The Bank of England raised Bank Rate from 3.75% to 4% on 5 November 2026, its first increase in more than three years, adding pressure to a London housing market already struggling to turn planning permissions into construction starts. The Monetary Policy Committee voted 8–1 for a quarter-point increase, responding to higher energy prices and inflation expected to reach around 5% by mid-2027.
For developers with funding and viable projects, however, the immediate construction market presents a different picture. The Building Cost Information Service (BCIS) reported annual building-cost growth of 4.3% against tender-price inflation of 3.2% in the third quarter of 2026. London Construction Magazine calculates a 1.1 percentage-point difference between the two measures. It suggests that tender competition is restraining prices at a time when contractors continue to face higher input costs, creating an opportunity for clients prepared to procure work without exposing their supply chains to unsustainable risk.
Why the rate rise changes less than the headline suggests
The Bank of England's November decision followed months of changing market expectations. Financial markets had already anticipated higher borrowing costs, with mortgage lenders increasing fixed-rate pricing before the announcement. The committee said monetary policy was not on a pre-set path, leaving further decisions dependent on inflation, pay growth and economic activity.
Moneyfacts recorded an average two-year fixed mortgage rate of 5.97% at the beginning of November 2026, compared with 5.59% at the beginning of September. The five-year average increased from 5.63% to 6.00% over the same period. Those increases are substantial for buyers, but they also show that a considerable part of the anticipated tightening had already entered mortgage pricing before Bank Rate moved to 4%.
This distinction is relevant to London developers assessing reservations, mortgage affordability and the likely sales period for new apartments. The Moneyfacts figures do not suggest borrowing has become inexpensive. They show why the November decision should be read against the financing conditions already built into sales forecasts, rather than treated as an entirely new quarter-point shock to every fixed-rate borrower.
The procurement window and LCM's Contractor Absorption Gap
BCIS published its third-quarter construction forecast on 8 October 2026. Its General Building Cost Index was expected to increase by 4.3% annually, while the All-in Tender Price Index recorded estimated annual growth of 3.2%. LCM's Contractor Absorption Gap measures the 1.1 percentage-point spread between these published inflation rates.
The comparison is commercially useful because the indices describe different sides of construction pricing. The building-cost index tracks movements in construction inputs, while the tender-price index measures accepted tender prices, including the effect of competition, overheads, profit allowances and contractors' commercial decisions. The gap is therefore an indicator of cost pressure and incomplete price pass-through, not a measurement of how much profit an individual contractor has lost.
Further pressure appears in construction materials. The latest provisional government materials data, reported by BCIS on 6 November, recorded a 7.2% annual rise across all construction work in September 2026. That was four percentage points above annual tender-price inflation, although the materials series measures a narrower cost category and covers a different reporting period.
BCIS also reported that 77% of its tender-price survey respondents regarded contractors as eager to tender in the third quarter, compared with 67% in the previous quarter. For clients holding funded schemes, this provides a reason to test the market with properly developed packages and a realistic construction programme. It does not justify assuming that the cheapest return is necessarily a deliverable contract.
For London residential schemes, a two-stage procurement route can allow the contractor and design team to examine the basement, reinforced concrete frame, façade, MEP and specialist packages before agreeing the final construction price. Early supplier engagement, appropriate fluctuation provisions and evidence of subcontractor financial capacity become especially important where materials quotations could change before orders are placed. LCM previously examined these pressures in Buying Work? Falling UK Orders Squeeze Tender Margins in 2026.
For a developer, the opportunity is to obtain competitive, properly priced work and improve programme certainty. For a contractor, it is to secure an order with manageable risk, sufficient margin and realistic purchasing arrangements. The present gap between the two BCIS indices makes those negotiations particularly relevant.
Development finance and building safety still constrain starts
London's housing slowdown was already evident before the November rate decision. In LCM's 31 October investigation into paused housing schemes, Planning London Datahub figures showed residential starts falling from 48,962 in 2022/23 to 21,665 in 2024/25. Approximately 48,000 homes had permission on sites that had not started at the end of that period.
A further quarter-point increase in benchmark interest rates can affect schemes financed with floating-rate development debt, particularly where interest is accumulated during construction and repaid after sales or refinancing. A longer build programme increases the period over which that finance is carried. Lenders also assess expected sale proceeds, construction contingencies and the amount of borrower equity available before releasing funds.
Canada Water and Lewisham Shopping Centre remain examples of the commercial pressures. British Land and AustralianSuper held back further residential delivery at Canada Water during October 2026, while Landsec deprioritised its Lewisham redevelopment. LCM's earlier project report recorded the different circumstances behind those decisions, including sales conditions, construction costs and development viability.
Regulatory requirements also influence the appraisal. Amendments to Approved Document B introducing the 18-metre threshold for second staircases took effect on 30 September 2026, subject to transitional arrangements. The Building Safety Levy came into force on 1 October for qualifying residential building-control applications, with statutory exemptions. Both need to be considered at the appropriate design and application stage.
There has nevertheless been measurable improvement at Gateway 2. The Building Safety Regulator's data to 5 October 2026 recorded a 97% approval rate for new higher-risk buildings and conversions determined in London, with 36 approvals from 37 decisions and a median approval time of 22 weeks. Another 111 London applications, representing 22,204 residential units, remained in progress. The approval figures are encouraging, but developers still have to allow for the assessment period before proceeding with regulated construction.
Housing supply remains weak, but investment has not disappeared
The National House Building Council's 26 October registration figures showed 26,231 homes registered nationally in the third quarter of 2026, down 13% annually. Ten of the UK's 12 regions recorded falls. London registrations stood at 1,223, broadly unchanged from the same quarter in 2025, but far below the 5,130 recorded in Q3 2019.
There is little evidence of a sustained London recovery in those figures, although the latest quarter suggests the decline has at least paused in NHBC's registration series. Lower registrations also mean fewer homes entering the future construction pipeline. For developers planning starts in 2027 or 2028, that could affect competition from new supply when completed apartments eventually reach buyers, although future selling prices remain dependent on demand and financing conditions.
The latest UK House Price Index recorded a 0.7% monthly increase in average London property prices in August 2026, taking the average to £554,430. Annual prices remained 2.2% lower, while London flats and maisonettes were down 5.0%. The monthly increase is a positive movement in completed transaction prices, but it is too early to describe it as a recovery in new-build demand.
Investment markets provide another distinction. Savills recorded approximately £4.2bn of UK Build to Rent investment during the first nine months of 2026, the highest amount recorded at that stage of any year. More than £900m was invested during the third quarter alone, although demand was particularly strong for completed operational assets and established single-family housing portfolios. Investment in existing rental properties does not automatically produce new construction orders.
London private rents increased by 3.5% in the 12 months to September 2026, according to the Office for National Statistics. That continuing rental demand supports the longer-term case for additional housing, but developers still need construction costs, debt terms and achievable values to align before committing to a site.
City Hall's £324m Developer Investment Fund remains another route for eligible schemes capable of accelerating delivery, although its grant expression-of-interest window closed on 13 October 2026. Debt and equity proposals remain open under the published programme arrangements. The next scheduled UK House Price Index release is on 18 November 2026, followed by the Bank of England's next monetary policy decision on 17 December 2026.
How LCM calculated the Contractor Absorption Gap
London Construction Magazine compared BCIS's October 2026 General Building Cost Index forecast of 4.3% annual growth to Q3 2026 with the All-in Tender Price Index estimate of 3.2% annual growth over the same period. Subtracting tender-price inflation from building-cost inflation gives a spread of 1.1 percentage points. LCM separately compared the provisional 7.2% annual rise in the All Work materials index for September 2026 with the 3.2% tender-price figure, a four-point difference between measures with different coverage and reference periods. The Contractor Absorption Gap is LCM's name for the first index spread; it measures the difference between published inflation rates, not individual contractors' margins or the cash value of costs absorbed.