UK housebuilding activity tumbled last month at the fastest pace since April 2009 – excluding the decline during the initial coronavirus pandemic lockdown in 2020 – as higher interest rates took their toll.
The drop, which it was warned would “send a chill down the spine of the UK economy”, was revealed in a key survey published yesterday by the Chartered Institute of Procurement & Supply and S&P Global. May is the sixth straight month in which UK housebuilding activity has fallen.
CIPS and S&P Global noted: “Worries about the impact of higher interest rates and subdued market conditions continued to dampen housing activity. Work on residential building projects decreased for the sixth month running and at the steepest pace since May 2020. Aside from the pandemic-related downturn, the latest reading for this category of construction activity (42.7) was the lowest for just over 14 years.”
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The last time the residential building sub-sector reading was lower – aside from the pandemic lockdown – the UK was in the teeth of the 2008/09 recession triggered by the global financial crisis.
A survey reading of 50 signals no change, so the 42.7 figure indicates sharp decline.
The weak performance by housebuilding was in stark contrast to an acceleration of output growth in May in the other two construction sub-sectors covered by the survey, commercial property building and civil engineering.
Overall, the UK construction sector registered modest growth in May, with the activity index rising from 51.1 in April to 51.6 in May on a seasonally adjusted basis to signal a slight acceleration of the pace of expansion to the fastest since February.
The Bank of England has raised UK base rates from 0.1% in December 2021 to 4.5% with the most recent rise, of a quarter-point, implemented last month. And economists expect base rates to rise further.
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John Glen, chief economist at CIPS, said: “Though overall output in the construction sector showed an improvement for the fourth month in a row, the steepest drop in housebuilding activity since April 2009, barring the initial pandemic lockdown in early 2020, will send a chill down the spine of the UK economy.
“The residential sub-sector is closely linked to consumer confidence and levels of spending. A further hike in interest rates is expected this month and, along with the relentless increase in the cost of living, [this] is making buyers hesitate about purchasing homes. As a result, builder confidence was pinched to remain below the survey average, as business costs remained high and firms expanded their workforce numbers at only a modest pace as they were cautious about their own affordability rates.”
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Tim Moore, economics director at S&P Global Market Intelligence, said: “Cutbacks to new residential building projects in response to rising interest rates and subdued housing market conditions resulted in the sharpest drop in housing activity for three years. This meant that residential work underperformed the rest of the construction sector by the greatest margin since October 2008. Survey respondents also commented on concerns about the broader UK economic outlook, which contributed to an overall drop in output growth projections to the lowest for four months.”
Highlighting growth in the commercial property and civil engineering sub-sectors, CIPS and S&P Global said: “Commercial building – index at 54.2 – was the best-performing segment, with output rising at a robust and accelerated pace. Construction companies cited a gradual turnaround in confidence among clients and faster decision-making on new projects. Civil engineering also gained momentum – index at 53.9 – with growth hitting an 11-month high in May.”
Mr Moore said: “May data highlighted a mixed picture across the UK construction sector as solid growth rates in commercial and civil engineering activity contrasted with a steeper downturn in housebuilding. Rising demand among corporate clients and contract awards on infrastructure projects meanwhile underpinned the fastest rise in new orders since April 2022.”
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