According to the Construction Products Association’s Winter Forecasts, construction output is expected to shrink 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.

However, the CPA sees construction output grow by 2.0% in 2025, thanks to 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 recently anytime soon.

The lack of a government policy stimulus to help overcome high deposit and mortgage payment requirements, also means the 2022 peaks in housebuilding 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, while 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.

However, this is likely to be partially offset 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. 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.”