The London Housing Federation and London Councils found in the last 10 years the amount of homes with three or more bedrooms had almost halved.
In 1996, 35% of new-build homes in London were "family-sized", compared with 18% of properties in 2005.
Councils are being urged to insist that more family homes are built.
Family break-ups
An estimated 800,000 people - including more than 260,000 children - live in overcrowded conditions in London, amounting to a tenth of the population.
The proportion of black and ethnic minority families living in such conditions is much worse than average, the report found.
It also said there was evidence of the first rise in levels of overcrowding seen in London since the 1960s.
This was harming children's educational achievement, causing depression and family break-ups, the report said. It was also a contributing factor in the spread of diseases such as TB.
The report's authors called on ministers to fund new affordable housing schemes in London.
Berwyn Kinsey, head of the London Housing Federation, said: "London may be one of the world's most prosperous cities, but it is clear that not everyone is sharing the benefits. Overcrowding is 21st Century London's shame.
"The shortage of family-sized homes is putting the squeeze on thousands of families. It is time for housing providers to think big and build the homes Londoners need."
A Communities and Local Government spokesperson said they did not recognise the figures in the report but were planning to update the overcrowding standard.
They added: "Too many families in London are facing overcrowding, that is why Housing Minister Yvette Cooper and the Mayor of London Ken Livingstone announced yesterday £19m to help overcrowded families.
"New planning guidance will encourage local authorities to promote more family homes in the capital. But we need to do more to help overcrowded families."
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