Residential and Commercial Construction Hit Hard
The UK construction sector closed 2025 on a sobering note, marking its longest period of decline since the global financial crisis. According to the latest S&P Global/CIPS Construction PMI, December registered a reading of 40.1, up slightly from November’s 39.4 but still well below the 50 threshold that signals growth. This capped off a full year of contraction for the industry.
Housebuilding bore the brunt of the downturn, with activity falling to 33.5—its weakest level since the COVID lockdown in May 2020. Commercial construction also suffered, posting its sharpest decline in over five years. Civil engineering projects remained subdued, reflecting widespread caution among clients and developers.
What’s Driving the Slowdown?
Several factors have combined to create a challenging environment:
- High borrowing costs and tighter credit conditions have dampened demand.
- Rising build costs and persistent labour shortages continue to squeeze margins.
- Planning delays and regulatory hurdles have slowed project pipelines.
Despite these headwinds, demand for new homes remains strong—underscoring the structural imbalance between housing supply and need.
Signs of Hope for 2026
While the data paints a bleak picture, there are reasons for cautious optimism. Business confidence among construction firms improved in December, reaching its highest level since mid-2025. This shift is largely attributed to:
- Post-Budget clarity, which has eased some uncertainty for developers.
- Expectations of lower interest rates in the coming months.
- Potential government support for housing and infrastructure, aimed at stimulating growth.
Industry leaders stress that meaningful recovery will depend on structural reforms, including planning system improvements and incentives for smaller developers to boost housing supply.
What This Means for You
For housebuilders, estate agents, landlords, and property developers, the message is clear: the market remains challenging, but opportunities are emerging. Staying agile—by monitoring policy changes, managing costs effectively, and preparing for renewed demand—will be key to success in 2026.
Government Rejects Claims Linking Housebuilding to Migration
The Ministry of Housing, Communities & Local Government (MHCLG) has dismissed suggestions that new homes are being built to accommodate migrants, calling such claims “scaremongering.” In its statement, the department stressed that the vast majority of housing developments are aimed at UK nationals and those legally eligible.
Social housing allocations remain tightly controlled, with around 90% going to British citizens. Migrants on temporary visas and asylum seekers are not entitled to social housing, MHCLG confirmed.
Instead, the government says the real challenge is meeting growing housing demand across the country. To address this, ministers have committed to delivering 1.5 million new homes, backed by the most significant planning reforms in over a decade and the new Planning & Infrastructure Act designed to speed up approvals.
For developers, this is a clear signal: the focus is on boosting supply, not redistributing homes. With planning changes now in law, 2026 could offer opportunities for those ready to bring forward new projects.
Local Housing Allowance Freeze Puts Pressure on Landlords
The government has confirmed that Local Housing Allowance (LHA) rates will remain frozen at 2024 levels for the current financial year. LHA continues to be set at the 30th percentile of local market rents, meaning benefit-dependent tenants can access more affordable housing—but landlords in high-cost areas may face widening gaps between LHA support and actual rents.
There is no automatic annual adjustment for inflation or rising rents, so future changes will depend on government reviews and budget decisions. Landlord groups warn that without regular updates, arrears and eviction risks could increase.
For landlords and agents, now is the time to check current LHA caps, reassess tenancy strategies, and monitor policy developments closely.
Nationwide Predicts Modest House Price Growth in 2026
Nationwide’s latest review suggests the housing market will remain resilient in 2026, with prices expected to rise by 2–4%. This outlook follows a year of slower growth, as annual price increases eased from 4.7% at the end of 2024 to 1.8% by late 2025. Despite this cooling, prices remain close to record highs.
The lender points to improving affordability as a key driver for renewed buyer confidence. Earnings growth has outpaced house price rises, and mortgage rates have begun to fall from their recent peaks, helping first-time buyers return to the market. High loan-to-value lending reached its strongest level in over a decade, signalling renewed appetite among buyers.
Regional trends remain mixed: Northern Ireland saw double-digit growth last year, while London lagged behind with minimal gains. Nationwide expects these disparities to persist but narrow further as affordability pressures ease.
Looking ahead, gradual interest rate reductions and stable economic conditions should underpin demand. However, tax changes affecting buy-to-let income could tighten rental supply, adding pressure to the private rental sector.
