The fundamentals behind London’s current housing crisis and potential solution?


The assignment will consider the housing market within London, paying close attention to the housing policy and macro-economic conditions that have led to the current ‘crisis’ within the city’s housing market.It could be argued that a current shortage of housing developments, mainly in the more affordable range, coupled with a surge in international real-estate investment in the city has caused a major shortage, leading ultimately to price increases and so a divergence from housing markets within the North of the UK (Dyson, 2014) [Online].

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This assignment will first touch upon the policies that have led to this problem before looking into the recent macro-economic trends which have aggravated the issue, pushing into the spotlight.

The UK housing market has for some time been impacted by poor housing policy, with many arguing that levels of new construction have been unable to meet the surge in population growth and so demand for new houses.While this has become a more national problem, the south of England, most notably London has witnessed the greatest affect (Myers, 2012).

Property Overview

While the population of London has continued its growth given its rise in status as a ‘global business hub’, housing developments have been unable to supply the market with enough new properties, as well as properties which locals deem ‘affordable’.

While it can be noted that there are currently some significant developments within London such as the Battersea Power Plant regeneration, many have commented that these ?Million properties are being built with the wealthy oversea investors in mind over local buyers given that the prices asked are far out of reach of many workers (Renshaw, 2013) [Online]. While local councils have attempted to resolve this issue by pushing all developers to include a percentage of ‘affordable’ homes in their plans to win planning permission, many of these new developments are still primarily geared at the high-end of the market; with many developers advertising their properties in international markets (London First, 2014). This, along with major regeneration plans in some area’s which has prioritised commercial/ retail space over residential, has seriously restricted the potential for new housing for the local market and supported the price increases seen over the years. Furthermore, the central boroughs of London are also restricted by the availability of land to develop new homes, with new developments pushing higher for greater floor space. While this has become a popular method in London with new skyscrapers such as The Shard, these developments have usually favoured office and retail space over residential (Ball et al, 2012). What could be considered here is the desire by boroughs within London to re-generate and effectively create local centre’s to compete with the main areas of London. There has been significant discussion over the years regarding the ‘downfall’ of the UK high-streets as out of town competition and online shopping reduces the demand for typical bricks-and-mortar stores; in London the main issue for some could be the easy accessibility into the city centre and so the main shopping and entertainment districts. With this, local boroughs have prioritised the development on new commercial and office space in a bid to attract the private investment that would be needed to support larger regeneration plans and attract more people into the area, however as mentioned previously given the short supply of available land in some central boroughs this has led to an ‘opportunity cost’ between residential and commercial development.

London Crisis

The main issue for the market is a simply supply and demand crisis; essentially the market is severely under supplied, with prices been pushed up by the consumers willing to pay a higher price for the property. This has created a situation where the supply of affordable housing is quite inelastic and so any notable increase in demand will only result in the price moving higher. This has also led to another affect whereby prices have also increased strongly in the wider South-East area as commuters seek property in lower price areas with strong transport connections into London.

The supply crisis has also been heightened by another issue; namely strong international demand for property in London as an investment opportunity and store of wealth (Tower Hamlet Citizens, 2014). In 2008, the financial crisis hit global economics and stock-markets. With this, investors sought for new ‘safe-havens’ for their wealth as global stock markets remained volatile and the value of other havens such as gold fell. Property or investments in brick-and-mortar have always been popular, especially in economies like the UK where the market has remained buoyant over a number of years (Berry et al, 2011). London especially appealed to investors given its stock of high-value properties, increasing population, global image as a destination for the wealthy, falling corporation tax as well as a weakening currency which made investment into UK property cheaper for international investors. The economics behind this move has largely been driven by the desire to reduce risk but maintain returns on investments; given that London house prices were increasing at above 10%p.a (ONS, 2014), investors who had once favoured holding their cash in stock markets and commodities such as gold quickly moved their money into property as a store of wealth. This movement has recently been reversed to some extent as a strengthening ?GBP and improving global outlook have decreased demand for high-end properties in London at a time when a wave of new supply is hitting the market (Titcomb, 2014) [Online].

Potential Solutions

Moving forward, a number of factors have been put forward to help deal with the issue, focusing on new regulation and opportunities (London First, 2014). In terms of opportunity, London has been working to improve transport connections with wider area in a bid to open up more areas to potential commuters, essentially increasing the stock of housing that is available to anyone working within London, (Emmett, 2014). This would then lead to an increase in supply, which should help decrease prices. Notable projects include the Crossrail development, an ?18Billion transport project that will decrease commuter times into central London for a number of local boroughs (Crossrail, 2014) [Online].

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The proposed HS2-HS3 (high-speed rail) projects could also been seen as a new opportunity; giving more businesses the chance to open offices, facilities in other major UK cities such as Birmingham, Manchester, Leeds etc. while still having access to London. The main benefit on this is that it would move some business away from London as so reduce demand for housing from workers. Furthermore this project has also been seen as a way to reduce the heavily debated North/South divide within the UK, which in turn may help better align house prices between the two. In terms of regulation, a number of London boroughs have sought to effectively force developers to include affordable housing within their plans to be granted planning permission (Besley, 2010). Given this, new developments such as the Battersea Power Plant have included some affordable housing within their plans, however as they only account for 15% of total home some have argued the measure doesn’t go far enough to solve the supply issues (Robertson, 2014) [Online]. In economic terms, local boroughs have identified the profitability that developments in London provide; by asking developers to include some affordable housing within their plans they have affected the Net Present Value (hereafter NPV) or potential payback of the project, however given that projects are still being announced in the city it appears that developments still remain profitable for these companies. It could be argued by some that these new demands from the local authorities could be seen as interference within the free market, effectively using the private sector to provide a good (e.g. new homes) that the public sector has failed to provide. What this essay must also consider is that if that the public sector have done little themselves to attempt to resolve this issue, most probably down to a lack of capital and experience necessary to move forward with these large-scale developments and so requiring the need for the involvement of the private sector. As mentioned beforehand, the private sector will be driven by the eventual profitability or NPV of these projects and so local authorities must ensure that they still allow these profits to be made while also attempting to resolve the housing crisis. According to data from the ONS, home prices in London are up 31.6% above their 2008 peak, while those in the North remain under the 2008 level, (ONS, 2014).

Closing Remarks

To conclude the essay has shown that housing policy in London could have been seen as failing for a number of years as demand from a rising population has outgrown the level of new supply, pushing prices up much higher than the UK average (Savills, 2014). The issue has intensified recently as the global economic crisis increased the desire for international investors to hold their money in property, with London seen as a prime market given the weaker value of the ?GBP could with continuous price rises. While the essay has noted a number of initiatives underway to help increase supply and reduce demand, the potential impacts may be small and seen in a long-term scenario. While there is new infrastructure underway to improve the competitiveness and attractiveness of a wider London and also wider UK area; the Crossrail development will not come online until 2018, while the high-speed rail links are not current expected until after 2020. Furthermore, while local boroughs have attempted to increase regulation and push more affordable housing into development plans, these are only small percentages, with some people disagreeing on what will be deemed affordable. Moving forward the main issue for London will be developing the land that it currently has spare in the best way possible to accommodate its rising population but also its rising status as a global business hub – in this case, higher residential housing prices may be needed for developers to justify their construction over commercial or office space.


Ball, M, Lizieri, C and MacGregor, B (2012): The Economics of Commercial Property Markets, London, Routledge.

Berry, J, Deddis, N and McGreal, W (2011): Urban Regeneration, Property Investment and Development, London, Taylor & Francis.

Besley, T and Ghatak, M (2010): Property Rights and Economic Development. In Dani Rodrik and Mark Rosenzweig, Ed: Handbook of development economics, London, Elsevier Publications.

Crossrail, (2014) [Online]: A world class railway company, Available at, Accessed 29/10/2014.

Dyson, R (2014) [Online]: House prices: gap between London and the rest of the UK is highest in 40 years, Available at, Accessed 29/10/2014.

Emmett, S (2014): London Infrastructure: Outlook, London, Savills Research.

London First (2014): 12 steps to solving London’s housing crisis, London, London First.

Myers, D (2012): Economics and Property, London, Taylor & Francis.

ONS (2014): Comparison of regional house price indices before and after the financial crisis, London, ONS Research.

Renshaw, R (2013): Selling stampede at Battersea Power Station sets new record, Available at, Accessed 29/10/2014.

Robertson, L (2014) [Online]: No affordable housing in Battersea power plant development, Available at, Accessed 29/10/2014.

Savills (2014): Infrastructure and development must work together to accommodate London’s growing population, London, Savills Research.

Titcomb, J (2014): London House prices tipped to fall, Available at:, Accessed 29/10/2014.

Tower Hamlet Citizens (2014): A report on the housing crisis in one of London’s most expensive boroughs, London, Tower Hamlet Citizens.

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