As the consultation for the draft London Plan closes, Chris Wheaton, senior director, and Niamh Lockwood, economic analyst, at Pegasus Group, analyse whether our lack of housing ambition is crippling the capital’s growth potential
Nowhere in the country is economic activity more closely linked to housing delivery than in London. The capital is facing a critical housing shortage – one with significant ripple effects across a range of social and economic indicators. The new draft London Plan, which closed its consultation this October, reflects the scale of this challenge. While it builds on the Greater London Authority’s (GLA) commitment to deliver more affordable homes and improved infrastructure, many have questioned whether it lacks ambition given the city’s overwhelming housing need.
The government’s original 10-year target for London housebuilding was 880,000 new homes, but the latest draft London Plan reduces this target by around 300,000. The Plan described this reduction as the most ambitious approach possible in the circumstances and a reflection of the harsh economic conditions for housebuilding in London. This assessment is not wrong; we’ve seen developers pull out of the city over viability constraints on many occasions this year alone.
But the reduction has consequences, and new analysis by Pegasus Group highlights the social and economic cost of this shortfall. Our research estimates that the undelivered homes could have housed about 762,000 people – a population equivalent to a city the size of Glasgow or Leeds – who would, in turn, contribute around £41 billion a year in economic output to the city.
This constraint on London’s growth potential has national implications, especially as the government puts economic growth high on the political agenda. Supporting London’s economic firepower means being bolder on housing ambitions and more flexible in helping housebuilders get homes built at scale.
Retaining London’s workforce
London is the hub of many of the UK’s most successful industries, including tech, professional services, and life sciences. This success is supported by a pipeline of talent in the capital. Retaining this talent alongside a robust labour force is vital. However, Pegasus’ analysis suggests the number of London residents moving elsewhere in the UK rose by 28% between 2014 and 2024.
Persistent housing shortages have placed upward pressure on house prices and borrowing costs, making the London housing market both difficult to enter and challenging for existing homeowners to remain in. With 300,000 fewer homes in the draft London Plan, Pegasus estimates house prices could rise by almost 16% more than they otherwise would have, adding a burden to a city consistently ranked as the least affordable in the UK.
A loss of workforce, which has been deterred by high house prices, also affects how public services perform in the city, particularly the NHS. A recent survey by NHS Homes Alliance found that 68% of staff cited a lack of affordable housing as a key reason for leaving employment in London.
Poor housing already costs the NHS over £100 million per year in the capital, according to the NHS Homes Alliance. The 300,000 homes originally included in the draft Plan could have saved an estimated £30-35 million annually and helped retain the key healthcare workers the city relies on.
Lost opportunities for construction
A substantial impact on London’s workforce is not the only potential consequence of the 300,000 shortfall. Pegasus’ analysis found that, over ten years, the reduced housebuilding targets could represent a £69.6 billion loss in construction investment – vital revenue for an industry already battling higher build costs, planning backlogs, and viability pressures in the capital. This investment could have created 25,400 direct construction jobs and a further 52,800 roles across the supply chain and wider economy.
Our analysis also indicates that the construction phase of the missing 300,000 homes could have generated an additional £8 billion of Gross Value Added (GVA) annually – that’s £80.6 billion over the Plan’s ten-year scope.
The wider UK economy has been resilient, and we have seen GDP growth despite a pessimistic outlook in the sector. Construction needs to be a key driver of UK success, and empowering developers to increase construction activity is a clear path forward. More housebuilding drives more construction activity, which in turn creates opportunities for jobs and investment. Without the construction output from 300,000 additional homes, London misses out on the benefits this would offer the wider economy.
The evidence is clear: helping housebuilders get spades in the ground has significant knock-on benefits for the country’s bottom line and should be viewed as a strategic priority with benefits beyond the housing market alone.
How could London’s outlook be improved?
GLA will now reflect on feedback from the consultation before publishing an updated draft of the London Plan. This next version should properly review the costs and benefits of housing delivery and use more levers to get closer to the government’s 880,000 target.
The Plan encouragingly recognises that infrastructure investment must sit at the heart of meaningful increase in housing delivery. This is crucial, given how much of London’s future housing capacity will be dependent on major transport investment. Support for schemes like the West London Orbital and the Bakerloo Line extension could unlock significant housing growth, but it needs sustained funding and effective collaboration across government and industry.
We also need to see the promises of pragmatic Green Belt release translate into delivery. Any future development needs to focus on the most sustainable and well-connected locations, maximising housing delivery while minimising land take to avoid low-density growth patterns.
It is also essential to ensure that planning contributions and standards are realistic, enabling more types and locations of schemes to become viable. Restrictive policies on the unit type mix and home sizes should be removed so developers can respond to market demand. Affordable housing targets also need to be realistic, recognising that the GLA’s own evidence supporting the plan indicates 10% or less is a viable level of affordable homes in many locations.
Although some areas on the outskirts of London may step up to absorb the reduction in homes delivered in the London Plan, many of the 300,000 homes removed from the draft will not be delivered elsewhere, reflecting the persistent struggle to get residential projects off the ground. UK developers have shown remarkable resilience against a challenging economic backdrop this year, but London’s housebuilders need better support to build. A combination of more ambitious targets, focused funding, and policy reform will not just mean more housing in the capital, but will have far-reaching positive implications for the UK’s economy as a whole.
