Britain’s housebuilders are cutting back on the construction of new homes amid signs that potential buyers are being spooked by the prospect of increases in mortgage rates over the coming months.
The latest report on the construction sector found that work on residential building sites slipped in May to the weakest level since 2009, apart from when sites were locked down during the Covid pandemic.
While the other two parts of the construction sector – commercial building and civil engineering – surveyed each month by S&P and the Chartered Institute of Procurement and Supply (Cips) continue to expand, housebuilding activity is being held back by the steady rise in the cost of borrowing.
The Bank of England has raised official interest rates 12 times in the past 18 months, and after disappointing news on inflation the expectation of further tough action has pushed mortgage rates up steeply in recent weeks.
John Glen, the chief economist at the 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 construction sector purchasing managers’ index showed activity in housebuilding at 42.7 in May, down from 43.0 in April. A reading below 50 is a sign that output is contracting rather than expanding. Commercial building was the strongest performing subsector, registering an index reading of 54.2, while civil engineering hit an 11-month high of 53.9.
Despite the weakness in housebuilding, new order books for the sector as a whole were the healthiest in more than a year, while price pressures and supply-chain bottlenecks eased.
“The residential subsector is closely linked to consumer confidence and levels of spending,” said Glen. “A further hike in interest rates is expected this month, and along with the relentless increase in the cost of living is making buyers hesitate about purchasing homes.
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“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.”
