Lung adenocarcinoma (LUAD) is a leading cause of cancer-related mortality worldwide, yet the cellular dynamics and molecular mechanisms governing tumour initiation and progression remain elusive. Although alveolar type II (AT2) cells, which act as stem cells in the alveolar epithelium, have been identified as key cells of origin of LUAD, little progress has been made in understanding the precise sequence of events that transform single AT2 cells into complex malignant tumours. Here, I trace thousands of individual wildtype and oncogene-expressing mutant AT2-derived clones across multiple timepoints in vivo to shed insight into the early events driving neoplastic transformation. By integrating immunofluorescent analysis with 3D reconstruction and mathematical modelling of AT2- derived clones, I describe the presence of two independent AT2 subpopulations regulated by distinct dynamics. I show that these populations undergo neutral competition with their neighbours to maintain homeostasis, but that differentiation occurs more slowly at steady state than previously thought. Having established a physiological baseline for AT2 behaviour, I then utilised an oncogene-associated multi-colour reporter mouse model to simultaneously trace wildtype and KrasG12D mutant AT2 cells in the same mouse. Clonal analysis of the mutant compartment revealed a heterogeneous response to oncogenic activation where only one AT2 subset underwent significant clonal expansion. By leveraging single cell transcriptomics and 3D in vitro organoid systems, I show that these mutant cells hijack the regeneration pathway but fail to complete differentiation, resulting in aberrant expansion via stochastic fate transitions between reprogrammed cellular states. Further, I demonstrate that deletion of Interleukin 1 receptor 1 (Il1r1) acts as a roadblock to oncogenic expansion by preventing cells from entering the reprogramming trajectory. By performing comparative analyses between oncogenesis and homeostasis, I reveal that the presence of oncogenic clones induces a systemic injury response in wildtype AT2 cells, causing accelerated proliferation and differentiation through a similar state previously reported to be an injury-specific progenitor. These changes occur in conjunction with phenotypic changes in the surrounding niche, which, according to in vitro experiments, preferentially support oncogenic expansion over wildtype AT2 maintenance. Collectively, my results delineate key evolutionary trajectories driving neoplastic AT2 transformation and point towards a mechanism where mutant cells shape wildtype cellular dynamics to ultimately create a niche favoured towards tumour progression.