UK housebuilding falls sharply in August

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Housebuilding in the UK last month fell at the second-fastest pace since the first Covid-19 lockdown, reflecting the impact of high interest rates on demand, according to a closely watched survey.

The S&P Global/Cips UK Construction Purchasing Managers’ house building sub-index, a measure of activity in the sector, fell to 40.7 in August, down from 43 in July and the second-lowest level since May 2020. A reading below 50 indicates a majority of companies reporting a contraction.

Outside the pandemic period, this was the lowest reading since spring 2009, and the sharp drop was the main driver in pushing the overall construction PMI down to 50.8 in August from 51.7 the previous month.

The sector also registered a decline in new order volumes for the second time in the past three months, the steepest drop since May 2020.

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, said: “UK construction companies experienced another slump in house building activity during August as rising interest rates and subdued market conditions resulted in cutbacks to client demand and new build projects in particular.”

The Bank of England has raised interest rates from a record low of 0.1 per cent in November 2021 to 5.25 per cent last month. Markets expect a further rate rise later this month.

The latest PMI suggests the trend in housebuilding seen in official data is likely to accelerate. In the three months to March, new housing starts in England were estimated to be 37,810, down 12 per cent from the same period in 2022 and 27 per cent below their peak in the second quarter of last year, according to government figures published in June.

“High mortgage rates have taken the cost of buying a home out of reach for many, causing demand for new builds to slump,” said Giulia Bellicoso, economist at Capital Economics.

Housebuilders also signalled prospective buyers were holding back because of concerns about the near-term economic outlook, according to the survey.

PMI data for the eurozone also showed housebuilding contracting at the fastest pace since April 2020 when the market was largely shut because of Covid-19 restrictions.

In contrast to housebuilding, commercial building activity in the UK continued to expand in August with the index reading 54.2 — largely unchanged from the previous month. Similarly, the civil engineering sector also registered growth although below July’s levels.

“Corporates seem willing to push ahead with capital projects now that the economic uncertainty is lower than in the Covid and Brexit years, and are able to do so because their balance sheets are in pretty good shape,” said Gabriella Dickens, economist at Pantheon Macroeconomics.