Building more high-end homes could ease the affordability crisis

Policymakers and residential developers have a complex relationship. This government has an ambition that there should be an adequate supply of affordable housing. Developers are in the business of buying sites to deliver homes for profit, and the two objectives don't always align.

That's why there are rules mandating that developers deliver a certain number of "affordable" homes alongside open market homes. The optimal proportion of affordable homes in each project gets harder to establish when land values are high and buyer demand is soft; developers struggling to get schemes beyond the drawing board often point out that a lower percentage of something is better than a higher percentage of nothing.

This issue is particularly critical in London, where residential development has dropped to crisis levels. With buyer demand subdued and land prices elevated, developers are contending with a thicket of regulations, all while councils continue to push for 35% of homes in each scheme to be affordable. The government needs to offer clearer direction, and a new study by academics Boaz Abramson and Tim Landvoigt modelling the impact of various housing policies on affordability comes with some surprising outcomes.

Upwards pressure

The pair use house prices and rents in San Francisco for the base of their model, and study the impact of three approaches on affordability: a demand-side policy in the manner of Help to Buy, and two supply-side scenarios – one that increases supply at the top of the market, and one that increases supply at the bottom of the market.

The first finding is that measures that target the demand side of the housing market are "mostly" ineffective; "in our model, a down-payment subsidy for potential home buyers increases upwards pressure on house prices, especially in those segments of the market in which buyers benefit most from the subsidies."

Additional housing supply is always beneficial, but perhaps most surprisingly, the research finds that building new homes in the high-end segments of the market reduces price-to-income ratios more across all segments than building at the lower end.

"This is because new construction in high-end segments reduces competition for units in medium and low-quality housing segments, improving affordability throughout the wealth distribution," Abramson and Landvoigt say.

A supply response

The government has already introduced some policies to boost residential development, and they are bearing fruit in regional markets where the homebuilders dominate, but urban locations are a different story. The strongest quarter for London housing delivery was in Q1 2015 when 9,750 homes began construction, as Molior's Tim Craine recently pointed out. In Q1 2025, developers started just 1,210 homes.

Back then, Help to Buy was in full swing – 2,560 homes were destined for those buyers, Craine said. Another 2,980 homes had about 80% off-plan investor sales close to commencement, de-risking projects and enabling them to progress. But the government introduced a 3% stamp duty surcharge for second homes and buy-to-let properties a year later, and off-plan investor purchasing began dwindling. That levy was raised to 5% last year. Starts have now been falling for a decade.

Abramson and Landvoigt might argue that cutting stamp duty for investors would constitute the kind of subsidy that increases demand without an adequate supply response, but history suggests that allowing developers to de-risk projects by marketing them to global buyers in the earliest phases would almost certainly trigger a supply response – especially in the very segments the authors identify as most effective at improving affordability. Of course, selling it to voters would present a different challenge entirely. Got a better idea? Email me here.

You can read the paper Curbing Rising Housing Costs:A Model‐Based Policy Comparison here, a Forbes overview here, and a column in this week's Times by David Smith here.

In other news...

UK construction activity extends longest run of falls since 2020 (Reuters).