The Soaring Cost of Housing in London: An Economic Analysis

London house prices have reached dizzying heights in recent years, fueling concerns over housing affordability in one of the world's most desirable cities. This article examines the economic forces driving London's housing costs upward and the risks posed by sky-high prices.

London House Prices: How High and Why?

The average home in London costs £364,000, more than double the £192,000 national average in England and Wales. Prices in posh neighborhoods like Kensington can top £1 million.

This premium reflects London's attractiveness as a global hub for business, culture and immigration. The city's strong job market, urban amenities, and investor interest buoy demand. London prices have risen at nearly 8% annually since 2009 as population and incomes grow.

Housing supplies haven't kept pace, constrained by scarce land and rigid planning rules. This mismatch between surging demand and lagging supply pushes prices up.

The Risks of Unaffordable Housing

Rising prices have outpaced earnings growth, making homes increasingly unaffordable for average Londoners. With homes selling for nearly 10 times incomes, most first-time buyers need large deposits and parental help.

Surging prices may also presage instability. London saw house price crashes in the early 1990s and 2008. As interest rates and mortgage costs rise, indebted homeowners could be vulnerable.

There are also concerns that foreign investors are inflating a speculative bubble in London property. However, overseas buyers account for only a small fraction of sales.

Increasing Supply is Critical

Easing London's housing crunch will require boosting supply. More permissive planning rules and faster development approval could help builders respond to price signals.

Although no quick fixes exist, London policymakers are focused on reforms to curb price growth and make housing more affordable. More construction and thoughtful regulations are key to ensuring London remains open and welcoming to all.