Construction is booming, housebuilding is lagging - will Scottish Budget jumpstart homes?

Growth in the UK’s construction sector picked up pace last month, as stronger demand for office building and infrastructure work helped offset sluggish house building, according to new data.

News of more housing funding in this week’s Scottish budget has been welcomed, but regulations continue to “pause” some developments’ according to analysts.

The latest S&P Global construction purchasing managers’ index (PMI), watched closely by economists, scored 55.2 in November, up from 54.3 in October.

Any reading above the 50 threshold indicates that activity in the industry is increasing, while anything below means it is shrinking.

Ms Robison told MSPs: “We are going to ramp up action on housing, investing £768 million in affordable homes. | PA / Canva

The sector “bucked the slowdown seen elsewhere across the UK economy”, according to Tim Moore, S&P Global Market Intelligence’s economics director.

It follows figures showing that the country’s services sector – the biggest driver of economic output- came “close to stalling” in November because of companies slowing hiring and making cutbacks over worries about costs.

And the downturn facing the manufacturing sector also worsened amid heightened fears over the economic outlook.

The construction industry, however, was bolstered by the strongest rise in commercial work – such as offices, shops and warehouses – for two-and-a-half years.

Businesses reported seeing improving customer demand and new opportunities to bid for projects, despite subdued economic conditions.

Civil engineering activity, which refers to infrastructure projects such as roads, water systems and railways, also grew in November, albeit at a slower pace than previous months.

Growth in the UK’s construction sector picked up pace last month | Getty Images

“However, the recovery in construction activity remains somewhat lopsided,” Mr Moore said.

“Strengthening demand for commercial work and civil engineering projects contrasted with a sustained downturn in house building.

“Commercial construction activity expanded at the fastest pace for two-and-a-half years in November, while residential work declined at the steepest rate since June.”

Housebuilders continued to see higher borrowing costs and fragile consumer confidence weigh on demand, according to the survey.

In Scotland, energy infrastructure work in particular has picked up pace, but housebuilding is sluggish in an echo of the overall UK picture.

There were also some reports that political and economic uncertainty linked to the UK autumn Budget, which was unveiled at the end of October, had affected construction firms’ customers.

“A loss of momentum for new work, alongside concerns about rising employment costs, resulted in weaker job creation and falling business optimism across the construction sector,” Mr Moore added.

Finance Secretary Shona Robison presents her proposed Budget for next year to the Scottish Parliament (Picture: Jeff J Mitchell)

Scottish housebuilding sector following draft Budget

Jordan Smith, technical director at Scottish construction and property consultancy firm Thomas & Adamson, said: “While the rent cap put a pause on many new residential developments – particularly in the build-to-rent (BTR) sector – the hope will be that the Housing (Scotland) Bill moving through the Scottish Parliament should provide more clarity and help get more projects out of the ground.

“The announcement of new funding for housing in this week’s Scottish Budget should also help breathe new life into residential construction. At the same time, we’re continuing to see a ramp up in activity related to energy infrastructure and expect that to continue into 2025.”

Scottish finance secretary Shona Robison pledged £786 million for affordable housing investment in Wednesday’s draft budget statement.

Last year’s budget included cuts to funding for housing and planning but this was partially restored in April during Humza Yousaf’s final days as first minister.

Robison told MSPs: “We are going to ramp up action on housing, investing £768 million in affordable homes.

“It enables over 8,000 new properties for social rent, mid-market rent and low-cost home ownership to be built or acquired this coming year. And returns spending to a higher level than it was two years ago.”

Broader UK construction and housebuilding sector analysis

Stacy Eden, National Head of Real Estate and Construction at audit, tax and consultancy firm RSM UK, said: “November saw a slight increase in the construction PMI, despite economic challenges, geopolitical tensions and some market uncertainty following the Autumn Budget. As such, this may imply a settling of industry sentiment once businesses had time to process the impact of the Chancellor’s update.

Chancellor Rachel Reeves outside 11 Downing Street. PIC: Jordan Pettitt/PA Wire

“However, the rise in November was driven by a sharp jump in commercial activity, which although positive, is steeper than expected. This increase also offsets further falls in housing and civil engineering activity, which were anticipated, especially as the government’s housebuilding targets have come under much scrutiny recently.

“The industry is held back by land availability, affordable housing, productivity and labour shortages, with the root cause of these issues being the planning system. Although it’s encouraging to see government’s changing attitude towards housing and its role in stimulating the economy, construction businesses remain concerned about planning which slows down housebuilding due to lack of flexibility, delays, land banking and its unpredictable and complex nature.”

RSM UK economist Thomas Pugh added: “The tick up in the construction PMI in November to 55.2 suggests construction activity held up in November. However, the positive headline number masks clear signs of nervousness after the Budget.

“The unexpected large jump in commercial activity from 52.8 to 58.1, masks a slowdown in civil engineering and housing activity. As such, it raises the risk that the increase in the headline PMI last month won’t translate into more activity in the official data.”