The true opportunity cost of the draft London Plan

By Niamh Lockwood, economic analyst at Pegasus Group

Summary: The draft London Plan proposes a housing target that is around 300,000 homes below the Government’s housing target over the next decade. While the Mayor of London has understandably leaned towards realistic delivery, as we have noted before, the target represents a significant reduction in housing delivery relative to assessed need.  

This shortage could have consequences for London’s economy that extend far beyond the housing market, including the labour market, public services, and long-term growth prospects. As the GLA acknowledge, this draft London Plan is a platform for debate and discussion on the costs & benefits of alternative approaches. 

In our view the economic and social costs of an under-delivery in housing are too great to ignore, we therefore need to look again at potential solutions such as: 

1. More investment in transport infrastructure which can unlock more land for development and allow greater densities in that already available. There is a strong case for government funding but where this is not available, we should re-consider local taxation retention, private finance and tax increment style approaches. 
2. The grey and green belt, together with increased densities in these locations to ensure sustainable development. 
3. Greater densification in suburban areas, which has proven effective though sometimes locally contentious where trialled. 

With a housing crisis and perilous public finances, the opportunity of planning for more homes in London cannot be ignored. 

At a glance: key economic impacts of building 300,000 fewer homes 

Lost Construction Activity  

1. £69.6 billion of construction investment over ten years lost. 
2. 78,200 jobs (25,400 direct construction jobs & 52,800 wider economy jobs) each year not created. 
3. £8 billion of GVA lost each year during ten-year construction phase (£80.6 billion total).  

Lost Economic Growth  

1. Homes for 762,000 people not delivered (equivalent of a city the size of Leeds or Glasgow). 
2. 412,136 economically active people not accommodated  
3. £41bn of annual economic output from these people lost 

Worse Housing Affordability  

1. Households face house prices over ten times their annual earnings in London as of 2025. 
2. 300,000 home shortfall = 7.8% of housing stock in London.  
3. House prices rise by 16%, equivalent to an extra £82,000 on the house price of an average London home, pushing the price to over £600,000.  
4. One would need to earn over 130,000 to afford to buy a house in London. 

Workforce Retention / Productivity Issues  

1. 28% more Londoners moved to other parts of the UK in 2024 than 2014. 
2. While there may be some opportunities to recover homes in surrounding areas, they will be limited and not a solution to the 300,000 unit problem.    
3. 68% of NHS staff survey respondents considered the lack of affordable housing to be a key factor in deciding to leave their current employment in London.  

More Pressure on Public Services 

1. 75,000 households in temporary accommodation in London – one in 50 Londoners. 
2. £4million per day is spent by London Boroughs on temporary accommodation. 
3. 341,000 households on housing waiting lists (25% of all households in England) 
4. Poor housing costs the NHS around £100 million a year, even a modest assumption that one-third of these costs could have been mitigated through adequate housing delivery implies ongoing avoidable NHS expenditures of approximately £30-35 million per year. 

What are the construction impacts of the draft London Plan? 

Delivering 300,000 fewer homes in London than the Government housing target over the next decade would result in substantial lost economic activity, beginning with the construction phase itself.  

The delivery of these homes would require an estimated £69.6 billion of construction expenditure over ten years ¹ Based on ONS estimates of construction sector turnover per employee in London ² , this level of investment could support approximately 25,400 on-site construction jobs annually throughout the build period. 

The economic benefits extend beyond the construction sector. Housebuilding generates demand throughout extensive supply chains, including manufacturers of building materials, professional services, transport, home furnishings and household goods. Analysis by the Home Builders Federation found that each job in the housebuilding sector directly supports a further 2.1 jobs elsewhere in the economy, implying an overall employment multiplier of 3.1. Applying this multiplier suggests that the construction of 300,000 homes could support an additional 52,800 jobs annually across the wider economy.  

Taken together, the delivery of these homes could sustain around 78,2003 jobs ³ each year during the ten-year construction period.  

Another way of looking at the economic impact of the construction phase is to calculate the contribution a development makes to wealth creation, as measured by the increase in the value of goods and services generated within an area. This can be done by looking at the increase in gross value added (GVA), a common proxy for economic output. ⁴ Using ONS data, it is possible to calculate GVA per employee by sector at a regional level.  

Applying these estimates to the job numbers outlined above, the construction phase of the 300,000 homes could generate £8 billion of GVA per annum for the economy, or £80.6 billion over the ten-year period (current prices). 

How would the draft London Plan affect the UK’s overall productivity and growth? 

London plays a pivotal role in the UK economy, serving as the country’s largest economic centre and a major driver of national growth. In 2023, London accounted for 23% of the UK’s total Gross Value Added (GVA), generating £577 billion in GVA in the year, highlighting its significant contribution to economic output. For this reason, a shortfall of 300,000 London has serious knock-on effects for the wider UK, leaving tremendous economic and productivity growth on the table.  

Based on an average household size in London of 2.545 persons ⁵ 300,000 additional homes could accommodate approximately 762,000 residents – equivalent to a city the size of Leeds. Of these, an estimated 412,136 would be economically active ⁶. Applying average GVA per worker in London suggests that these additional workers could support around £41 billion of economic output (GVA) per year, highlighting the significant contribution that increased housing delivery could make to London’s and the UK’s economy.   

Housing affordability remains a significant issue in London, which also has implications for workers. In 2025, the median affordability ratio (calculated by dividing the median house price in an area by the median income for full-time workers) stood at 10.61, while the lower quartile affordability ratio was 11.29. This means both median and lower-income households face house prices that are over ten times their annual earnings ⁷. 

Because of this affordability challenge, many workers may be priced out of homeownership or compelled to seek more affordable housing outside the capital. This would only increase commuting pressures and reduce London’s attractiveness as a place to live and work. It ultimately risks limiting the capital’s economic potential by restricting access to the skilled and diverse workforce upon which many of its businesses depend. 

If London’s housing challenges are not addressed, labour mobility will likely deteriorate as individuals become increasingly unable or unwilling to move to, or remain in, the capital due to high housing costs. This can constrain the supply of labour available to employers, making it more difficult for businesses to attract and retain the talent needed to support growth and productivity. 

In 2024, around 415,000 London residents moved to other parts of the UK, a 28% increase since 2014. Although many moved to neighbouring regions. such as the South East and East of England, there has also been strong growth in movements to the Midlands and the North. This outward movement is partly linked to London’s high housing and living costs, which can make it difficult to retain workers, particularly in mid- and lower-paid occupations. This trend highlights the importance of addressing factors that influence workforce retention if London is to maintain the talent base needed to support its long-term economic growth. 

London is already experiencing labour shortages in terms of construction. Labour remains the largest source of cost inflation, particularly for skilled trades such as bricklayers, dry liners and M&E specialists ⁸. These shortages reflect wider labour mobility challenges, as the supply of workers is not keeping pace with demand. High housing and living costs in London can deter workers from relocating to the capital, while reduced EU migration following Brexit and an ageing workforce have further constrained labour supply.  

As a result, competition for skilled workers has intensified, increasing labour costs and limiting the industry’s capacity to expand output. This has important implications for London’s housing ambitions, as workforce constraints make it more difficult to deliver the homes required, contributing to a shortfall in housing supply, worsening labour shortages and mobility issues.  

It is also important to recognise that while the economic impacts outlined in this note may be slightly offset by housing delivery in other regions, the opportunities to recover housing units there will be limited. Neighbouring authorities across the South East and East of England are already facing challenges in meeting their own housing targets. Consequently, it is reasonable to assume that a substantial proportion of the 300,000-home shortfall would not be accommodated elsewhere in the wider region. The consequence is that the economic benefits associated with these homes – including construction activity, workforce growth, productivity gains and improvements to affordability – are likely to be lost entirely. 

Real Impact on Real People 

The implications of London’s housing affordability crisis are perhaps best understood through the experience of a typical key worker. A survey of NHS staff found that 68% of respondents considered the lack of affordable housing to be a key factor that could influence their decision to leave their current employment within the next two years ⁹. This suggests that continued housing shortages may exacerbate workforce retention challenges in London’s health sector, increasing recruitment and training costs while potentially placing additional pressure on service delivery. 

Using the example of a nurse employed in London, the following analysis considers how average earnings compare with prevailing house prices and rental costs. By examining disposable income after tax, pension contributions, and rent, the analysis illustrates the financial constraints that many workers face and the potential impact this can have on London’s ability to attract and retain essential labour. 

The average annual salary of a Nurse Practitioner in London is approximately £54,320. After income tax and a 5% pension contribution, this falls to a net annual income of around £40,437.10 ¹⁰.

In comparison, the average house price in London, as of 2025, is £527,000, nearly ten times a nurse’s gross annual salary. Given that mortgage companies will typically only lend 4-4.5 times a persons’ salary, homeownership is likely to be beyond the reach of many nurses without substantial savings or additional household income.  

Renting also presents its own affordability challenges. With average rent costs in London estimated as £27,624 a year, a nurse earning a net annual income of £40,437 would be left with approximately £12,813 per year, or £1,068 per month, to cover all other living expenses ¹¹. This includes essential costs such as council tax, utilities, food, transport, and childcare where applicable. This example demonstrates the significant financial pressures faced by key workers in the capital and highlights how housing affordability can undermine London’s ability to attract and retain the workforce upon which its economy and public services depend. 

Pressure on Public Services 

The UK government’s official analysis of housing supply impacts estimates that a 1% increase in the housing stock leads to a 2% fall in house prices (if nothing else changes). The shortfall of 300,000 homes, relative to a housing stock of approximately 3.9 million dwellings ¹², represents a 7.8% reduction in supply.  

Applying this estimate would suggest housing costs could be around 16% higher than would otherwise be expected. Therefore, based on a median London house price of £527,000, this equates to an additional £82,000 per dwelling, pushing the average house price in London to over £600,000. Given that mortgage providers will typically lend up to 4.5 times a persons’ annual salary, a buyer would need to earn more than £130,000 per year to afford such a property. In terms of monthly mortgage payments, the estimated £82,000 increase in average house prices would raise mortgage repayments by approximately £480 per month, assuming a 25-year repayment mortgage at a 5% interest rate. 

Some of the above impacts may be mitigated by people being deterred from moving to London, either accepting very long commutes or moving elsewhere in the UK or internationally. However, given London’s economic strength and growing reputation in areas such as life sciences and artificial intelligence, we would expect many people to still seek a home in the capital, making already challenging affordability even worse. 

The number of households in temporary accommodation in London has increased sharply over the last 15 years. As of 2025, 75,000 households (or 183,000 individuals) are living in temporary accommodation, this is a double the number in 2011. That’s one Londoner for every 50 – and the equivalent of one child in every classroom, costing London boroughs £4 million every day.  

In addition to this, as of 2025, 341,009 households remained on the waiting list for local authority housing, representing approximately 25% of all households waiting for affordable housing in England ¹³. This substantial level of unmet housing need highlights the scale of affordability pressures facing residents of the capital. The size of the waiting list indicates that many households are unable to access suitable housing through the private market and instead rely on the provision of affordable housing. Continued shortages in housing supply risk exacerbating these pressures, increasing waiting times and placing further strain on local communities and public services. 

London’s housing shortfall of 300,000 homes is likely to increase the health burden associated with poor housing conditions by limiting households’ ability to move into safer, higher-quality accommodation. Given that poor housing currently costs the NHS around £100.1 million annually in London ¹⁴, even a modest assumption that one-third of this cost could be mitigated through adequate housing delivery implies ongoing avoidable NHS expenditures of approximately £30-35 million per year. 

The key opportunity cost of the London Plan’s lower housing target is not simply 300,000 fewer homes, but the loss of tens of billions of pounds of economic output, tens of thousands of jobs, hundreds of thousands of potential workers, improved affordability, and reduced pressures on public services. The housing shortfall risks constraining London’s long-term growth by limiting the workforce and housing capacity needed to support a globally competitive economy. 

 

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