DEAR readers, I am moving to London in July. I'm quite excited about this. Last week I traveled to London with my wife to search for a place to live. We were successful; there is now a lovely little house awaiting us at a rent that is within our budget. But the experience reinforced the absurdity of Britain's ongoing economic doldrums.

London is extraordinarily expensive. It's the kind of expensive where even when you are accustomed to relatively expensive real estate (Washington is not the cheapest place to live) and know that London is far worse you are floored by how expensive it is. To rent a property roughly the same size, quality, and commute distance to work as the one we now occupy in Washington would have meant paying between two and three times as much in rent.

That London is expensive is the sort of thing people tend to take for granted. London property costs a lot, that's how it is, deal with it. But its high cost is actually a direct result of the interplay of supply and demand. Demand to live in London is sky high, for good reason. Weather aside, the consumption amenities in the city are very nearly unrivalled. And the city is also extremely productive, in financial services of course but in other businesses as well. London's cost is down in part to what people are willing to pay to live there. More accurately, the price of living in London rises as high as it must to clear the property market: to make sure that there are only roughly as many people obtaining London property as there is property for them to obtain.

Which brings us to supply. Construction costs in London are higher than in some places but not remarkably so. The marginal unit in London will be in a building that is shorter than the marginal unit in New York, for instance, and taller buildings are more expensive to build. Topographically speaking, London is far, far less constrained than New York or San Francisco. London's big supply problem is almost entirely due to extremely tight land-use restrictions. It's quite simply very difficult to get permission to build.

This is the subject of ongoing debate in Britain; witness the furore over whether to allow construction on London's "greenbelt". Construction is a constant point of contention in built-up areas as well. The magnitude of the impact of these supply restrictions on real estate costs is astounding. In a 2008 paper, Paul Cheshire and Christian Hilber estimated the "shadow tax" imposed by such regulations on office prices in London and other major cities. They found a shadow tax rate of planning restrictions (above construction costs) of about 800% in London's West End, and of nearly 500% in the City of London. The comparable rate is about 300% in Paris, 68% in Brussels, and 50% in Manhattan. (The Manhattan estimate is for the year 2000; other city estimates are for the early 2000s.)

Now, it isn't hard to understand why Londoners might wish to restrict development. In some cases, they no doubt want to preserve the Victorian character of a neighbourhood. They may fear the impact of new residents on London's creaky infrastructure, or worry about their effect on safety or schools or a sense of community. They may want to guard views or green space from which they derive value, or they may simply wish to protect their property value.

While these impulses are all understandable the net outcome is highly undesirable. Britain has in London an unparalleled export industry. The world craves London and is willing to pay vast amounts of money for a piece of it. And there are few logistical limits to making more London: a process that would generate huge flows of income and employment for Britons. There are certainly ways in which massive new construction in London could diminish this demand; if the city tore down all its most beautiful streets and buildings and replaced them with charmless new construction, that would hurt the appetite for the city a bit (though less than one might imagine, as people are paying for much more than pretty buildilngs). If the city didn't update infrastructure to accommodate a building boom, congestion costs would rise to choke off demand. But one could free building rules dramatically (lowering the shadow tax rate) and raise actual property taxes to help fund new infrastructure, and still have everyone come out ahead.

Or almost everyone, I should say. Property owners would not. And that's the reason there is a problem in the first place. London property owners, as a class, are effectively an incredibly successful rent-seeking operation greedily sucking up the economic surplus generated by the city's economy. When a London firm brings someone to London, they do so, presumably, because the move generates a productivity increase which generates gains that can be shared between firm and worker. But the lion's share of that increase flows not to the firm or the worker but to the owner of the firm's office space and the worker's flat. As a result, London winds up with many, many fewer firms and workers than it could otherwise expect to have. As does Britain, because firms and workers deflected from London are more likely to wind up in New York or Hong Kong than in Newcastle.

Keep that in mind when you read stories about Britain's struggling economy; its lagging growth and productivity performance, and its difficulties raising exports. It's largely down to those great vampiric beasts that bestride London's economy. You know, the homeowners.