12 May 2023 4 min read

Why London still rules when it comes to housing

By Michael Adefuye

As the capital continues to see the strongest residential demand in the UK, ongoing supply/demand tension will keep upward pressure on rents, in our view.


Back in 1981, Norman Tebbit, the then Secretary of State for Employment, extolled to the British people that when his father was unemployed in the 1930s, “he got on his bike and looked for work.” The message was loud and clear: follow the jobs. A certain amount of disquiet at the speech notwithstanding, British households did just that, with notable movements from the deindustrialised northern towns to cities – particularly those in the South.

The problem was, while many households ‘did their bit’ and got new jobs, you can’t put a house on a bike. Over several decades, while the UK continued to create more new jobs in the South, housing construction did not respond in kind.

London is the prime example of this trend. The chart below highlights the change in the distribution of jobs (% of total jobs) in England and Wales, between 1993 and 2021, compared with the distribution of homes throughout the same period[1].


This has also manifested itself in changes to household sizes (the number of people per household). Prior to 2021, while the rest of the country saw average household size continue to decrease, London again was the outlier. The decline in average household size stalled by 1991 and it has been rising ever since. A lack of housing supply (and subsequent affordability issues) has contributed to the more constrained household formation and bigger households, relative to other regions.


A problem was created that had no quick fix – building new homes takes time and given well-known planning issues in the UK, and sometimes ‘well-meaning’ attempts to reduce friction doing the opposite, it is likely that bottlenecks will continue to be the case over the medium term.

But there are new societal changes afoot that may well impact this trend. Government policy around levelling up may readdress some of the employment concentration issues in the UK. Growing the economic ‘pie’ more broadly across the country may also provide opportunities for residential demand to grow in other cities and slow the pace of London demand. We believe there are shades of this with Manchester’s recent resurgence as an employment and residential hub.

London: still a magnet for work and play?

Work from home patterns can also be a catalyst for some redistribution of households. However, this has not been the case so far. The strength of rental demand in the market since the pandemic would suggest that it has not had a significant impact on the appeal of London. Part of this will be to do with households wanting to be in London for more than just work – it remains the premier cultural and leisure destination in the UK.

Until we see significant changes in the concentration of employment in London, we believe London will retain its essential pull that drives residential demand. More needs to be built in London to meet demand; or the country needs a step change in redistribution of economic activity. Progress so far has been slow, as the Legal & General Rebuilding Britain Index shows[2]. The divergence in household size between London and the regions also suggests there is an intrinsic embedded demand in the capital which, we believe, will support demand even with a more widely redistributed economy. Either way, neither can be achieved quickly suggesting that this issue is entrenched for the medium to long term.

As real estate investors look to increase their exposure to the residential sector, we believe that this context highlights part of the compelling case for London as a key destination for that investment.


[1] Calculated as the absolute change in the % of total UK jobs for each region

[2] The L&G Rebuilding Britain Index was established to measure the UK’s progress in levelling up on a quarterly basis, surveying 20,000 people and tracking social and economic progress across 52 measures, including Health and Social Care, Education, Housing, Jobs & Economic Prosperity, Environment, Energy, Transport and Digital.

Michael Adefuye

Research Manager, Real Assets

Michael is a strategist in LGIM’s Real Asset division. With 13 years’ industry experience, he is responsible for research in the UK alternative real estate sectors, including Build-to-Rent and student accommodation.

Michael Adefuye