UK Construction PMI: Steep fall in house building "will help prop up house prices"

In October, UK construction activity saw its second-lowest reading since May 2020, according to the October S&P Global / CIPS UK Construction PMI.

At 45.6 in October, the headline S&P Global / CIPS UK Construction Purchasing Managers’ Index™ (PMI®) – a seasonally adjusted index tracking changes in total industry activity – was up slightly from 45.0 in September but still the second lowest reading since the first lockdown.

House building decreased for the eleventh successive month in October and at a much steeper pace than elsewhere in the construction sector (index at 38.5). Falling work on residential construction projects was widely linked to a lack of demand and subsequent cutbacks to new projects. Civil engineering activity also decreased sharply in October (index at 43.7) and the rate of decline was the fastest since July 2022. 

Tim Moore, Economics Director at S&P Global Market Intelligence, which compiles the survey, said: “October data highlighted another solid reduction in UK construction output as elevated borrowing costs and a wait-and-see approach to new projects weighed on activity. House building decreased for the eleventh month running and once again saw a much steeper downturn than other parts of the construction sector.”

Bob Singh, founder at Uxbridge-based Chess Mortgages, was not surprised by the data but said it could support house prices, as evidenced, perhaps, by the Nationwide October house price index, which showed average values rose by 0.9% last month: “Major builders placing projects on ice should come as no surprise in the current climate. The result is even less stock and hence reduced supply. This will help prop up house prices until building starts again in earnest. Builders are not going to build whilst there is no Government incentive in place, such as Help to Buy, and when there are so few buyers who can afford the repayments with such high mortgage rates. The next 12-18 months look very grim for the construction sector.”

Steven Hargreaves, mortgage and protection adviser at Leeds-based The Mortgage Co, agreed: “While demand is weak and builders are unable to sell the properties they have already built, there is little motivation for them to continue building. The flipside of fewer properties being built is that it could keep property prices from slipping further. That's one silver lining of this dire data, for existing homeowners at least.”

Tim Murphy, chairman at global property consultancy, IP Global, shared much the same view: "The decrease in new property construction will support a halt to declining property prices. This is supported by Nationwide's HPI, which indicated a 0.9% price increase last month, and the Bank of England's decision not to raise the base rate further."

Meanwhile, David Robinson, co-founder at Wildcat Law, said builders will wait until conditions improve before they ramp up activity levels: “'We have all the time in the world' would be appropriate lyrics for housebuilders currently. They are counting on the fact that they can sit on land, often with planning permission in place, and wait until conditions are more favourable. After reaping the rewards of a number of bumper years, many have deep reserves so do not need to build developments at what they perceive to be below market value. Instead they will wait until buyers are in a position to pay a premium again or until the Government blinks with a General Election looming and introduces a new incentive scheme. Either way, the only houses being built over the next few months will be existing projects or smaller developers who cannot afford to sit on projects.”

Gary Bush, financial adviser at the Potters Bar-based MortgageShop.com, said UK housebuilders need to “grow some”: "UK builders need to grow some. For too long, the construction activities of UK housebuilders have been tied to them suckling on the Government's Help to Buy scheme. Now that the public money cash cow has ceased production, they need to get over it. Building activity existed before this property price-inflating leg up so they just need to get back to business as usual. These companies sitting on their land banks and waiting for the next gravy train to come along should trigger action from politicians, and fast."

Ranald Mitchell, director at Norwich-based Charwin Private Clients, said builders are heading for the hills in the current climate: “Housebuilders are taking to the hills and stopping production until the economic climate is more favourable for them. With the era of ultra-low rates now at an end, no more Help to Buy to prop them up, lower prices for the end product, higher costs and low consumer demand, it is no surprise they are halting or slowing new build activity. Many builders will be planning for 2024 and how they can resume activity at a sustainable level.”

For Scott Taylor-Barr, financial Adviser at Barnsdale Financial Management, the latest PMI reflects how current mortgage rates are now serving as an economic handbrake after over a decade of ultra-low rates: “There are several concerns that this report highlights, the key one being the reduction in new homes being built. We already have a shortfall in the number of properties required for the growing population and so this will further exasperate that issue. This in turn creates problems for any government, as pretty much all parties have made promises to build more homes, so how are they going to do that? If house building sees this large a fall simply due to the current level of interest rates, that creates an even larger issue, as it would suggest we have an economy that has now become dependent on ultra-low interest rates. Rates of around 5%, which pre-Global Financial Crisis were seen as typical and average, are now an economic handbrake.”

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