This is both a broad and interesting question. According to Property Price Index 2017, London is indeed one of the most expensive when it comes to property prices and the most expensive in Europe.
Unfortunately, high prices have several root causes, making it hard to tackle this phenomenon (source):
- Growing demand - [...] demand for housing has been rising at a faster rate than the supply.
- Constraints on the building of houses - difficulty to find new land around greater London, preserving “greenbelt land”, existing
homeowners have a vested interest in keeping the supply as low as
possible in their area, lack of Social Housing
- strong demand for home ownership
- Low Interest rates
There are several methods that can be used to cap the prices, most of them having some drawbacks (source):
- higher interest rates - would have significant impact on reducing housing affordability, but might clash with controlling
inflation and economic growth
- mortgage regulation - limiting the availability of mortgages through regulation. However, mortgage lending is already quite scarce.
The same article emphasizes that none of these measures attack the actual problem: disequilibrium of supply and demand. This article dives into details about demand growing faster than supply.
Other methods that can be used are:
Apartment price control in Finland:
According to professors Niko Määttänen and Ari Hyytinen, price
ceilings on Helsinki City Hitas apartments are economically highly
inefficient. They cause queuing, and discriminate against the
handicapped, single parents, elderly, and others not able to queue for
days. They cause inefficient allocation, as apartments are not bought
by those willing to pay the most for them—and those who get an
apartment are unwilling to leave it, even when their family or work
situation changes, since they can't sell it at what they feel the
market price should be. These inefficiencies increase apartment
shortage and raise the market price of other apartments.
Rent control in New York City
The government put in price controls, so soldiers and their families
could pay the rent and keep their homes. However, this increased the
quantity demanded for apartments and lowered the quantity supplied,
meaning that available apartments were rapidly taken until none were
left for late-comers. Price ceilings create shortages when producers
are allowed to abdicate market share or go unsubsidized.
- Land value tax should work for lowering the rent, according to Wikipedia:
At sufficiently high levels, land value tax would cause real estate
prices to fall by removing land rents that would otherwise become
'capitalized" into the price of real estate
However, this kind of taxation is not very widespread:
Land value taxation is currently implemented throughout Denmark,7
Estonia, Lithuania, Russia, Hong Kong, Singapore, and Taiwan; it
has also been applied in subregions of Australia, Mexico (Mexicali),
and the United States (e.g., Pennsylvania).
Keeping real estate prices at reasonable prices - e.g. Bucharest, Romania, place 48 in Europe's price to income ratio.
This is clearly not a "well-off city", but it can be used as a reference to what lead to reasonable prices for rents and housing:
- fewer constraints on building houses - most of the constructors built with few restrictions. This was a benefit for the consumers, but this rendered town planning almost useless and also reduced the green space
- already existing high home ownership - according to this article (Romanian), house ownership is more than 95% in Romania. So, supply should compensate only for the latecomers
- much stricter mortgage regulation - higher advanced value, lower warranty values, lower accepted debt/income value and other regulations lead to lower loaning
- less State interference - the Romanian Government ran a program called The First House which allowed banks to have less risk and lower the advance to only 5%. The programs conditions changed and the advance is more than 15% now, making loans harder to get.
- context - due to high ownership as opposed to renting and the fact that most of the owners are private individuals, in most cases they do not afford to keep the houses empty (due to fixed costs), so they lower the price to get a client faster).
Note: one comment talks about "socialism experiments". Romania has been under the Iron Curtain and thus had a communist regime until the end of 1989. House construction and prices were centrally controlled and almost everyone had a place to stay. Some argue that this was a "success". However, they forget that the largest houses and flats went to politicians, State Security members and informers.
Anyway, this was possible because supply and demand were quite balanced.
Conclusion: I don't think there is a sustainable way to prevent rising prices for real estate, as long as supply does not follow the demand.