London's Housing Crisis: Why Politics and Market Reality Are Worlds Apart

Labour's ambitious target of 1.5 million homes this parliament looks increasingly unattainable and nowhere is this more evident than in London. Despite policy reforms including changes to the NPPF, £39bn in affordable housing funding, and Grey Belt unlocking, the capital's housebuilding has ground to a halt.

The numbers are stark. In Q1 2025, just 1,210 new homes started construction across London, the lowest quarterly figure since the 2009 financial crisis. Twenty-three of London's 33 boroughs recorded zero housing starts. We're a million miles from the government's target of 88,000 homes annually for London.

The Economic Squeeze

London housebuilding was already challenging: expensive land, costly brownfield remediation, and complex logistics. Macro-economic headwinds have made it worse. Inflation has driven up labour and material costs, while rising interest rates have increased financing costs and mortgage rates, eroding both profitability and demand.

But it's the political decisions of recent years that have delivered the knockout blow.

Death by a Thousand Cuts

The fire safety requirements mandating second staircases in buildings above 18 metres haven't just reduced saleable floorspace, they've forced wholesale redesigns of previously consented schemes. The Building Safety Act introduced bureaucratic complexity that has overwhelmed the under-resourced Building Safety Regulator, creating application backlogs where processes meant to take weeks now stretch indefinitely. Add the Building Safety Levy, another tax on residential development, and the burden becomes crushing.

This sits atop an already extensive list of developer obligations: Community Infrastructure Levy, carbon offset charges, Section 106 contributions, and new Biodiversity Net Gain requirements. Tax changes targeting overseas and buy-to-let investors, increased stamp duty, and the end of Help to Buy have simultaneously squeezed both supply and demand.

Then there is affordable housing. The GLA's 35% affordable housing requirement, combined with late-stage review mechanisms that effectively cap developer profits, creates a toxic equation: developers carry all the risk with minimal upside potential. Unsurprisingly, lenders have walked away. Projects that stacked up financially just a few years ago are now unviable, and construction has stopped.

The Political Mindset

What's troubling is that London's politicians seem oblivious to this market shift. As a former Labour councillor in Hounslow, I understand the political logic perfectly. Since 2016, Labour's planning narrative was straightforward: support development that delivers affordable housing and community benefits. This created clear political dividing lines: Labour championing homes for ordinary people versus Conservative-era developments like Nine Elms, perceived as luxury blocks for overseas investors.

Money was cheap then, development was viable, and London was building. The politics worked because the economics worked.

Labour councillors still think this way. They see consented sites standing empty and assume land banking. When developers return to committees seeking to reduce affordable housing commitments, councillors feel conned, believing they're witnessing broken promises rather than recognising that changing market conditions have rendered projects undeliverable.

For most councillors, who do not follow changes in the housing market or planning policy closely, the fact that conditions have changed will have passed them by. Even if they are aware, it doesn’t change the political expectations of their voters, or the manifesto commitments they were elected on. 

The Ideological Trap

The abundance versus affordability debate highlights the problem. Many on the centre-left reject the argument that increasing supply will naturally reduce prices, viewing it as a decades-long solution that doesn't help those in immediate need. Instead, they advocate building more council homes and subsidised affordable housing, a defensible position that I shared.

But this has created impossible expectations. Councils, lacking funds to build directly, have used developers as quasi-public financing mechanisms, extracting everything from affordable homes to public realm improvements through planning obligations. But now developers have been squeezed beyond breaking point.

The obvious answer for centre-left politicians is simple: government should return to direct housebuilding, as it did until 1979. But there's not enough money for that either.

The Perverse Outcome

We've created a bizarre situation where greenfield development booms across the country while brownfield development, exactly where we need housing most urgently, has collapsed. This is the opposite of the brownfield-first approach required to address the crisis in London and the South East.

The gulf between what even pro-growth Labour politicians will support and what the market can deliver has become unbridgeable. Developer distrust runs deep, with many councillors still believing viability assessments are clever wheezes to boost profits rather than genuine attempts to make projects work.

The Way Forward

Something must give. Either the GLA and London councils need to relax their expectations of developers, politically toxic for Labour, or government must revisit the tax and regulatory changes that have broken the market.

Planning reform that goes further and faster now seems unlikely, but the Planning and Infrastructure Bill will mark a significant move in the right direction should it survive undiluted on its passage through Parliament. Stimulating demand makes many in Labour uncomfortable, fearing it will juice house prices rather than help those most in need. Help to Buy is still viewed as for the already well-off, in the hope they’d vote Conservative, rather than a genuine solution for those trapped in the rental market.

As Nick Cuff in his excellent blog on ‘Why London Stopped Building’ astutely observes: "Is there much distinction between a local politician who opposes new housing and a local politician that supports new housing as long as it is social housing?", when the net result is the same: no building. If there isn't, can Labour truly claim to be 'the builders not the blockers'?

Until government and London politicians recognise the viability crisis and address its root causes, the 1.5 million homes target will remain an undeliverable aspiration.

The housing crisis demands pragmatism, not just principle. London's politicians need to choose: maintain ideological purity or actually build the homes their constituents desperately need.

What do you think? What levers should Labour pull to get London building?