The worst construction slump since the pandemic threatens Labour’s building targets

The UK’s construction industry plunged into its sharpest downturn since the early months of the pandemic, raising urgent questions about Labour’s economic momentum.

Property developer / investor confidence has collapsed and the feasibility of hitting the government’s ambitious housing targets was undermined given the uncertainty created in the long lead-up to the Autumn Budget. 

From the landlords’ perspective, the short-term outlook in the PRS is bolstered by the supply shortage, but a severely unbalanced market is no good for the economy as a whole.

The statistics don’t lie

According to S&P Global (a leading provider of financial market intelligence, data, benchmarks, and analytics) in its latest survey, the sector’s Purchasing Managers’ Index (PMI) collapsed to 39.4, a level that signals severe contraction. Anything below 50 indicates shrinkage, but sub-40 readings represent outright crisis-conditions in a construction industry that is usually more resilient than the consumer-facing economy.

At one level, this is a sector-specific slump triggered by a combination of higher borrowing costs, fragile development finance and customers rethinking capital commitments. But there is something more fundamental going on here: this contraction is increasingly viewed as a barometer for the overall performance of the UK economy under Labour, and it is flashing bright red.

With the government’s pre-election manifesto promising to build 1.5 million homes during the current Parliament, this construction nosedive is not just inconvenient for the government, it undermines one of Labour’s key economic and political promises.

Targeting growth

The government’s whole economic strategy is predicated on creating growth, investment and supply-side reform to define a new era. Rachel Reeves has clearly stated she wants a “stronger, more resilient economy" through a mix stability, reform (planning, regulation), and investment, aiming for broad-based, inclusive growth by unleashing private sector potential, removing business barriers, and fostering public-private partnerships to end Britain's "cycle of decline" 

Instead, and so far into this government’s term, construction is contracting at a speed that jars with this wider narrative of stability and renewal and the growth that the government is trying to project.

The PMI’s 39.4 is much worse than economists’ forecast of 44.1 and unchanged from October. It was the weakest performance since businesses were crushed by lockdown restrictions in May 2020. 

The figures compiled S&P Global add to the building industry’s own evidence that a prolonged period of kite-flying ahead of the Budget - when Whitehall insiders were floating numerous policy ideas to gauge public reaction - has done some real damage to the sector.

The figure also deals a blow to Labour’s stated ambition to “build, baby, build” and an increasingly remote possibility that the Government will reach its target of 1.5m homes constructed by the end of the current Parliament. 

The collapse is broad based across the sector

The depth of the slump is not confined to housebuilding. According to the S&P Global/CIPS survey, all three major subsectors — residential, commercial and civil engineering — have tipped into steep decline.

The S&P Global/CIPS survey refers to the monthly Purchasing Managers' Index (PMI) reports for the UK (Manufacturing, Services, Construction, and Composite), jointly produced by S&P Global and the Chartered Institute of Procurement & Supply (CIPS)

Housebuilding is supposed to be the backbone of Labour’s supply-side housing strategy, and it recorded one of its weakest readings since the post-mini-Budget chaos of late 2022. Developers report that new instructions have simply dried up, financing has tightened, and buyer demand is proving patchy at best.

The commercial sector

Commercial construction is also deteriorating fast. While commercial activity often lags household spending and corporate investment cycles, it is also one of the first places where confidence returns when a government introduces pro-growth policies. 

Instead, firms are signalling outright caution. Office refurbishments, logistics warehousing and retail developments have slowed across the board, a lethargy driven by concerns over tax policy, business rates, and uncertainty around how the Autumn Budget will alter business incentives.

Infrastructure development

Civil engineering is traditionally a sensitive proxy for government-led investment and infrastructure activity, but all the evidence indicates this has slumped even harder. The sub-index fell to levels not seen for 5 years, since early 2020 when the country effectively froze. 

This situation is particularly striking given the government’s stated intention to accelerate infrastructure delivery, streamline planning and push through energy, transport and regeneration schemes. Instead of a pipeline filled to capacity, contractors report cancellations, delays and stalled procurement decisions.

All this taken together depicts an economy operating under stress from every side. Historically, when construction shrinks this quickly, the wider economy rarely escapes unscathed.

The housing pledge at risk

Labour’s promise to deliver 1.5 million new homes is one of its most high-profile commitments. It is also a deeply politically symbolic commitment. After years of housebuilding stagnation under successive governments, Labour framed its pledge as evidence that it could sweep away the delays and get Britain building again.

The current data - though there’s still three and a half years to go - makes the promise to meet the target look increasingly precarious given that it is already eighteen months in and many thousands of house completions behind schedule.

With housebuilding activity contracting and planning approvals running way below replacement levels, developers report worsening financial conditions. So the idea of the industry hitting even 250,000 completions per year, let alone exceeding it, looks optimistic according to industry insiders.

Pure economics

The industry is responding to market fundamentals, not party politics. Developers simply cannot (will not) build at scale if demand is not there. Finance costs are rising, planning becomes unpredictable and risky, and contractors make losses. All of those pressures are intensifying, they’re not easing.

If Labour can’t reverse this slide by next spring or summer, its housing pledge will likely become a political liability and a symbol of its wider economic underperformance.

One of the most striking things about this slump is the sharp decline in new orders. This, it would seem, is not just a temporary blip caused by bad weather or labour skill shortages. The malaise runs deeper, the collapse in forward-looking activity is causing firms to struggle right now, and they are not filling pipelines ready for next year.

Getting “Britain building” again was the aim, but execution has been slow. Procurement cycles have not been accelerated, and infrastructure schemes take longer. They are not coming online fast enough to take up the slack. And local planning capacity is still constrained.

Why all this matters for landlords and property investors

For LandlordZONE readers, the construction slump has several implications: 

Housing supply will remain tight, potentially that supports rents, but it has the effect of strangling the long-term viability of the PRS. Commercial property stock may experience shortages, and this may worsen, affecting availability and pricing across logistics, retail and mixed-use developments.

Development appraisals will become more conservative, as build costs, planning delays and financing risks weigh on the feasibility of property developments and refurbishments. Government policy is likely to grow more interventionist, as political pressure mounts to deliver.

In short: a weak construction sector affects everyone in property. And right now, the sector is signalling distress.

Rob Wood, chief UK economist at Pantheon Macroeconomics, has said elsewhere:

“The PMI points to catastrophic conditions in the construction sector. We see little to change the weak near-term outlook for construction. The Budget focused on raising taxes to fund energy price giveaways and higher welfare spending rather than growth and construction-boosting measures. That will likely have disappointed builders.”

Here's the other side of this story: the demand (for housing) is still rising

While construction activity is falling sharply, the demand side of the UK housing market tells a very different story. It’s one of structural pressure, sustained population growth and chronic under-supply. The downturn in building output may weaken future supply, but there is little evidence that underlying demand for homes, especially in the rental sector, is falling.

In other words, the demand fundamentals remain strong even as supply deteriorates. That tension, if anything, is likely to push rents and prices up over time. These are the main forces driving the demand side:

The UK population continues to grow, driven largely by immigration. The available data is clear, immigration is now the single biggest driver of UK population growth, and it has a direct effect on housing demand.

The ONS reported net migration of 685,000 in 2023, and revised figures show sustained annual inflows above 450,000 for multiple years running. Even if policy cuts net migration sharply, inflows are still expected to remain significantly above the pre-2010 average. Migrant households tend to concentrate in cities and the Southeast. This is exactly where housing shortages are most acute.

There are two immediate consequences of this: (1) private rented sector (PRS) demand rises, because new arrivals overwhelmingly rent rather than buy in their first years, and (2) localised housing shortages will intensify, especially in London, Manchester, Birmingham, and other university towns.

This means that even if the housebuilding collapse is only temporary, pressure on the rental market will not ease up.

Household formation trends are outpacing new supply. Population growth tells only part of the story. The UK is experiencing historically high rates of household formation, influenced by: delayed marriage; more people living alone; higher separation and divorce rates; longer student stays in university cities; and young professionals relocating for post-pandemic work patterns.

The ONS projects an additional 1.1 to 1.4 million new households will form over the next decade, but England is building nowhere near enough homes to meet that demand. Even in good years, completions have hovered between 160,000 and 220,000, far short of the 300,000 widely accepted as the annual requirement.

With construction activity now collapsing, the supply-side gap will only widen.

For the PRS demand remains exceptionally strong

Despite tax pressures, new regulation, and landlord exits, the private rented sector remains the fastest-growing tenure for key population groups: migrants; students; young professionals; low-deposit first-time buyers who cannot afford rising mortgage rates; and people in insecure or mobile employment

According to the English Housing Survey and ONS the PRS accounts for roughly 20 per cent of all households, rising to one-third in major cities. In cities such as Manchester, Bristol, Leeds and Birmingham, rental demand has increased between 10 per cent and 25 per cent over the past three years.

In university towns, demand has grown each academic cycle regardless of construction activity. Even with landlord exits, tenant numbers keep increasing, tightening vacancy rates and pushing rents up.

Mortgage Affordability

First-time buyers are struggling with affordability. The Bank of England’s mortgage rate environment remains a major barrier to homeownership for under-40s. Average mortgage rates have risen from below 2 per cent in 2021 to 4–5.5 per cent today. 

House prices have not fallen enough to offset this rate shock, meaning monthly payments remain prohibitively high and the deposit burden — often £40,000–£70,000 outside London — is insurmountable for most renters, and in London this barrier is even higher.

With affordability stretched to 8–9 times income or even high in many regions, the natural flow from renting to ownership has stalled. The result is a larger, more permanent renter population.

This effect will only intensify during construction slumps, because limited new supply keeps prices from falling and rents high.

Social housing shortages 

The UK has lost more than 180,000 social homes over the past decade through Right to Buy and demolition, while replacement rates lag far behind. Waiting lists have risen to over 1.2 million households in England which pushes more of these households into the PRS. 

Local authorities increasingly rely on the private rented sector housing for low-income families; temporary accommodation placements; those fleeing domestic violence and recently arrived migrants.

As a result, even when the economy slows, demand for PRS housing from this sector will remain robust. 

Student numbers continue to rise

International student inflows are now another major housing-market pressure point. The UK has hosted 680,000+ international students this year (2024/25) while domestic participation rates have also increased. PBSA (purpose-built student accommodation) is undersupplied in most university towns, pushing students directly into the PRS.

Cities such as Durham, Bristol, Manchester, Nottingham, York, and Exeter have been experiencing rental bidding wars because supply cannot match demand, something that cannot happen next year under the new Renters’ Rights Act. 

The labour market remains strong 

Despite the construction slump, the labour market remains relatively tight. Unemployment is low by historical standards and wage growth has remained above inflation in many sectors. Cities continue to attract inward migration from rural areas and smaller towns as young people move for work maintaining that pressure on local PRS markets.

In summary

There is strong demand with collapsing supply, which is a recipe for tension. Even though construction has entered a steep downturn, demand for housing and renting is not falling. In fact, many of the forces shaping demand — migration, demographics, household formation, student numbers, and affordability barriers — are intensifying.

When strong demand meets collapsing supply, the result is predictable: vacancy rates fall and prices / rents rise. Competition for what properties there are increases and landlords achieve shorter voids and higher yields. 

For Labour, these levels of housing shortage become more politically explosive but from the landlords’ perspective, the short-term trend is reassuring: the demand side remains extremely strong.

Whether the government can stabilise the industry and restore confidence remains to be seen. Right now, the indicators are going in the wrong direction.