The Real Cost of London’s Housing Crisis for Britain’s Economy

London’s deepening housing crisis is no longer confined to the capital, it is now shaping the trajectory of the wider UK economy. While the city remains the country’s financial engine, accounting for nearly a quarter of national output, its economic growth has stalled since the 2008 financial crisis. Limited housing supply, unaffordable prices and increasingly complex regulations are collectively restraining labour mobility, productivity and business expansion across the UK.

A Broken Housing Market with National Consequences

London is falling far short of its housing targets. Just 30,000 new homes were completed in the year to June, far below the 88,000 annual target set to meet demand. The shortfall has contributed to record levels of homelessness and driven families out of the capital in search of affordable living.

This exodus is changing the geography of the British economy. Skilled workers, priced out of London, are relocating to regional cities such as Manchester, Birmingham and Leeds, where housing costs and commuting times are lower. Businesses are following suit: a growing share of financial and head-office roles are now based outside London, signalling a structural shift in where the UK’s economic activity is centred.

The result is a feedback loop: as workers leave, London’s productivity stagnates, limiting the UK’s overall economic growth. The capital’s housing pressures (once seen as a local issue) now act as a drag on national output and competitiveness.

Why the System is Stalling

The new-build sector, which should be part of the solution, is itself in decline. Data shows sales of private new homes in London have fallen to their lowest level since the global financial crisis. In the first half of 2025, only 3,946 private units were sold (a 30% drop year-on-year) with May marking a record low of just 19 new-build sales across the entire city.

Developers cite a combination of planning bottlenecks, rising construction costs and increasingly demanding regulatory frameworks as major obstacles. The post-Grenfell safety regime has introduced additional approval stages for taller buildings, while cladding compliance requirements continue to add cost and delay.

Affordability remains the most significant constraint. The average London home now costs over £500,000, requiring first-time buyers to save deposits exceeding £120,000. Meanwhile, the halving of the Stamp Duty threshold in 2025 has added roughly £7,000 to average purchase costs. Without upfront sales, many schemes struggle to secure financing, stalling delivery even further.

The Economic Stakes

The wider economic implications are substantial. According to independent forecasts, meeting London’s homebuilding target could inject around £40 billion into the UK economy by 2034 and boost long-term productivity by more than 5%. It could also raise average take-home pay for Londoners by approximately £3,700.

The Office for Budget Responsibility has estimated that building an additional 170,000 homes nationally could lift GDP by 0.2% by 2030, but London’s slowdown makes achieving that goal increasingly difficult. Without intervention, the capital’s housing shortage threatens to deepen a national productivity gap, limiting job creation, innovation and overall economic resilience.

Unlocking Growth Through Housing Reform

Policymakers and industry leaders are calling for a step change in housing delivery. Streamlined planning approvals, investment in affordable and intermediate homes and greater support for first-time buyers are seen as essential to restoring balance. Housebuilding is not just a social necessity, it is an economic imperative. Addressing London’s affordability crisis would strengthen the capital’s role as a global talent hub, support regional growth and help lift the UK out of its post-crisis stagnation.

Until then, the nation’s economic performance will remain tied to a housing market that is increasingly failing to meet demand.