By Chris Wheaton, Senior Director of Economics at Pegasus Group

London’s residential market is struggling. Just 5,500 new homes began construction in 2025, against a Government target of 88,000 per year[1]. Ask developers in 2026 and they will tell you conditions are only worsening.

As a planning and residential development consultancy working across London and the UK, Pegasus Group is repeatedly seeing the same constraints: high build costs, restrictive planning requirements, and escalating development taxes. These factors are creating the perfect storm for stalling development viability, preventing London from meeting its housing needs. But it doesn’t have to be this way.

Why the maths on London residential schemes no longer add up

A core truth of residential development is this: you cannot build affordable homes that sell below market value without subsidy. Right now, the numbers for London simply aren’t working.

Build cost inflation is eroding viability

23 percent cost inflation over 5 years is straining development viability; for high-density and tall-building schemes, it can be over 30 percent.

Developers have been clever enough to find solutions around the cost increases. In many cases, this has meant smaller and more affordable homes set in attractive landscaping, with amenities like gyms and home working spaces.

But even smart design efficiencies cannot outpace cost pressures when combined with high taxes and restrictive regulation.

Planning requirements are restricting delivery

Despite strong demand, planning policy is increasingly limiting what developers can viably deliver in London.

  • Planning requirements on unit type mix, sizes of homes, tenures and amounts, and types of employment space constrain values and extend sales and letting periods.
  • Requirements for layout and services – e.g. dual-aspect homes, district heating, cycle parking – often reduce building efficiency and create awkward ‘space-invader floorplans’ that have worse energy and build efficiency.

The net result: higher construction costs, and slower sales and letting periods. The schemes that worked before no longer do.

Taxes are the straw to break London’s housing delivery

Even if developers overcome planning and build cost challenges, London’s development tax burden effectively wipes out profitability entirely.

Current and upcoming charges include:

  • Affordable housing contributions
  • Affordable workspace
  • Community Infrastructure Levy
  • Section 106 obligations
  • Residential Property Developer Tax
  • Building Safety Levy (adding ~£4,000 per home from October)

The biggest problem? These taxes hit turnover, not profit.

On a £485,000 London flat, the developer might aim to make £97,000 profit. But once requirements of 35% affordable housing and other charges are applied, the bill exceeds £120,000 — that is 124% of the profit.

No housing project can survive those conditions.

Let London Build

Despite London’s housing shortfall and ongoing challenges around housing delivery and development viability, there are reasons for optimism: Demand for homes remains exceptionally strong. Many existing and new planning consents are in the pipeline and could be modified. Developers know which schemes are most sustainable. They know what to build.

The solution? Give developers the tax relief needed to make schemes viable. Allow them to build homes that meet market demand.

If London is to hit its targets, developers need:

  • A fair return, meeting their cost of capital
  • Stable policy conditions
  • Reduction or restructuring of turnover‑based taxes

Every new home reduces housing costs, supports jobs, and drives economic growth.

London is ready to build. We just need to let it happen.

How Pegasus Group Can Help

Pegasus Group supports residential developers across London with:

  • Planning applications & strategy
  • Viability assessments
  • Affordable housing advice
  • Design & masterplanning
  • CIL & Section 106
  • Grant funding business cases
  • Expert evidence at inquiry

If you’d like to discuss how Pegasus can support your development, get in touch with our Senior Director of Economics Chris Wheaton.

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[1] Molior London research – https://www.moliorlondon.com/