The UK housebuilding sector has suffered a significant setback due to higher mortgage rates, leading to a sharp downturn in construction activity. This decline has reversed a period of growth observed in the wider construction industry last month.
According to the latest S&P Global/CIPS construction purchasing managers' index (PMI), the score for June stood at 48.9, dropping from May's 51.6. This marks the first decrease in construction activity for UK companies in five months. A score below 50 indicates a decline, while anything above suggests growth.
Economists were taken by surprise as the PMI score fell below their expectations. The consensus predicted a reading of 50, which would have indicated a flat sector. Instead, weaker demand for new homes dampened housebuilding activity, resulting in the fastest contraction in three years. The last time such a decline was observed outside of pandemic-related disruptions was in 2009.
The survey revealed that builders attributed this decline to higher borrowing costs and a subdued outlook for the housing market. The major constraint on housebuilding activity was the combination of these factors.
However, the decrease in demand for residential work was somewhat offset by strong growth in civil engineering. Construction companies secured more infrastructure projects, contributing to their overall activity. Additionally, there was an increase in interest for refurbishment projects, which boosted the commercial building segment.
Moreover, purchasing prices experienced a marginal decrease. This is notable as it marks the first time since January 2010 that costs for builders have reduced. Construction companies cited a decline in the cost of fuel, steel, and timber as contributing factors.
Despite these positive aspects, builders expressed weak optimism. They voiced concerns about rising interest rates and the depressed housing market conditions, as highlighted by the survey.
Samuel Tombs, the chief UK economist for Pantheon Macroeconomics, stated that higher mortgage rates have led to a "plunge in housebuilding."
He said: "He added: “June’s construction PMI suggests that interest rates now have risen far enough to push the sector into a renewed downturn.”
However, Tombs added that the housebuilding downturn has had a positive impact on prices and wages, which aligns with the Bank of England's goal of bringing inflation back down to target levels.
John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: “Looking ahead, there were few reasons to be cheerful as optimism fell to its lowest since January.
“A large blot on the landscape was the fall in employment growth. With interest rates at the highest for 15 years and inflation four times over the Bank of England target, the sudden reduction in construction sector hiring is one of the red flags facing the UK economy at the moment," he said.
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