Investment, development and growth
Over much of the last two decades, the UK has seen some of the lowest business investment of the OECD’s high income countries. A key consequence of this has been a slow rate of productivity growth, almost half of the OECD average.
According to the London School of Economics, around half of UK business investment is in buildings, and much of the remaining investment is in businesses that need to be housed in buildings. The ability to develop is therefore fundamental to the UK’s economic prospects. But construction is made more risky and expensive in the UK compared to other countries by the unpredictability of the planning system, driven by a lack of joined up, long-term decision making.
We have looked at the growth potential of the UK Core cities and selected high growth locations. According to Oxford Economics, these locations are forecast to see gross value added (GVA) economic growth of £50bn over the next ten years, adding more than 400,000 jobs to the UK economy.
But our analysis of development pipelines in these locations shows that there is a strong risk that this growth potential won’t be fully realised due to a lack of new commercial and residential space. Without an appropriate range of incubators and follow on space, startups that are attracting new investment will struggle to grow. And unless there is sufficient new housing, employers will struggle to find enough workers to fill positions in expanding companies.
The planning and development process needs to be viewed as a core part of resolving the UK’s productivity challenge. The country needs clear, long-term policy frameworks, supported by consistent decision making. This will give investors more confidence to make the decisions that are critical to drive economic growth over the next decade.
Larger than local decision making: putting housing at the heart of growth ambitions
What role can housing play in supporting economic growth? And how can the UK incorporate planning for housing into wider economic strategies? A key challenge is to get decision making at the right geography, as local and regional economies don’t align neatly with local authority boundaries.
Residential development has long been a significant contributor to the UK economy. As we set out in 2010 in The Case for Housing, delivering an extra 100,000 new homes per year would create over 200,000 jobs, boost tax revenues by over £2bn, and in the long term, result in an additional 1% of growth in the UK economy. This was backed by ONS analysis in 2019, which found that every 100,000 new dwellings contributed 0.83% to UK GDP in the decade to 2018. In 2024 values, that would add £18 billion to the UK economy every year.
But, only focusing on the impact of the construction industry itself underplays the importance of residential development to economic growth. Housing has a fundamental role in enabling mobility in the labour market, allowing skilled workers to move to productive jobs. If there are not enough homes available at reasonable price points within commutable distances of growing workplaces there are fewer incentives for workers to move. This makes it harder for companies to attract the right employees and limiting the capacity of industries to realise their full potential.
Housing has a fundamental role in enabling mobility in the labour market.
The impact of long-term undersupply of housing on mobility patterns is already evident. The number of working-age people moving into a higher housing cost area has decreased by 3% between 2002-3 and 2017- 18 according to the Resolution Foundation. A move in 1997 for a median renter from a third decile earnings area to a ninth decile area would have seen a 26% uplift in their after-housing-costs earnings. In 2019, that same move would have left the earner worse off as the growth in housing costs in the most productive areas has far outstripped wage growth.
Travel to work areas are on average 7 times larger than core urban authority areas.
The key challenge to reversing these trends is aligning planning for housing with employment areas. Currently, three quarters of a million people commute into the fifteen cities in our study, according to Oxford Economics. This is projected to grow by 18% over the next 10 years, as expanding employment markets pull more people from beyond the core urban area.
The census shows that the travel to work areas for our study cities are 7 times larger than the area of the urban local authorities themselves and, on average, 20% of workers in the cities are not local residents. In Leeds, for example, the proportion rises to almost 30%. Any aspiration to drive employment growth in Leeds will have consequences not just for the city’s housing requirements, but for the wider West Yorkshire region.
Delivering the housing to support economic growth comes with many challenges. Across our 15 cities, only 68% of housing need is currently being met - contributing to rising prices, increasingly unaffordable housing and limited workforce mobility.
Land availability is a major constraint. Within the urban local authorities, most development will have to be on brownfield land, and will often have to be high density apartments in order to be viable.As a result, the wide range of housing types needed won't be delivered. Surrounding local authorities should accommodate some of the employment-generated housing need, but more strategic planning is needed to tackle issues like Green Belt reviews, transport infrastructure to link jobs and homes, and power and water capacity.
Yet strategic planning is not consistently in place across the UK. 75% of the cities in our study don’t have any form of statutory strategic planning mechanism in place that could enable them to deliver their growth ambitions. Tackling the mismatch between housing planning and functional economic areas should be a key priority for any incoming government aiming to improve the UK’s productivity.
More strategic planning is needed to tackle issues like Green Belt reviews, transport infrastructure, and power and water capacity.
Infrastructure: Giving developers confidence
Commercial and residential space will only be delivered if the right infrastructure is in place. The National Infrastructure Commission (NIC) published their latest National Infrastructure Assessment in October 2023, which concluded that slow decision making and uncertainty in infrastructure planning was a major barrier to the UK’s economic growth.
This uncertain decision-making process will not encourage private capital to invest in the infrastructure so desperately needed to unlock growth. Nor will it give real estate developers and investors the confidence that transport, power and water infrastructure needed to support new development will be delivered.
To realise the UK’s full growth potential, we need updated and regularly reviewed National Policy Statements to set clear plans for bridging the infrastructure gap. This must then be translated to spatial regional requirements that reflect growth ambitions. Finally, it's to be used to inform the local planning process so that developers and investors can have confidence that schemes will not be held up by a lack of infrastructure.
As the Chief Executive of the NIC remarked in March 2024, “policy stability and predictable regulatory models” are critical to securing the investment needed to ensure that the UK has the infrastructure in place to boost growth.
Housing, Development and Investment Research Hub