Rental Prices, Cost of Living and Migration in London

Rental Prices, Cost of Living and Migration in London




The cost of living and the housing costs in London have been influenced by increased demand for houses. Moreover, immigration to United Kingdom (UK) has also increased the demand for houses. With high demand for houses compared to the supply, the cost of living and rental prices are expected to increase. In addition, the gap in housing costs for houses in London compared to the rest of England has continued to widen (Trust for London and New Policy Institute, 2016). Overcrowding, mainly in the private rented sector, has further increased becoming higher than the rest of the UK. London house prices have continued to overtake those in other parts the UK, with the average property gong for £500,000 annually (Anderson, 2015). Data by the Land Registry indicates that prices of houses increased by 9.percent in 2015, implying that the average London property price is estimated at costs £499,997. The increase in the costs of houses has been as a result of growth in the economic, improved earnings growth, low interest rates, and high levels of employment (Anderson, 2015).  The purpose of the report is to discuss about property prices, cost of living and migration in London from an economic viewpoint. The report provides information that can be used by people relocating into the United Kingdom especially London. 

The Economic Functioning 

a.     Demand and Supply 

The demand for housing market is partly driven by the desirable global city to move to for greater work, but is also driven by changes in population in terms of births and deaths. A survey conducted by the Boston Consulting Group (BCG) found that more workers around the world would like to come to London than any other places in spite of the cost of living (Williams, 2014). The report further showed that one in six of those participants (16%) wanted to work and live in London,  12.2% in New York, 8.9% in Paris, and 5.2% in Sydney (Kollewe, 2014). Also, the UK has emerged as the second-most attractive country for international workers, after the U.S. 

There is a close relationship between house prices and demand as explained by the income and substitution effect. For instance, the price of houses increased by 7% in 2015 to £531,000, it is expected to increase in recent months as result of increased demand (London Housing Market, 2016).  With a decline in the employment rate to 6.3% and continued growth of the London’s economy, there has been a change in the level of national income. Employment increase results to increase in income increase hence demand for the property. Moreover, when people have a high wages, they tend to switch from renting to home ownership. With this, the increase in demand for property is triggered. Since 1991 to 2014, the London’s population increased by 23% (equivalent of1.7 million) to approximately 8.6 million, while the households increased by 20% to 3.4 million (Marsden, 2015). Increase in population and households the demand for houses also increases, which is required to match the growing population. 

Change in supply is affected by factors such as price, price factors of production, costs, expected future prices, and technology.  Regarding house price, the relationship amongst supply and price is certain, with higher prices empowering supply. Rising prices of houses compel house developers to build more lodging, and existing proprietors are encouraged to sell.  According to Marsden (2015), when the demand is not adequately satisfied by the supply of housing, the housing costs and house prices are expected increase until when the advantages of living in London are higher compared by the costs. The emergence of new technology to build houses and building materials, then the supply of property is expected to increase, hence lowering the prices. As UK, especially London continues to be the most likeable and preferred city to work in, the price of housing may increase. Thus, supply can be driven by speculative price increase in the property market, leading to increased prices in the future. The figure below shows growth in population, housing stock, and households in London.


 Figure 1: Cumulative Growth in Population, Housing Stock, and Households in London. Source: Marsden (2015). 

Figure 1 is a combination of the patterns in the number of households, people, and homes in London since 1991. From the figure, all have increased in the recent years with growth in the number of households and populations have increasingly outperformed housing supply. The supply has remained subdued following the outcome of the recession. Moreover, between 1991 and 2014, housing stock in London has increased significantly from 516,000 to 3.4 million dwellings, which is an equivalent 22,435 homes per year (Marsden, 2015). London is facing a major challenge with regard to the provision of sufficient new homes required to meet the demand of the growing population. 

b.     Price mechanism 

The house prices in London though in renting, are cheap in purchasing because of low costs of credit. Low interests have increased ability to finance of home ownership and the cost of borrowing (Economist, 2014). The upward pressure on the price of housing market in the UK has increased the quantity of housing supplied in the market. In between 1998 to 2014, the numbers of London dwellings were slower compared to growth in the number of household, but this increased as a result of different attributes such as unregulated property prices in London. 

c.     Private Sector Incentives 

Long term unemployment harms to people and communities, it influences mental and physical wellbeing, and keeps down economic growth. With this, the private sectors incentives can provide housing to low and medium income earners.  In addition, incentives can bring down the costs of housing to more affordable rates. As demand for houses increase, the government can provide tax relief and incentives on land, building materials, and other requirements (Marsden, 2015). On the other hand, the removal of the empty property discounts from Council Tax has minimized the incentive for private property owners to file reports that their homes are empty. Lack of incentives increases the prices of houses in the long run. 

d.     Market equilibrium 

The both demand and supply reflect on house price and as all markets equilibrium price in London property market will happen at the price that matches current demand to accessible supply (Montiel, 2005). In the short run, supply is moderately inelastic given that it requires a long time to manufacture new houses. Henceforth, the increments demand have a particularly enormous impact on house price. Over time, demand for lodging in the UK has risen consistently while the supply has stayed stable (Montiel, 2005). UK house building lately has been one of the least in Europe, and this has added to the rising level of UK average house price. 

e.     Equilibrium Price and Quantity 

Balance between demand and supply results to the equilibrium price and quantity.

High prices, in the property market are a reflection of the connection of strong demand and inadequate supply (Mankiw, 2009). For instance, at current the market price, an increase in demand for the number of houses increases prices when fixed supply. Thus, the equilibrium of price and quantity can only be reached when houses supplied are equal to the demand needed. 

Demographic Demand Pattern and Expatriate Demand Pattern for Rental Property Market in London 

The demand for rental property market in London by expatriates continues to increase because it is their preferred choice. Savills World Research (2013) decrease in UK buyers has resulted to an increase in international purchases. The influx in overseas wealth has resulted to the increased demand for rental property in the UK. The report by Savills World Research (2013) has indicated that 46%) of Prime London sales and 65% of resales in London are made to international buyers. Trends in overseas buyers are presented in figure 2 below.


Figure 2: Trends in overseas buyers. Source: Savills World Research (2013) 

The figure 2 shows between 2005 and 2014, the demand for property in London increased from 23% to 40%. This is as a result of increased number of expatriates working and living in the UK. While the population of UK continues to increase, White British and other demographics have continued to exit London (Easton, 2013). The shift has been driven by the need for low prices properties outside London. 

Explanation of Possible Causes for and Effects of Shifts in Demand & Supply 

Speculation/buy to let: in spite of the volatile nature of the London’s housing market, housing continues to be an increasingly good investment (Pettinger, 2015). The returns related to purchase of a house are consistently high and have outperformed the stock market. As a result, the demand has shifted to the right, while supply has remained constant. For instance, in London, the demand for houses is high, especially from foreign nationals. The speculative increase in demand has been linked to increase in the high house prices, which are unsustainable and more likely to fall (Pettinger, 2015). However, the housing market in London is strongly priced, thus outperforming other regions. 

Relatively Low Interest rates: Low interest rates have increased house prices in the short term, making purchase of houses attractive compared to renting.

 Figure 3: UK Lending Rates: Source: Pettinger (2015). 

From figure 3, the interest rates have fallen from 15 percent to 0.5 percent in the UK since 1992, which makes cost of mortgage relatively lower. As a result, supply has moved further to the right as the demand for rented houses increases. 

Renting is London is Expensive: The cost of renting a house in London is high compared to incomes. The increased price of renting is a reflection of the fundamental imbalance between demand and supply, hence the experienced shift (Pettinger, 2015). 

Comparison with Cost of Living in another Major Global City 

Both London and New York are considered to have high cost of living because of their economy and geopolitical locations. Research by BCG consulting has showed that New York (12.2%) is the second preferred city after London (Kollewe, 2014). The cost of living in New York is higher than London in terms of transport, rent, clothing, utilities, among others as present below.


 Figure 4: Cost of Living Index. Source: Numbeo (2015). 

From figure 4 cost of living index in NY is high compared to London. This is because consumer prices, rent prices, restaurant prices, groceries prices, and local purchasing power are lower in London compared to the UK. 

  1. Own Price Elasticity: Because of the inverse link between price and the quantity demanded, own-price elasticity is high in NY compared to London. This is because consumer Prices in NY are 18.45 percent more than in London (Numbeo, 2015). Moreover, the rental prices in London remain high in relation to salaries (Bloomfield, 2016)
  2. Income Elasticity: The income elasticity of demand’ associated with housing in London is considerably positive which implies that that market demand for housing grows as people get employed. London has higher income elasticity, which means high demand for property compared to NY.  For instance, in 2014, more property were sold in London than in NY. 

 Market Failures for London Property Market and Intervention 

There are persistent market failures in the London property market as a result of the high prices. The ratio of house pricing to income continues to be very high, and this has restricted ownership of property in London compared to other regions (Economist, 2014). As a result supply of housing in London is inelastic, change in demand results to change in price. Any prediction and speculation on prices could result into market failures. High prices have forced people to shift to North and other cities for cheaper houses and property, hence failure of the market (Economist, 2014). 

Positive externalities also result to market failure in the London’s property market. For instance, good quality housing results to positive externalities, including improved public health, air pollution, reduced heating bills and reduced crime (Marsden, 2015; Munday, 2000). This can be associated with London, which has become attractive to even foreigners than any other city in the UK. 

To solve the price related market failures, the government can come up with measures which can reduce the situation in London. For instance, the government can come up with regulation the prices by having standard values for property in London. Subsequently, the regulation can have effect on construction costs, land prices, and house prices (Greater London Authority, 2003). 

Recommendations to the UK Government 

In order to relieve pressure mounted on the housing stock, the UK government can remove most-run housing estates and build new high-quality homes. This could reduce market failures associated with low-quality houses outside London.  The government of the UK could also commission new affordable houses and properties in four sites found outside London. The starter homes could reduce the supply pressure in London. 

The government can also implement policies to regulate pricing in London. Policies can increase supply substantially, to meet the demand. Government policies when acted on demand for housing demand via increased stamp duty, schemes like Help to Buy, and macroprudential policy can enhance affordability. Although the housing supply can be slow, it can with time meet the demand stock for property in the UK. Incentives such as tax relief on construction materials and land rates can also play an integral role in the property market. 


            Demand for housing and property in London, is higher compared to other cities in the UK. In addition, London is more preferred compared to other cities around the world like NY and Sydney. The increase in the costs of houses in London than other parts has been linked to economic growth, improved earnings growth, low interest rates, and high levels of employment. For instance, low interest rates have attracted people to purchase, rather than rent a house in London. Price and positive externalities are the two major forms of market failures experienced in London. The equilibrium of price and quantity can be realized when houses supplied are equal to the demand stock.  To rectify the problem, government policy, incentives, and commission of new and affordable houses outside London are required.


 References List

 Anderson, E. (2015). Average London house price hits £500,000 as capital's housing market shows no sign of losing steam. The Telegraph. [Online] Available at: < https://> (Accessed 12 Dec. 2016).

Bloomfield, R. (2016). Renting in London: Rents Fall for the First Time In Eight Years As Homes To Let Flood The Market. Homes & Property. [Online] Available at: <> (Accessed 12 Dec. 2016).

Easton, M. (2013). Why have the white British left London? BBC News. [Online] Available at: <> (Accessed 12 Dec. 2016).

Economist. (2014). Do British housing markets suffer from market failure? [Online] Available at: <> (Accessed 12 Dec. 2016).

Greater London Authority. (2003) Market failure and the London housing market. Greater London Authority, UK.

Kollewe, J. (2014). London voted most desired place in the world to work. The Guardian. [Online] Available at: <> (Accessed 12 Dec. 2016).

Mankiw, N. G. (2009). Principles of economics. Mason, OH: South-Western Cengage Learning.

Marsden, J. (2015). House Prices in London – an Economic Analysis of London’s Housing Market. [Online] Available at: <> (Accessed 12 Dec. 2016).

Montiel, P. J. (2005). Macroeconomics in Emerging Markets. Cambridge University Press.

Munday, S. C. R. (2000). Markets and market failure. Oxford: Heinemann.

Numbeo (2015). Cost of Living Comparison Between New York, NY and London. [Online] Available at: <> (Accessed 12 Dec. 2016). 

Pettinger, T. (2015) Why are UK house prices so high?. [Online] Available at: <> (Accessed 12 Dec. 2016).

Savills World Research. (2013). Spotlight The World in London. [Online] Available at: <> (Accessed 12 Dec. 2016).

Trust for London and New Policy Institute. (2016) Housing tenure trends in London. [Online] Available at: <> (Accessed 12 Dec. 2016).

Williams, C. (2014). London 'is most desirable global city to move to for work'. The Telegraph. [Online] Available at: <> (Accessed 12 Dec. 2016).

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