CPA forecasts 3.3% construction fall in 2026

The Construction Products Association has downgraded its outlook for UK construction, forecasting a 3.3% fall in output during 2026 as higher costs and weaker demand spread through privately financed sectors.

Output had already fallen by 1.6% during the year to date, according to Office for National Statistics data used in the forecast. Activity is expected to weaken further during the second half as inflation, financing costs, lower confidence, and deteriorating project viability affect starts and investment decisions.

Construction output is forecast to return to growth of 1.2% in 2027, although the association says risks remain weighted heavily to the downside. Any recovery would also begin from a lower base following the deeper contraction now expected this year.

Private housing carries the largest downgrade. Output is forecast to fall by 10% in 2026, compared with the 7% contraction anticipated in the spring forecast, before remaining flat during 2027.

Housebuilders have reported a sharp weakening in buyer demand as mortgage interest rates rise and affordability deteriorates. The effect is expected to be most visible in higher-value areas, while lower-price markets face a different viability problem as construction costs increase against more limited selling values.

Regulatory costs are adding to the pressure. The Building Safety Levy is due to take effect in October 2026, followed by implementation of the Future Homes and Buildings Standard in March 2027.

Those requirements sit alongside higher labour, finance, land, infrastructure, and construction-product costs. Individually manageable additions can collectively remove the margin from sites that were already difficult to progress.

Private housing repair, maintenance, and improvement is forecast to fall by 8% during 2026 and remain flat next year. Essential repairs have continued, but discretionary home-improvement activity remains weak as households favour saving over larger projects.

Government-funded energy-efficiency schemes could support longer-term demand for solar photovoltaic systems, heat pumps, insulation, ventilation, and associated electrical work. Skills availability may limit delivery, particularly if installers leave the sector during the near-term downturn before funded programmes reach scale.

Commercial construction also faces uncertainty because higher financing costs affect development appraisals and occupier investment. Projects with planning permission may remain unbuilt where rents, yields, pre-lets, and construction costs no longer support the original business case.

The forecast follows evidence that construction starts and contract awards weakened during the second quarter. That pipeline data aligns with the CPA’s expectation that reduced activity will become more visible on sites after a delay.

Tender pricing does not necessarily follow material inflation immediately. Competitive workloads can lead contractors to absorb risk or rely on optimistic subcontract quotations to secure work.

Recent tender-price forecasts have remained comparatively restrained despite rising input pressure, increasing the importance of contract terms, package timing, and the period for which quotations remain valid.

The CPA expects a spike in construction-product prices during the second half of 2026. It also identifies the government’s 50% tariff on imported steel from 1 July as an additional source of cost pressure across structural frames, reinforcement, façades, building services, plant, and manufactured components.

Rebecca Larkin, head of construction research at the CPA, said: “Construction activity so far this year is already lower than a year earlier and there is still considerable concern that we are yet to see the key impacts of cost inflation on projects down on the ground or the extent to which it affects appetite for signing up to or starting new projects.”

Cost movement affects far more than the final contract value. Contractors must decide how long quotations remain valid, whether imported components can be fixed in price, which party carries exchange-rate or tariff exposure, and whether provisional sums remain realistic when packages are finally bought.

Clients may attempt to preserve the headline budget by reducing scope, delaying phases, or substituting products. Nominal project value can remain unchanged while the physical volume of construction falls, particularly where rising prices consume contingency and planned later stages.

Infrastructure remains the principal exception. Output is forecast to increase by 3.2% in both 2026 and 2027, supported by existing contracts, committed funding, and pipelines in energy generation, National Grid distribution, and water investment.

Those markets provide valuable workload but cannot absorb every company or trade affected by falling housing. Heavy civil engineering, high-voltage networks, water treatment, tunnelling, and major infrastructure require specialist competence, security, plant, systems, and financial capacity that cannot be transferred immediately from residential construction.

Rail carries greater uncertainty, with the HS2 cost-saving reset now expected in spring 2027. Roads face pressure after proposals to fund higher defence expenditure partly through reductions to new-road investment.

Infrastructure growth is also exposed to the same inflation affecting the rest of construction. A funded programme can maintain its cash budget while delivering fewer kilometres, structures, substations, or treatment assets if material and labour costs rise faster than the allowance.

The supply chain therefore faces an uneven market rather than a uniform recession. Energy, grid, and water specialists may experience strong demand, while housebuilders, residential subcontractors, merchants, and improvement-focused businesses manage falling volumes.

Capacity loss presents a longer-term concern. Companies that close, reduce apprenticeships, sell plant, or release experienced employees during the contraction will not return immediately when demand improves.

A weak 2026 could consequently limit the speed of any housing, infrastructure, or retrofit recovery during 2027 and beyond. The loss of specialist labour and production capacity may also increase prices once activity begins to recover.

Government policy will need to address demand and cost together. Planning reform and housing targets cannot generate starts where finance, levy costs, infrastructure requirements, and build prices leave schemes unviable.

Temporary cost relief will achieve little where buyers, registered providers, and public clients remain unable to fund projects. Equally, demand support that ignores supply-chain capacity may simply translate into higher prices rather than additional construction.

The forecast leaves infrastructure as the strongest part of the market but removes any assumption that its growth can offset the wider decline. With private housing and home improvement contracting sharply, total output is expected to fall materially before a limited recovery begins from a smaller industry base.