Why London's small flat market crisis runs deeper than the data shows

Nearly half of London's one-bedroom and studio flats are now selling for less than their original purchase price, and mortgage professionals working in the capital say the problem runs far deeper than a straightforward market correction.

Analysis of Land Registry data by property data firm Bricks & Logic shows that almost half of small London flats are selling at a loss – not just among those bought at the recent market peak, but also among sellers who purchased 10 to 20 years ago. In the past year alone, the average price of an inner London flat has fallen by 6.2%, stripping around £35,000 from what sellers can expect to pocket, while average house prices for semi-detached and terraced homes in London rose by 1.2% over the same period.

For brokers on the frontline, the data reflects a convergence of pressures – structural, regulatory and financial – that have been quietly building for years. Louis Mason (pictured top right), director at Oportfolio Mortgages in London, told Mortgage Introducer the result was inevitable. "Almost half of London's small flats selling at a loss is really the result of several pressures all hitting at once. And to be honest, I am not surprised by the news."

A problem with many layers

Nouran Moustafa (pictured top left), executive financial and mortgage adviser at Roxton Wealth in London, told Mortgage Introducer the crisis cannot be pinned on any single cause. "Flats are really tricky because of the structure of the building," she said. "A lot of flats in London are Victorian-type buildings, and then you have External Wall System 1 (EWS1) certificates, cladding issues for higher-storey buildings, fire safety concerns. There are so many factors."

Those factors are creating lending barriers that ripple directly into pricing. Moustafa recalled a client who purchased a flat at auction in an eight-storey building with unresolved cladding and fire risk assessments outstanding. Because most buyers couldn't secure mainstream mortgages on the property, competitive interest was suppressed. After purchase, a remortgage based on full market value allowed the client to recover the cash put down, plus stamp duty. "He almost bought the flat for free and now he's getting rent," she said.

Separate research has suggested that up to 37% of flats in England and Wales could be unmortgageable because their service charges exceed 1% of the property value – a threshold many lenders will not accept. Mason said the roots of the crisis stretch back to a very different rate environment. "For years, small flats were the natural first step onto the property ladder, particularly in London. Many of those properties were bought when prices were peaking and mortgage rates were close to historic lows. We're talking 1–2%."

What does the London flat crisis mean for mortgage brokers?

Mason points to rising service charges as one of the most immediate pressures bearing down on the market. "Rising service charges are quickly becoming one of the biggest obstacles we see when clients are buying flats. Lenders don't just look at the mortgage payment anymore. They assess the overall affordability of owning the property. If a buyer is facing a large monthly service charge, that can significantly reduce how much they're able to borrow."

In London, average service charges have reached £2,800 a year, according to estate agency Hamptons, with the average flat price in the capital falling from £450,000 in January 2025 to £431,000 in January 2026. For brokers advising clients on leasehold properties and mortgage affordability, these figures represent a fundamental shift in how deals are structured and assessed.

Why are lenders being so cautious about London flats?

Moustafa is explicit in defending lenders' restrictive stance. "We need to put ourselves in the shoes of the lender. They are giving someone about a £1 milllion or £1.5 million and the only security they have is this flat. When you look at flats that have got cladding issues, short leases, or are in Victorian buildings, how fast can they sell that flat? That is the problem.

"If we go and absolutely ease the rules and anything happens, people start defaulting, and we will technically be building another financial crisis. Whatever rules lenders have in place when it comes to buildings, I think they are correct."

Mason agrees lenders are adapting but argues wider reform is still needed. "Greater transparency around service charges would help enormously, as would reforms that give leaseholders more protection against excessive increases."

At the Select Committee hearing on the Commonhold and Leasehold Reform Bill in March, campaign group Free Leaseholders warned that more than a third of UK flats may face significant selling difficulties, with spokesperson Harry Scoffin telling the committee there is "a crisis in the flats market at the moment."

Supply, confidence and a market at a crossroads

Mason's diagnosis is unambiguous. "London still has an affordability problem. We need more housing supply and a leasehold system that gives buyers confidence rather than uncertainty. Until then, parts of the flat market are likely to remain under pressure, even if the wider housing market proves more resilient."

Moustafa is equally direct. "Some lenders really want to lend but just can't. The problems with flats are property-specific, not market-wide."

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