Discussions about taxation are rarely sexy but often necessary, given that some taxes negatively affect the labor market and thereby reduce long-term economic growth.
One of the more harmful taxes in the U.K is the stamp duty, a tax on buying property. By making housing even less affordable, especially in areas with elevated prices, the tax disincentives workers from moving to where the most productive jobs are. In fact, internal labor mobility in the U.K. is following exactly the opposite pattern of what a healthy labor market should look like: There is a flight from large cities like London to more affordable regions, which means that workers are moving away from “good jobs” (highly productive and highly paid).
What is stamp duty and why does it matter for the labor market?
Stamp duty is a tax that buyers need to pay for the acquisition of a residential property. First-time buyers in the U.K. benefit from a reduced rate; Until March 2025, they only had to pay taxes on properties above £425k. But on April 1st of this year, the U.K. government lowered the threshold to just £300k.
Following the change, first-time buyers now must pay £6,250 in taxes for a property worth £425,000. A month and a half ago, it would’ve been £0. This is a significant additional burden on top of the large deposit that would be required for such property, putting homeownership out of reach for many households.
No wonder that real estate transactions went absolutely through the roof, surging by about 100% in March 2025 compared to the previous year, as buyers scrambled to avoid thousands of pounds in taxation.
Of course, this also means that real estate transactions will likely be somewhat depressed for the remainder of 2025 since the volume of acquisitions has been historically elevated in Q1.
Going forward, the higher rates of stamp duty will act as a deterrence to potential home buyers, especially in high-price areas like London. The average house price in the U.K. is now about £370k, leading to a stamp duty tax of £3,500. In London, the average house price exceeds £530k, implying a tax of more than £11k. Adding that to the £60k or more in deposit that such a house would require is a massive cost that most workers cannot shoulder. Remember that the median London salary is just under £50k.
U.K. housing affordability is among the worst across advanced economies
Elevated levels of net migration in recent years paired with several decades of insufficient residential construction have led to one of the most severe housing shortages across advanced economies. The United Kingdom has some five million fewer housing units than France, which has roughly the same population. Rent inflation has recently approached 10% nationally (and more in London), the highest in decades. Workers’ incomes have not kept up with housing costs.
The house-price-to-income ratio, comparing the median sales price with median earnings, has increased from a mere 3.5 in 1997 to 8.3 in 2023, making the U.K. an outlier in terms of housing affordability.
There are, of course, large regional variations within the U.K as well. Housing affordability in the North stands somewhere between 6 and 9. In the South and London, workers need anywhere from 10 to 16 times the median salary to buy the typical house – and that’s ignoring some more exclusive areas of the capital.
The labor market implications: Flight to cheaper pastures
The toxic combination of excessive rent growth and runaway house price inflation have created a housing affordability crisis unlike any seen before. With the recent surge in stamp duty, many U.K. workers are now unable to afford homes in the big cities, which is where the most productive and highest-paid jobs are located. Housing affordability exceeds 13 in most areas of London, 12 in Cambridge, 11 in Oxford.
The U.K.’s net internal migration rate is showing exactly the opposite pattern of what a healthy economy should look like, with workers fleeing those islands of islands of unaffordability like London and “Oxbridge” and therefore sacrificing their long-term careers and salary growth. But it makes sense. Recent analysis suggests that due to housing costs, workers in the capital are not even able to consume more than their peers in other U.K. regions, despite enjoying significantly higher salaries. Housing expenses are literally killing Londoners’ wallets.
Internal migration rate: United Kingdom
Source: https://localdataportal.oecd.org/
Other countries exhibit much healthier migration patterns. Looking at Poland, for example, one can see that net migration is highly positive for the surrounding areas of large cities. Polish people are flocking towards urban areas to improve their living standards and gain access to better labor markets, as should be the case.
Internal migration rate: Poland
Source: https://localdataportal.oecd.org/
What are the growth implications?
This urban flight in the U.K. comes at a huge economic cost. As the chart below shows, households in London have a gross disposable income that is more than 43% higher than the U.K. average, up from just 20% in 1997.
The massive gap can be explained by the outperformance of London wages vis-à-vis the rest of the country. High value-add white-collar jobs in professional and business services, tech, consulting, and finance continue to cluster in the capital and pay handsome salaries. But, as explained above, almost all the salary gains are eaten up by higher living expenses.
Economic research suggests that housing constraints in high productivity areas are highly detrimental for long-run economic growth precisely because they inhibit labor mobility. We want workers flocking towards productive cities, not fleeing them.
The economist Enrico Moretti has examined the effect of housing constraints on U.S. economic growth. His estimates suggest that per capita income could easily be some 10% higher if the housing market was more flexible.
Since the U.K. housing market is more constrained, the growth effect of adding additional housing supply should be even larger. In the long-run, British households could gain several thousand pounds in additional yearly income if Greater London and other cities were to add hundreds of thousands of housing units.
While the Labour government has promised to increase housing construction, there is a misguided ambition to create new cities and build in low-density areas instead of focusing on upzoning the most productive places in the country, which are existing cities.
What does that mean for recruiters?
The U.K.’s housing unaffordability is uniquely bad amongst advanced economies. And recent changes to stamp duty have made matters worse. Workers are fleeing high productivity areas like London because net of housing costs they are actually worse off there. This has contributed to the long-run economic stagnation that the U.K. economy has found itself in.
From a recruitment perspective, companies could ease the burden on the housing market by offering more hybrid and remote roles. The author of this piece recently fled London himself and relocated to Solihull in the Midlands to buy property there as his company permits him to come to the office just once a week. But obviously not many roles offer this amount of flexibility.
As long as the U.K. housing market remains as unaffordable as it is today, companies would do well to offer as much flexibility as possible for certain roles. This would increase the pool of available candidates and even allow workers to locate outside of the Greater London metropolitan area, thus both benefiting employers and employees alike.
