1Why building homes in the UK’s most successful cities matters for the economy

Demand for housing in the UK’s most economically successful cities has risen inexorably over the last three decades. Globalisation of trade, reduced transport costs and a restructuring of the economy has led to business investment, better paid jobs and wealth concentrating on those cities which have retained a highly skilled workforce. This growing demand is reflected in rising house prices.

But house-building is not responding to this demand, as Table 1 shows. London is estimated to need between 49,000 and to 65,00012 homes (or 17 to 23 new Olympic Villages) a year,13 but there were only 18,000 homes built in 2013/14.14 In fact, between 2008 and 2013, there were relatively more homes built in Barnsley15 (second most affordable city in Great Britain in which to buy a house given local incomes) than in London or Oxford (the least affordable cities). 16

The failure to build more homes in the country’s most successful cities has a significant impact on individuals. It drives up the cost of housing and makes it unaffordable for people to live and work there. Expensive housing reduces people’s mobility, a key component of helping people access opportunities, as well as a city’s and the country’s economy. When house prices vary as much as they do in the UK, it means people who wish to do so cannot move to more productive cities to take up new jobs, or start a business.

The rising costs of housing in economically successful cities – at least in part a result of planning policy decisions – has also seen homeowners’ wealth grow much faster than elsewhere. Subsequently, they will have greater access to capital through borrowing collateral or equity release. Indeed, for many homeowners in successful cities an annual rise in house prices ‘earns’ more than their income.17 Clearly there is a divergence in wealth between homeowners in these cities and ‘the rest’. This can widen inequalities with implications for the economy as well as individuals.

Businesses in the UK’s most productive cities are affected too. Expensive housing makes it difficult for businesses to set up and trade from the most successful cities and makes it more challenging for firms to access the workforce they need. Therefore workers find it harder to find the jobs that best match their skills. The London Chamber of Commerce now highlights housing costs as the biggest threat to economic competitiveness.18 More than half of London businesses say the cost of and access to housing is impairing recruitment, particularly for entry level roles19 (this is also the case in Bristol20 and Oxford21).

Housing costs also affect the amount of money people have to spend in those cities. Businesses must pay higher wages to keep their workers, reflecting their cost of living. For individuals, even though incomes may be higher in those cities, those who can afford to live there are forced to spend a much larger amount of that income on housing, rather than in local restaurants, shops or services.

In contrast, areas which allow for more house-building – like Milton Keynes22 – have lower living costs, which frees up more income for expenditure on things other than housing. A worker in Milton Keynes earns on average £28,600 whilst the average house price is £209,600. While a worker in London earns a significantly higher average wage, £33,000,23 the average cost of a house is more than double, £458,400.24 Therefore a Londoner moving to Milton Keynes will – despite taking a 14 per cent pay cut – likely enjoy a higher disposable income.

Ultimately a lack of house-building in high demand and unaffordable cities impacts on the national economy. Research from economist Enrico Moretti shows that there are significant productivity and welfare gains at the national level from enabling people to live in, or near to, a country’s most successful cities. The study found a lack of new housing in the most productive US cities between 1964 and 2009 meant that national output was 13 per cent lower than it could have been at the end of this period.25 In the UK, three of the top five most productive cities are also amongst the least affordable cities26 to own a house in (Figure 1) – the exceptions being Aberdeen and Milton Keynes.

Figure 2: Affordability of housing in UK cities


Source: Land Registry (2014), Price Paid Data 2013. Registers of Scotland, Residential properties volume and price data 2013.  ONS (2013), Annual Survey of Hours and Earnings (ASHE), average gross weekly residence based earnings 2012 and 2013 data. Contains Ordinance Survey data © Crown Copyright and database right 2014.

This is a problem that can be tackled, and the benefits of ensuring house-building matches demand for homes is evident in Milton Keynes. Not only has it been one of the UK’s strongest city economies in recent years, unlike other strongly performing cities, its house prices are below the English average. This is because supply has moved broadly in line with demand. The city had the strongest population growth of all UK cities (over 17 per cent) between 2001 and 2011. But alongside this growing demand, housing stock increased by 18 per cent.27 This has made it easier for people to access the homes and jobs that sustain the city’s economy.

As the Milton Keynes example shows, housing of the right type and quality, in the right place, can attract and retain residents, supporting jobs and the city economy. But the under-supply of homes has been a long-term and systemic problem for the UK. Overcoming this and building the homes that many places and people need requires bold national as well as local political leadership. Cities need to evaluate their local areas to consider different types of land that is close to existing settlements, jobs and infrastructure and in an appropriate location for housing. This requires a more flexible approach to the designation and use of land, one that considers the merits of land irrespective of its past planning designation.

Figure 1: Planning needs to use land prices to better reflect demand

Strategic Housing Market Assessment (SHMA) figures are usually calculated on the basis of household projections and adjusted for delivery of affordable houses, to address past under-provision, and to support expected growth in jobs. However, this calculation of ‘need’ does not always fully reflect the spill-over demand from the UK’s most successful cities.28

Although land prices are taken into account for SHMAs, Cheshire and Sheppard suggest that planning authorities should distinguish the premium in land prices for different uses, using this as an indicator for the land use that is in demand.29


  • 12 Copeley, T (2013) Response to London SHMA http://tomcopley.com/wp-content/uploads/2014/02/Response-to-the-Draft-London-Housing-Strategy.pdf. Accessed 23 October 2014
  • 13 Greater London Authority, (2014) Homes for London: The London Housing Strategy. London: GLA. http://www.london.gov.uk/sites/default/files/Draft.pdf. Accessed 8 September 2014.
  • 14 DCLG, (2014) Live Tables on House Building, London: DCLG. https://www.gov.uk/government/statistical-data-sets/live-tables-on-house-building. Accessed 8 September 2014.
  • 15 Based on net aggregate compound housing stock change, see source of Figure 1.
  • 16 See source of Figure 1.
  • 17 Swinney, P, (2014) In which cities do houses ‘earn’ more than residents? Centre for Cities https://www.centreforcities.org/blog/2014/08/06/in-which-cities-do-houses-%E2%80%98earn%E2%80%99-more-than-residents/.
  • 18 London Chamber of Commerce and Industry, (2014) Getting our house in order: the impact of housing undersupply on London businesses, London: LCCI. http://www.londonchamber.co.uk/DocImages/12438.pdf. Accessed 2 September 2014.
  • 19 CBI and KPMG, (2014) London Business Survey, April 2014, London: CBI. http://www.cbi.org.uk/about-the-cbi/uk/london/london-business-survey/ Accessed 8 September 2014.
  • 20 Marshall, A., quoted in Allen, K. and Pickard, J., (2014) ‘London’s employers warn of economic effect of soaring housing costs’ Financial Times, 28 July 2014: In “Bristol employers have concerns because they can’t get people”.
  • 21 SQW, (2013) The Oxfordshire Innovation Engine: Realising the growth potential, Oxford: SQW. http://www.sqw.co.uk/files/2613/8690/7243/Oxford_engine.pdf. Accessed 1 September 2014.
  • 22 Although Milton Keynes’ economy is intrinsically linked to London, Centre for Cities analysis of Census 2011 data finds only 7.8% of residents commute to London PUA from Milton Keynes PUA.
  • 23 Centre for Cities, (2014). Cities Outlook 2014. London: Centre for Cities
  • 24 Average price 2013, Land Registry 2013, Market Trend Data, Price Paid, 2013 data.
  • 25 Moretti, E and Hsieh, CT., (2014) Growth in Cities and Countries: Working paper, July 2014, Cambridge, MA: National Bureau of Economic Research. http://users.nber.org/~confer/2014/SI2014/EFJK/Hsieh_Moretti.pdf. Accessed12 September 2014.
  • 26 GVA per worker 2012, Centre for Cities, (2014) Cities Factbook. London: Centre for Cities
  • 27 Centre for Cities, (2014) Cities Outlook 2014, London: Centre for Cities
  • 28 Tilley, K., (2014). ‘London Region Housing Shortfall to Reach 1 million by 2036’. Planning, 15 October 2014. http://www.planningresource.co.uk/article/1317248/london-region-housing-shortfall-to-reach-1-million-2036.
  • 29 Cheshire P & Sheppard S (2005) ‘The introduction of price signals into land use planning decision-making: a proposal’ Urban Studies 42 (4) pp. 647-663