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Sure it will. Housing price is a function of supply and demand, like everything else. If you don't have enough supply of housing in London for people who want to live in London, then what happens is that housing prices rise until sufficient people are priced out.
If a developer builds new housing, then someone is going to live in it. If that person is living in that housing, then they aren't living in some other housing in London, which will make that housing more-affordable.
But what if a developer only builds luxury housing and nobody wants to live in it?
A developer has a pretty strong incentive not to build something that nobody actually wants, so that's unlikely to be a serious problem -- their incentive is not to do this. But, sure, assume that happens. Then that developer is going to need to recoup what they can by selling the development for what they can, even at a loss. The parties who invested in that development will wind up covering some of the cost of buying housing for people in London.
What's at issue isn't "fancy housing" or "not-fancy housing". It's the quantity of housing. Build more of whatever type of housing, and the price of housing will drop.
As long as one can profitably build housing -- the price of land and the price of construction and a reasonable return is lower than the price of housing -- developers have every incentive to build. They only won't build if they aren't allowed to do so.
Removing or relaxing London's height restrictions might be a good place to start.
https://archive.ph/jRQIm
https://en.wikipedia.org/wiki/YIMBY_movement
While the free market should be able to correct the problem, it can't.
I can't talk specifically about the uk, but in the US many locales have strict zoning regualtions that hamper building medium density cheap housing, perfect for all these people that can't afford to live where there's work.
Examples are things like minimum parking requiements, driveway setbacks, and limitations on multifamily homes.
You're contradicting yourself. There's no free market when you have zoning regulations. That's the issue in Britain as well - too much red tape everywhere and too many fees to get any permissions. Builders are not allowed to build as much as they want or as much as people need. The housing crisis is created artificially by the government.
Yes prices go up and people get priced out that is the bloody problem!