Housing Affordability and Productivity
Introduction
The relationship between where people live and how productively they work has become a central question in UK economic policy. A June 2025 report by Alma Economics for Homes England, titled “Housing Affordability and Productivity,” provides rigorous evidence that these two issues are deeply interconnected. The report, which combines econometric analysis with qualitative case studies, demonstrates that building new homes in the right places specifically near productive industrial clusters can materially boost economic productivity. Conversely, a lack of affordable housing in high-growth areas constrains labour mobility, worsens skill shortages, and ultimately dampens the UK’s economic potential.
This summary distils the report’s core findings, methodologies, and policy implications, structured around two interrelated studies: a quantitative econometric analysis and a qualitative comparative case study analysis.
The Core Challenge: Rising House Prices and Stagnant Productivity
The report opens with a stark observation: housing in England has become dramatically less housing affordabality over the past two decades. In 2000, the average home cost roughly 4.5 times the average annual salary. By 2022, that ratio had more than doubled to over 10 times the average salary. This crisis is most acute in London and the Greater South East, where the house-price-to-earnings ratio now exceeds 14:1.
Simultaneously, UK productivity has stagnated since the 2007-08 financial crisis, showing little material improvement. The report argues these two trends are causally linked. When housing costs consume a disproportionate share of income, workers cannot easily relocate to the most dynamic, high-wage labour markets. Firms in productive clusters struggle to recruit skilled talent, and investment is diverted from high-yield activities towards housing costs. This creates a drag on the whole economy.
The report directly cites the 2025 Spring Statement and the Office for Budget Responsibility (OBR), which acknowledge that building more homes in the most productive parts of the country generates growth by enabling labour mobility and agglomeration effects. This paper is Homes England’s attempt to quantify those effects and understand the mechanisms behind them.
Part 1: Econometric Analysis – Quantifying the Impact
The first study employs panel data econometrics covering 279 English local authorities from 2000 to 2022. Labour productivity is measured as real Gross Value Added (GVA) per job, while housing affordability is the ratio of median house prices to workplace-based earnings. The analysis extends previous work by NERA in two key ways: it uses real (inflation-adjusted) GVA rather than nominal GVA, and it incorporates time lags to reflect that changes in affordability take years to affect productivity.
Key Findings for the Greater South East
For the Greater South East (London, the South East, and the East of England), the results are statistically and economically significant. The baseline dynamic model shows that a 10% increase in housing costs relative to incomes leads to a 3.1% decline in productivity in the long run. This is more than double the 1.4% effect reported by NERA, largely because the Alma model accounts for lagged effects (specifically, housing affordability from one year and four years prior).
To put this in practical terms, the report draws on a Ministry of Housing, Communities and Local Government (MHCLG) rule of thumb that a 1% increase in housing stock reduces house prices by 2%. Consequently, a 5% increase in housing stock (approximately 187,000 new homes in London) would be associated with a 10% reduction in house prices and a 3.1% increase in productivity.
Sensitivity checks confirm the robustness of this finding. Varying the buffer zone used to define commuting areas (from 10km to 30km) and excluding the COVID-19 pandemic years (2020-2022) still yields negative, statistically significant effects. However, when the model includes region-specific or local-authority-specific time trends, the effect becomes insignificant likely because such trends absorb too much variation, making it hard to isolate the impact of affordability.
Findings Outside the Greater South East
Outside the Greater South East, the econometric analysis finds little consistent evidence of a relationship between housing affordability and productivity. For the North of England, the Yorkshire and Humber region, and the South West, the coefficients are statistically insignificant. The Midlands present a mixed picture: a baseline model suggests a 10% improvement in affordability could raise productivity by 1.5%, but this result is sensitive to model specification. When using different buffer zones (no buffer, 10km, or 30km) or excluding the pandemic years, the effect becomes insignificant or only weakly significant.
The report cautions against concluding that no productivity effect exists outside the South East. Instead, it argues that industrial clusters in other regions are often confined to relatively small geographic areas (e.g., a single manufacturing hub or logistics corridor). The econometric approach, which aggregates data across entire local authorities, may be too blunt to detect effects in such small clusters. This limitation directly motivates the second, qualitative part of the study.
Part 2: Case Study Analysis – Understanding the Mechanisms
The second study uses Qualitative Comparative Analysis (QCA) and five in-depth local case studies to explore how housing affects productivity. QCA is a mixed-method technique that identifies combinations of starting conditions associated with an outcome of interest here, above-average growth in both housing stock and labour productivity between 2012 and 2022.
QCA Results: The Winning Combination
The QCA examined 252 English local authorities (excluding Greater London as a single unit). The analysis found that local authorities with the following starting conditions were far more likely to subsequently experience high housing growth and high productivity growth:
Above-average skills endowment (share of residents with Level 3 qualifications or higher, 2011).
Above-average starting productivity (GVA per hour, 2012).
Above-average industry concentration (specialisation in traded sectors like manufacturing, IT, or professional services, excluding basic industries and retail).
Above-average starting housing stock.
Of the eight local authorities that possessed all four conditions, seven went on to achieve both high housing growth and high productivity growth. The linear probability model restatement shows that possessing this “primary combination” of conditions increases the probability of achieving high housing affordabality and productivity growth by around 59 percentage points.
Additionally, the QCA uncovered a secondary path: local authorities with above-average starting deprivation combined with above-average starting productivity also had a higher probability of success. Bolsover exemplifies this path, where regeneration of former mining land has driven growth.
Five Case Studies: Cambridge, Wokingham, Rushmoor, South Derbyshire, and Bolsover
These five areas were selected for deep-dive mixed-methods analysis, including secondary data, planning documents, and 17 stakeholder interviews.
1. Productivity growth is driven by expanding high-productivity sectors. In Cambridge, it is professional, scientific, and technical activities (notably R&D). In Wokingham, it is the information and communication technology (ICT) cluster along the M4 corridor. In Rushmoor, it is aviation and leasing (rental activities) around Farnborough Airport. In Bolsover, it is transportation and storage (warehousing and logistics). In South Derbyshire, it is advanced manufacturing, anchored by a Toyota plant and over 250 smaller firms. All these sectors exhibit agglomeration effects firms benefit from proximity to skilled labour, suppliers, and knowledge spillovers.
2. Housing supports the expansion of productive sectors. All case study areas experienced positive net inward migration, increasing housing demand. Land availability (brownfield sites, green belt releases, or regeneration of former industrial land) was a key enabler. For instance, Wokingham developed strategic locations like the former Arborfield Garrison (3,500 homes). Cambridge released green belt sites for urban extensions. Bolsover reclaimed 115 hectares of former colliery land.
Stakeholders consistently reported that unaffordable or unavailable housing affordability was becoming a constraint on further growth. Business representatives noted difficulty recruiting skilled workers when local housing was scarce or too expensive. In Cambridge, even lab technicians and nurses are being priced out, forcing them to commute long distances or leave the area entirely.
3. Affordability declines as productivity rises. Figure 5 in the report shows that in every case study, the house-price-to-earnings ratio increased between 2012 and 2022. For example, Cambridge’s ratio rose from around 9 to over 12; Wokingham’s from 9 to 11. While some areas (Rushmoor) remained relatively more affordable than London, affordability pressure was universal.
Local authorities adopted different responses. Cambridge developed targeted key-worker housing (e.g., Eddington for university staff, proposals for healthcare workers). Wokingham used a more general housing affordability strategy. Rushmoor benefited from its relative housing affordability compared to London, attracting young professionals. Bolsover focused on regenerating deprived towns and maintaining a stock of socially rented homes (18% of housing stock).
4. Transport infrastructure is critical. Good transport links amplify the benefits of housing growth. Wokingham’s connectivity to London, Heathrow, and Reading (with 35.5% of residents commuting >10km) was a major pull factor. Bolsover’s logistics sector thrives on M1 links to the South East and Midlands. However, rapid growth also creates congestion. Cambridge stakeholders noted that “densification” and commuter traffic from more housing affordability surrounding areas strain the road network. Investment in new train stations (Cambridge North), guided busways, and cycling infrastructure has helped, but remains a work in progress.
5. Deprivation and inequality. Despite strong productivity growth, deprivation patterns did not change dramatically over the ten-year period. In four of five case studies (Rushmoor, Bolsover, Cambridge, South Derbyshire), the most densely populated areas (town centres) also remain the most deprived. This suggests that productivity gains are not automatically shared across all residents. Rising unaffordability risks exacerbating inequality, as lower-income workers are pushed to the periphery.
Policy Implications and Recommendations
The report concludes with several actionable policy insights, framed for Homes England and national policymakers.
1. Target housebuilding in areas with growing industrial clusters. Building homes in the “right” places where agglomeration effects are already driving productivity enhances labour mobility and allows clusters to expand. This is most obviously relevant to London and the Greater South East, but also applies to smaller clusters in the Midlands, the North, and the South West.
2. Address both general housing supply and specific affordability programmes. The report finds that housing affordability challenges affect not only the lowest-income households but also medium-to-low earners (e.g., nurses, lab technicians) who may not qualify for social housing. Targeting key-worker housing (as in Cambridge) is one solution, but must be balanced with general needs to avoid worsening inequality.
3. Integrate housing policy with transport and infrastructure investment. New housing developments, particularly urban extensions or new communities, require accompanying investment in roads, public transport, schools, and GPs. Without this, congestion and poor connectivity will limit the productivity gains.
4. Collaborate with developers and neighbouring authorities. Stakeholders emphasised that local authority capacity, speedy planning decisions, and positive relationships with housebuilders are essential for increasing supply. Working across local authority boundaries helps spread demand and avoids over-concentrating growth.
5. Monitor labour mobility, not just national population. At a national level, the working-age population is relatively fixed. The key is labour mobility enabling workers to move from lower-productivity to higher-productivity regions. Affordable housing and good transport are the enablers of that mobility.
Recommendations for Future Research
The report identifies several gaps. First, more work is needed on transport infrastructure: how much additional capacity is required when large housing developments are built, and what travel patterns emerge. Second, understanding best practice in local authority–developer collaboration would be valuable, including interviews with developers and analysis of planning application processing times. Third, a formal evaluation of key-worker housing affordability schemes (like Eddington or the proposed Wellcome Trust development) would shed light on their benefits, costs, and inequality implications. Finally, the report suggests that while econometric methods struggle to detect productivity effects in small clusters outside the South East, qualitative and quasi-experimental methods could fill that gap.
Conclusion
This Homes England report makes a compelling case that housing affordability is not merely a social welfare issue but a fundamental driver of economic productivity. The econometric analysis shows that in the Greater South East, a 10% worsening of affordability reduces productivity by 3.1%, and that increasing housing stock by 5% could reverse that effect. The case studies reveal the mechanisms: productive clusters rely on a supply of skilled labour, which in turn depends on the availability of affordable housing near jobs. Without that housing, growth is choked off, congestion rises, and inequality worsens.
For policymakers, the message is clear: building more homes in the right locations is a growth strategy. It must be pursued alongside transport investment, thoughtful housing affordability programmes, and strong collaboration with local authorities and developers. The report does not claim that housing alone solves productivity stagnation, but it demonstrates that housing is a necessary and often overlooked component of any serious industrial strategy.
Also Read: 14th Annual Demographia International Housing Affordability Survey: 2018