Britain’s housing crisis is, at root, a shortage in the places people need to live. That is why prices sit far above what it costs to build, why young people delay forming households, and why rents are so high. Tax tweaks could free up some extra homes, but they cannot deliver the volume of new homes we need. The durable fix, if we want to fuel economic growth, raise living standards and ease the cost of living, is to build much more where demand is highest. This is inevitably the locations where workers live to be close to good jobs.
A recent piece in the FT argued that a large rise in homebuilding would not make housing more affordable. Of course, in the short term, raising today’s low build rates won’t instantly meet need and therefore halt the zero-sum bidding up of housing stock. But the only way to bring prices back toward construction costs is a sustained increase in homes where demand is highest. Precisely because this takes time, we should start now. Take the lesson of nuclear energy as a case study — not starting in the early 2010s because it seemed “too slow” left the UK short of affordable power years later; housing works the same way.
The article points to the increased demand stimulated by decades of credit liberalisation and low interest rates, questioning whether there is a housing shortage by comparing build rates to population growth. It then argues that tax reform is the best way to fix affordability.
It is indeed correct that Britain’s property-tax regime is messy and could better capture uplift and improve allocation. It is of course true that credit availability and taxes influence who pays and how volatile prices are, but this fails to explain why prices have stayed this high for this long and the huge regional disparities. Prices only explode like this when supply is held back in the job-rich places where people want to live.
The result of this is clear: the UK finds itself in a unique position in which its house prices have pulled far further ahead of construction costs than those in comparable economies. But just how great is the supply gap that is driving this?
Source: Figure 6, The Urgent Need to Build More Homes, TBI
The scale of Britain’s shortage of homes
Compared with Western Europe, Britain is missing around 4.3 million homes — roughly 15% of the entire stock. That is a backlog built up over decades of underbuilding. In fact, our housebuilding rate collapsed after the mid-20th century and has never returned to the levels that once kept prices in check. This is both in terms of council homes, the numbers of which have dwindled for 50 years, and private homes, which have never returned to pre-war levels of building.
Source: Figure 1, The housebuilding crisis: The UK’s 4 million missing homes
The above chart highlights the scale of Britain’s home shortage, demonstrating the enormous drop-off in homebuilding. With such a gap in the homes we need, the government’s ambition of building 1.5 million homes by the end of this Parliament is vital.
It is key that those homes mainly get built where there is need. In many parts of the country, there is no significant shortage of market homes: the additional need is for social homes. But in London and the South East, market prices are far above construction costs, and private rents are sky-high.
Adding new homes in the places they are needed most can, if we are careful, also help to fund our ailing public services and infrastructure. This is because new housing schemes can be required to give planning contributions that pay for vital local services like school places, GP capacity, parks, and community centres. As more homes are built, the tax base grows and local businesses benefit from additional footfall and consumption. And because these homes are near transport, higher passenger numbers help sustain and improve local infrastructure. This is partnership in action — crowding in investment to deliver growth that translates directly into improved communities and living standards.
How supply impacts affordability
When there aren’t enough homes where people need them, prices and rents detach from build costs as people compete over scarce homes. Fortunately, the reverse is also true: in areas that build more homes, prices rise at a much slower rate.
Source: Figure 1, More Flexible Zoning Helps Contain Rising Rents
This dynamic helps us explain why England has a house price-to-income ratio of 8, much higher than the 1990s ratio of 4; and why private rent takes 36.3% of income nationally (and 41.6% in London). The failure to build more homes is a direct driver of over half a century of rising housing costs.
Source: Britain’s forgotten financial crisis, WiP
In the highest-demand areas — central and inner London, alongside core cities such as Bristol — the shortage bites hardest, with overcrowding at 11% in London and young people delaying household formation. This is a clear-cut scarcity premium.
Because supply in those places is tight, every demand shift, lower rates, easier credit, stronger local job markets, drives mostly in prices and rents, not more homes. That is why London and other job-rich cities have become more expensive. Building ‘somewhere else’ does not relieve this pressure: homes far from jobs and transport leave costs high for the workers and apprentices who fuel the growth we need.
The wider harms of underbuilding
Beyond sky-high housing costs, the spillover effects of Britain’s homes shortage are vast. Scarcity near high-wage labour markets holds back productivity and innovation because people cannot afford to live near the jobs they want.
The Housing Theory of Everything makes this exact case: that the housing crisis fuels a myriad of other social issues. Unaffordable housing drives economic inequality and financial instability, while restricting the ability of young people to form families and embed themselves in communities. This has arguably shattered the old social contract, in which people felt that they would be more prosperous than previous generations.
Making homes affordable
The practical remedy is to build in the high-demand areas until the gap between prices and build costs begins to shrink. That means unlocking well-designed homes with good public transport access and enabling density where residents opt in. In short, the only way we can improve affordability is by building the new homes we need where demand is greatest.
This sounds like quite a simple solution in theory. In practice, however, the powerful political constraint of local opposition has led governments of all stripes to get cold feet on building more homes. Many argue that government has two choices: enact unpopular legislation to build without local support, or shelve the housing agenda altogether and maintain political popularity. It is no surprise that governments pick the second option. But this is a false choice. Because the housing crisis is so severe, there are many win-win reforms to build homes with popular support.
Here are some of the most effective, mutually beneficial policies that would allow a vast number of new homes to be built:
- Estate renewal: expand London’s successful residential ballots to regenerate old council estates, improving the quality and number of our social homes.
- Upward extensions: make it simple to add extra storeys to existing buildings in keeping with existing style, enabling more bedrooms for growing families or even creating new flats without using more land.
- Street votes: allow residents to set a plan for their own street with design rules that, following a democratic vote, enables matching extensions or new homes.
- Greater Cambridge: build more homes in one of the UK’s most productive cities to meet the rising demand from workers and high-growth businesses.
- Residential annexes: green-light the building of residential annexes (ADUs or ‘granny bungalows’) to create a boom of new infill homes.
- Fix the Building Safety Regulator: a well-intentioned system has enormously slowed building starts, preventing the homes we need.
- Revitalise former industrial sites: release land on large, underused sites to both intensify industrial activity and build new homes.
- Alter London Plan rules: remove restrictive dual-aspect requirements and the arbitrary cap of eight homes per staircase core that are reducing the number of homes that can be built on sites.
By enacting these low-friction, high-impact reforms, the government could begin to close the supply gap to minimal political cost.
What change could look like
If the government continues with ambitious planning reform, the results will be transformational. Prices in high-demand areas will trend back toward build costs as scarcity eases. Overcrowding will fall and young-adult household formation will rise, showing we are adding homes where they are most needed.
Only by starting to shrink Britain’s chronic homes shortage would this change be possible.
The consequences of new homes and better places would be transformational. Every 100,000 homes built in London would add £50 billion to the economy, and would increase access to high wage jobs. The proceeds of this growth would free up the new investment in public services and infrastructure that is so vital to improving living standards.
Final thoughts
The FT is right that credit and taxes matter — but they matter because we have not built enough homes where people need them. If we enable new homes in the places people want to live, over time rents and prices will converge to more sensible levels, opportunity will widen, and we will see the gains in growth, health and family life that Britain needs. We do not make homes affordable by re-slicing a too-small pie. We make them affordable by getting Britain building again.
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