law student in her second year. With an interest in law, economics, and business operations, she will aim to explore ways the law influences economic policies and current affairs.

Contact details for any questions or collaboration: bs23254@qmul.ac.uk


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