UK construction contracts sharply as rising borrowing costs stall house building

The UK construction sector contracted sharply in October, with new data pointing to severe headwinds in the residential market driven by rising borrowing costs. The S&P Global UK Construction Purchasing Managers' Index (PMI) fell to 43.6 in October, down from 46.1 in September, marking the 22nd consecutive month below the neutral 50 threshold.

The S&P Global UK Construction PMI is compiled monthly from a panel of around 150 construction companies and is widely used by central banks, financial markets, and business decision-makers as an indicator of economic conditions.

New orders collapse, demand dries up

The most significant finding in the October data is not the headline index but what is driving it: a sharp and accelerating collapse in incoming work. Total new work received by construction companies fell at the sharpest pace since June, reflecting subdued market conditions and fragile customer demand. A number of firms commented on more cautious budget setting among clients and fewer opportunities to tender.

For mortgage professionals, falling new orders are a leading signal: when developers stop commissioning work and clients pull back on budgets, the consequences flow through to development finance drawdowns, bridging loan activity, and ultimately the volume of new housing stock entering the market.

Some firms reported improved order books due to higher infrastructure spending, particularly data centres, energy networks, and utilities projects — but these are not sectors that generate mortgage demand. The residential shortfall is where the impact on brokers and lenders concentrates.

House building bears the brunt

Residential activity was by far the weakest-performing segment, with the index reading at 35.1 — the lowest since December 2025 — indicating a steep drop in house building.

Fewer housing starts mean fewer completions, reduced mortgage demand, and a thinner pipeline for brokers — particularly those active in the new-build space. The October data reinforces a picture of a market in which the cost of finance is actively suppressing supply, not just demand.

Tim Moore, Economics Director at S&P Global Market Intelligence, described the results as "a setback for the UK construction sector after some signs of stabilisation in the previous month," adding that construction companies were reporting "severe headwinds in the house building sector from rising borrowing costs, weak consumer confidence and elevated economic uncertainty."

James Staunton, head of communications for commercial mortgage lender TAB, said the data reflected a regulatory burden that was compounding the problem. "We aren't hitting housing targets or coming close to solving the housing crisis because building homes has become a red-tape marathon," he said. "Every new levy, every new survey and sign-off slows down a project, adding days, weeks and sometimes months to a build. That time is not cost-free — it can kill viability. Ministers can't demand more homes while making each one harder to build than the last. The cheapest stimulus available costs the Treasury nothing: get out of the way."

Costs rise as supply chains buckle

Compounding the demand-side weakness, construction firms are simultaneously absorbing sharply higher input costs. Input cost inflation accelerated sharply from the seven-month low recorded in September, with 48% of the survey panel indicating an increase in their input costs in October, up from 25% the previous month. Many firms cited fuel surcharges, higher energy costs, and rising raw material prices, particularly aggregates, concrete, electrical items, and steel.

Supplier performance deteriorated for the third consecutive month, with vendor lead times extending to their greatest degree since May, linked to low stocks, transport delays, and spillovers from stretched manufacturing supply chains.

For lenders active in development finance, rising build costs eat into project margins, reducing the viability of schemes that may have already secured funding in principle. Where costs overshoot original appraisals, lenders face difficult conversations with borrowers — and sometimes stalled projects.

Confidence at its lowest since late 2022

The 34% share of construction companies expecting output growth in the year ahead exceeded the 27% forecasting a decline by only a narrow margin. This is the lowest net sentiment since May, with political and economic uncertainty cited as the main challenges. Infrastructure spending provided some offset, but not enough to reverse the broader trend.

For lenders and brokers working across residential lending, bridging, and the new-build market, October's PMI data is a reminder that construction sector weakness is not a distant economic signal. It is a live constraint on housing supply, deal flow, and ultimately, mortgage volumes. Until borrowing costs ease and the planning environment becomes more predictable, the pipeline is likely to remain under pressure.

Want to be regularly updated with mortgage news and features? Get exclusive interviews, breaking news, and industry events in your inbox – subscribe to our FREE daily newsletter. You can also follow us on Facebook, X (formerly Twitter), and LinkedIn.