The very high property prices in London are slowly pushing growth to outside the city.

In a report in the Economist written before the British vote to leave the EU (23 June 2016), the ‘faulty land-use regulation’ is said to ‘throttle’ the capital.

While the immense growth – a hectare of residential land in London has increased by over 300% between 1993 and 2008, while the value of commercial property has also sky-rocketed – is good news for property owners, the ongoing rise can lead to several problems. The report states that academics as well the number of people working in professional scientific, research, engineering and technology jobs in inner London has fallen from 6,6% to 5,4% since 2011. A school principal is quoted that it is very difficult to find young teachers who do not live with their parents, while the number of people in their 20s have declined by 3% between 2011 and 2014 – a negative growth indicator.

What is more, the disposable income of Londoners has fallen by 4% between 2008 and 2011 – much higher than in any other part of the UK. “According to the Centre for London (CFL), a think-tank, the disposable income of private renters in inner London dropped by 28% between 2001 and 2011.”

As poorer people are pushed out – and getting poorer – the diversity of people also falls. This is seen as negative for the sharing of ideas as well as for productivity.

But what has land-use regulation got to do with all of this? The report argues that not enough space is made available for new development – especially building enough houses to meet the actual demand. (In 2015, only half of the needed amount of houses were built.)

London’s so-called ‘green belt’ covers about one-fifth of the city. And more than 50% if agricultural land, not parks and playgrounds, as many people imagine. This has not changed significantly since 2007. “There is enough green-belt land in Greater London to build 1.6m houses at average densities, says Paul Cheshire of the London School of Economics (LSE) – about 30 times the number of new houses London needs a year. But opposition from homeowners is strong—especially from those near the green belt, who do not much like the thought of newcomers bringing down property prices.”

While some argue for the use of brownfield sites (land used previously for industrial purposes) this will not meet even half the demand up to 2030, the consultancy Nathaniel Lichfield and Partners argues.

Another reason why London is not developing enough new residential and commercial property, is the height restrictions on buildings in the city. The report states that central London’s population density is only about half that of central New York. “According to Mr Cheshire and Christian Hilber, Also of the LSE, restrictive planning policies inflate the price of office space in the West End by about 800%. A square foot there is twice as expensive as in midtown Manhattan.”

The low residential property tax in Britain means that it is not a means for councils to significantly up their income. They basically do not have a financial initiative in this regard. “Worse, the way the central government doles out grants to councils more or less eliminates any extra revenue in the medium term for local authorities that allow more development. And the cost of the additional infrastructure that building makes necessary—roads, schools and the like—is rarely met by central government, he says.”

The report ends stating that the only foreseeable change to the situation would be a British vote to leave the EU. “[The] demand for London property [will wither]. The economy will slow as rent takes a bigger chunk of pay and earnings. Skilled people will move to jobs in less productive places, thus earning less. A recent paper by Chang-Tai Hsieh of Chicago University and Enrico Moretti of the University of California, Berkeley suggests that tight land regulation in America may have reduced GDP by more than 10%. A similar, perhaps larger, effect is likely in Britain. Unless London’s property market can be sorted out, people across the country will bear the brunt.”