According to the Construction Products Association’s Winter Forecasts, construction
output is forecast to fall by 2.1% this year due to falls in private housing
new build and repair, maintenance and improvement (rm&i) - the two largest
construction sectors.
The CPA forecasts that construction output will rise by 2.0% in 2025 in line
with falling interest rates and a general economic recovery, which, in turn,
could ease challenges in the housing and rm&i sectors.
Recent disruptions in the Red Sea, however, have been identified as a key
risk to the forecasts, potentially leading to supply issues such as delays and
accelerating cost inflation.
Private housing - the largest construction sector - suffered a double-digit
fall last year after a spike in mortgage rates hit housing market demand.
Consequently, many house builders have reported a fall of around 25-35% in
demand, in addition to the regulatory issues that smaller house builders
continue to face in particular around planning, as well as water and nutrient
neutrality.
The lagged effect of higher mortgage rates is likely to continue to weigh
upon property transactions this year with private housing output expected to
fall by a further 4.0%. Looking to next year, a gradual fall in interest rates
should boost demand with private housing output expected to rise by 4.0%. This
doesn’t imply a speedy recovery however, as interest and mortgage rates are not
expected to return to the record lows seen as recently as 2021 anytime soon.
The lack of a government policy stimulus to help overcome high deposit and
mortgage payment requirements, also means the recent peaks in housebuilding
from 2022 are unlikely to be seen again until at least the end of the decade.
Private housing rm&i is the second-largest construction sector and
activity continues to be on a general downward trend. The rising cost of living
has hit discretionary household improvements spending. In addition, fewer
property transactions last year led to a decline in refurbishment activity from
new homeowners who typically make cosmetic improvements within the first 6-9
months of moving in.
Smaller project work is likely to continue to remain flat in the first half
of this year as household spending remains tight, whilst the continued fall in
property transactions in the first half of this year is likely to hit larger
project work for the remainder of 2024. This is likely to be partially offset
though by strong activity on energy-efficiency retrofit such as insulation and
solar photovoltaic work. Overall, private housing rm&i output is expected
to fall by 4.0% in 2024 before growth of 3.0% in 2025.
In infrastructure, which is the third-largest construction sector, activity
remains strong down on the ground. Work continues apace on HS2 Phase One
despite the most recent cost increases, as well as on Hinkley Point C and the
Thames Tideway Tunnel. Frameworks activity in the regulated sectors of roads,
rail, water and electricity provides sustained levels of activity in the
infrastructure sector too. Concerns remain, however, over pauses and delays to
National Highways projects, as well as increasing uncertainty on the
deliverability of plans in the water sector to deal with water quality issues
through increased capital expenditure. Furthermore, at a local level, councils
continue to face financial constraints and despite government announcing £8.3
billion of funding for potholes, resurfacing and roads projects to 2034, there
is little evidence to suggest that this will lead to any uplift over the
forecast period. As a result, overall, infrastructure output is expected to
fall by 0.5% in 2024, a third successive marginal fall in output, before rising
by 1.2% in 2025.
Commenting on the Winter Forecasts, CPA Economics Director, Noble Francis
said: “The bad weather at the start of January has already affected the
construction industry but there is still lots of time for a catch up in
activity when the weather improves. The bigger problems for the industry are
the hits to activity last year in its two largest sectors - private housing and
private housing rm&i. These are likely to continue into 2024. Even with
expected falls in interest and mortgage rates in the second half of this year,
rates are likely to remain relatively high and so demand in the housing market,
house building sector and rm&i sector is likely to remain subdued overall.
“Given the importance of housing to the UK economy, it was disappointing
that the Chancellor’s Autumn Statement last year had little to help the
beleaguered sector. It is critical that we see measures to help boost house
building and homeownership from government in the upcoming Spring Budget.
Furthermore, government should do more on infrastructure delivery given that
the sector is set for its third consecutive fall in output. This is despite
announcements from government on new projects to compensate for the cancelling
of the Northern leg of HS2.”
