Despite being one of the largest sectors, the UK construction industry has not been immune to the effects of economic uncertainty, showing mixed signals even in the face of a weak sterling and easing energy costs, reducing input inflation.
While ONS data reported a record £139bn of new work output in 2023 (a 4.2% rise), growth stalled in 2024. High inflation and rising borrowing costs strained demand, in combination with weak GDP growth. With base interest rates hitting around 4.5% in Feb 2025, projects were delayed or scaled back. Early data from 2025 shows near-zero growth in the construction industry. Q1 2025 compared to Q4 2024 showed a 0% change. Despite this, signs of stabilisation have emerged, with the ONS reporting a modest 0.6% increase in new work from May 2025.
Table of Contents
Macro view of the 2025 construction industry
Here is some key data on the construction industry in 2025.
Construction output
After reaching an all-time high in 2023 of £139bn, 2024 saw little growth, followed by an equally dismal start to 2025. May 2025 output fell 0.6% from April, following a 2.1% drop in repair and maintenance work. However, year-on-year, May 2025’s output was up 1.2% led by a 3.6% jump in new work.
New orders
Signs appeared in 2023 indicating a slowdown of new orders, falling 16% to £67.9bn, with the main culprits being public infrastructure, private commercial buildings and housing, indicating limited public sector stimulus. However, in Q1 2025, new orders jumped 26.6% quarter on quarter, largely from infrastructure and industrial projects, an encouraging sign for later in 2025.
Sector breakdown
Here’s a breakdown of each main sector of construction in the UK:
Residential housing
As expected, the private housing market has been extremely volatile. The combination of weak demand and high mortgage costs has shown housebuilding to be at its weakest on record in February 2025. By June, however, it had lifted back into growth. One of the main issues facing the residential housing sector is the challenge of planning permission – housebuilding permissions fell to around 242,600 in 2024, the lowest since 2014. Despite planning reforms, Labour’s goal of 1.5m new homes by 2030 appears to be very ambitious looking at current rates.
Public housing and infrastructure
Public housing orders were the only increasing sector in 2023, according to the ONS. This directly reflects the government’s support for social housing. On the other hand, infrastructure has had mixed support. The scaling back of HS2 freed up resources, while creating uncertainty at the same time. Similar projects like the third runway at Heathrow or the Lower Thames Crossing are potential future work opportunities, but will require private funding and are not yet live.
One encouraging stat is the increase in public output for non-housing projects, like schools, hospitals and utilities, helping regional growth. Overall, infrastructure output is growing modestly. The Construction Products Association forecasts an increase in infrastructure of +1.8% in 2025, and +4.5% in 2026. The encouraging recent spending review from Rachel Reeves has committed £113bn for funding in transport, housing and energy over the next four years.
Commercial and industrial
On the other hand, office and retail segments remain weak. Commercial projects are down 18% year on year into mid-2025. Leisure and office projects are particularly delicate due to tenant uncertainty. Conversely, light industrial projects are doing better. BCIS notes that private industrial new work is one of the fastest-growing areas in early 2025. The landscape is very much divided – while there are pockets of demand in capital-intensive projects like infrastructure, industrial and housing, the bulk of commercial construction is marred by low demand.
Costs, labour and productivity
The costs of inputs are still elevated, but stabilising. While labour costs have risen 7.1% year on year by Q2 2025 (thanks to NI and NMW hikes), they are forecasted to climb 16% by 2030. Material costs have actually fallen since their spike in 2022, but BCIS predicts a 13% total rise between 2025-30. The on-site costs of materials like concrete, timber and insulation continue to tick up, but annual inflation eased to a five-month low in June. Contractors report that supply chains have largely normalised, with fewer shortages than 2021-22, however, energy and transport still add to bills.
Wages and workforce
Currently, the construction industry is facing chronic labour shortages. Excluding self-employed workers, the UK construction industry employed around 1.4 million people in 2023. In order to meet demand, CITB forecasts a required growth of 2.65m in 2024 to 2.75m by 2029, adding around 47,860 workers per year. Efforts are being made to enact this growth, with 5000 new apprenticeships being added annually, as well as expanding visas for skilled workers. However, the lingering effects of Brexit, combined with an ageing workforce and periods of no pay rise, have created a gap between supply and demand. Technology has facilitated small improvements, but labour productivity in construction compared to other sectors is lagging behind. If these shortages persist, we could see pressure from rising wages and project delays.
Finance and investment
On interest rates and lending, the Bank of England’s Base Rate peaked at 4.75% in late 2024 before being cut to 4.5% in Feb 2025, easing borrowing costs. JLL has noted modest upticks in new project starts since the easing of rates, despite the relatively high cost of borrowing. While insolvencies have slowed, lenders still remain cautious, particularly on big projects.
Capital and funding
Government borrowing hit a four-year high in Dec 2024, at £17.8bn, which limits new commitments. However, the recent Spending Review has made one of the largest commitments in decades, with £39bn over 10 years for social and affordable housing, with annual spending doubling to £4bn by 2029-30. Furthermore, a targeted £625 million funding package was announced to train up to 60,000 new construction workers through apprenticeships and bootcamps. Private investment is showing mixed signals, with institutional investors interested in “green” projects but perhaps being too risk-averse to take them on. Alternative funding methods are seeing an increase in popularity, such as developer finance or bonds. For contractors seeking loans, the tighter lending criteria means that credit is most likely going to those larger projects, whereas smaller builders turn to alternative credit products like invoice financing.
Policy and regulatory environment
Dominating headlines, Labour’s 1.5 million homes target by 2030 has been met with sceptical forecasts, such as that from the OBR, which implies that only 1.3 million is possible. Achieving these targets will require major regulatory changes, with planning permissions falling 2% to 242.6k in 2024 – far below the 370k/year required. Policy changes like the National Planning Policy Framework from December 2024 plans reforms which aim to free up land, with OBR estimating these will boost housing by +170k over the decade. Short-term issues still persist in local planning delays and environmental regulations, like water neutrality requirements.
Infrastructure pipeline
Uncertainty caused by large projects has also been a major drag. Until recently, the updated National Infrastructure and Construction Pipeline was delayed, leaving contractors unaware of spending plans. High-profile projects like the Lower Thames Crossing and Heathrow runway expansion are now heavily dependent on private funding. Short-term grants for projects like NHS buildings and school repairs allow certain work to continue. Following the Spending Review, we will likely see large increases in workloads from the extra social housing allocation.
Regulation and subsidies
The upcoming Future Homes Standard (projected Autumn 2025) will introduce new rules on building safety, energy efficiency and carbon. This will, without doubt, raise construction costs for new homes, with compliance enforcement adding uncertainty to higher-risk projects. However, the latest allocations to social housing and EV charging infrastructure (£400m), are creating niches of growth. Financial tools like green bonds and the government’s National Wealth Fund (UK Infrastructure Bank) are financing these construction projects directly.
Trends and opportunities
The following are sectors to watch closely:
Sustainability and retrofits
Green building will be a major growth area. The act of retrofitting existing homes, with insulation upgrades or heat pumps, for example, is now heavily encouraged through government planning policy, and funding schemes. This both reduces carbon as well as addresses housing shortages by making more stock habitable. New standards are pushing developers towards more low-carbon construction. Firms are seizing these opportunities, with projects like large-scale retrofits of schools and social housing being projected to leap. Environmental regulations will further influence design and material choice.
Technology and innovation
Tech adoption is also accelerating, with Building Information Modelling (BIM) now being widely used for planning and cost control. Some firms use drones for surveys, as well as AI-powered management tools and 3D printing of components. Prefabrication and modular construction techniques are all commonly accepted ways of boosting productivity and managing labour gaps. These long-term trends will become major factors in future competitiveness, with uptake levels being a particularly interesting trend to monitor.
Skill development
As discussed in the Spending Review, the acute skills shortage is driving new apprenticeships and visas, as well as professional training and re-skilling programs. This year, government ‘skills bootcamps’ for trades were introduced. Spurred by the introduction of growing sectors like renewables installation, specialist training is now available. These programs will hopefully alleviate some of the shortage difficulties or open new job pathways.
Risks and challenges
Some potential risks include:
Economic uncertainty
If there is a downturn in the wider economy, such as a faltering UK or global growth, private investment in construction will sink further. Rising costs could easily reverse the recent easing. Any new debt crises, trade wars or oil shocks will not be a welcome event for the construction industry.
Interest rates
Higher interest rates will keep a lid on mortgage finance and project financing, potentially triggering more repossessions or project cancellations. Further cuts will provide a boost.
Political shifts
As construction is so heavily policy-driven, any government pivot can cause major volatility. Any changes in planning rules, tax incentives or infrastructure commitments will be monitored. If Labour tightens net migration, this will exacerbate labour shortages. A general election will mark a moment of potentially seismic shifts for the construction industry.
Market competition and insolvency
Intense competition continues to burn in many segments. Smaller firms in particular struggle with flat and falling workloads. Despite insolvencies dipping from their 2023 peak, they are still above pre-2020 levels.
Future outlook
Some projections and potential opportunities include:
Modest growth
The Construction Products Association (CPA) predicts that overall output will increase in 2025 and 2026, driven mainly by housing and infrastructure. Backed up by recent government policy decisions, this looks like a safe assumption to make.
Funding opportunities
According to current data and policies, priority areas for funding include affordable and social housing, retrofits and energy-efficient projects, transport and utilities, and commercial/logistics warehousing.
Looking forward
As of mid-2025, the UK construction industry is being shaped by a profound rebalancing of capital and public spending. £39bn of spending on social and affordable housing over 10 years, combined with an expansion of capital budgets and a £725billion infrastructure strategy has brought major shifts to the construction industry. Concretely, housing remains a cornerstone of funding certainty, boosting lender and borrower confidence. Whilst infrastructure capital is up, it remains fragmented, leading to competition within infrastructure for the available funding. Lenders and developers need to account for these shifting capital allocations and evolving policy frameworks. These will lead demand, and be crucial for evaluating or pursuing construction finance in 2025.
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