Research Paper

Market failure and the London housing market

May 2003 Contents

Introduction 1

1. Recent trends in house prices 3

2. The demand for and supply of housing 7

3. Cycles, expectations and bubbles 19

4. House building and planning 27

5. Affordability 37

Conclusion 47

Appendix: House price data sources 50

References 53

Introduction

The market for housing is highly complex…
London is a city of over three million dwellings. Its stock of housing is made up of a wide variety of different types – flats, houses, maisonettes, bungalows – and of tenures – owner occupied, shared ownership, privately rented, socially rented. Its stock is relatively old – the majority of London’s housing having been built before the Second World War. Indeed, the market for the purchase of property is almost entirely a second hand one – the amount of newly built housing in London in any one year represents a tiny proportion of the total stock (less than half a per cent).

London is also a very varied city – when you buy a property you are also buying its location in terms of the quality of its immediate environment, access to public transport and local services.

…and unique
For most people the purchase of a property is a highly infrequent activity. It is generally the most expensive purchase an individual will make during their lifetime and therefore entails borrowing a large sum of money. As a consequence the market for housing is inextricably connected to the market for finance – rates of interest play an important role. In addition, unlike most purchases people in London make, prices are to a certain extent negotiated.

Yet properties, as well as being places to live, are also seen as investments. In recent times house prices have increased rapidly, performing better than equity markets. However, as recently as the beginning of the 1990s the market witnessed falling prices with some house owners experiencing negative equity.

All these

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