London's insane house prices are holding back the UK

As the United Kingdom potentially unravels this week and the incumbent Conservative government continues to fall far behind in the polls, Prime Minister David Cameron should consider looking at some of the excessive building regulations that are strangling his country. New information from the UK's Office of National Statistics shows that house prices in Greater London are going positively stratospheric in the face of robust demand.

London house prices (Source: Office of National Statistics)

The average price of a London home is now up to £514,000 — $833,000 at current exchange rates — which is clearly far more than the cost of constructing a decent place for a family to live. Under the circumstances, you'd think there would be a huge opportunity here, with tons and tons of new-built flats under construction in London and selling for £400,000 a piece and the city's population booming. But it doesn't happen because of planning and zoning restrictions. The dynamic leaves the city with a few signature prestige projects like the Shard under way in London, but nothing like the kind of mass construction of mid-rise middle class housing that there's robust market demand for.

Looser restrictions and building more in London would have a bunch of positive impacts on the UK situation:

• The directly created construction jobs would help reverse the UK's low-wage, low-GDP recovery, since construction pays better than retail gigs.
• London's new residents would earn higher salaries, because service sector productivity is higher in big cities than in smaller ones or rural areas.
• As people who love big dense cities flood into London, those who prefer smaller cities or rural areas will benefit, as nice homes in those areas "filter" downward and become more affordable. 
  
• The boost in economic activity would bolster tax revenues and allow the UK government to reduce some of its austerity measures while still hitting its budget targets.
• A more affordable and accessible London could ameliorate the sense that government officials and policy elites live in a bubble surrounded exclusively by bankers and Russian oligarchs, reducing the centripetal pressures on the United Kingdom.

Best of all, this could be achieved through a simple deregulatory measure that would be in line with the current government's official ideology. On the other hand, it would be against the interests of some current wealthy property owners, which is presumably why it will no more happen in London than in New York or San Francisco or other hyper-expensive cities.

But the Greater London area is a much larger share of the UK economy than New York is of the United States, so it's a much bigger deal. And the UK doesn't have any equivalents for metro areas like Charlotte or Houston that are growing quickly on the back of cheap house-building.

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