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Housebuilding activity in the UK fell sharply in July, marking the eighth consecutive month of contraction as higher mortgage rates hit demand, according to a closely watched survey published on Friday.
The S&P Global/Cips UK construction purchasing managers’ index for housebuilding was 43 in July — well below the 50-points level that divides expansion from contraction — although a slight improvement from previous months.
“It’s obvious that UK interest rate rises and cost of living pressures have dealt a hammer blow to the housing sector,” said John Glen, chief economist at Cips.
Matthew Pointon, at the consultancy Capital Economics, said leading indicators showed that demand for new builds was still falling. The PMI was consistent with a 15 per cent year-on-year fall in housing starts; he expects a fall of 20 per cent overall this year.
Stacy Eden, a partner at the auditor RSM UK, said the downturn in the sector was a concern, as the housebuilding industry was already falling behind the government’s targets for affordable homes. “Unless something changes quickly, the housing market is heading towards a chronic lack of supply,” he said.
However, the sharp drop in residential construction was offset by a strong pick-up in commercial building activity and continued solid growth in civil engineering. Companies reported rising demand for infrastructure work, office refurbishments and a range of commercial projects.
This meant the sector had returned to growth overall with the headline index rising to a five-month high of 51.7 in July, up from up from 48.9 in June.
Some economists questioned whether the sector could continue expanding, given the headwinds it faced from rising borrowing costs. Glen said there was “a question mark over the sustainability of this growth and the challenges that lie beneath the floorboards”.
But the survey suggested that business was picking up partly because previous blockages in supply chains have eased, raw material costs were no longer rising steeply and companies were finding it easier to hire.
Samuel Tombs, at the consultancy Pantheon Macroeconomics, noted that the sector could be benefiting from the recent addition of construction roles to the shortage list that lowers the bar for employers to hire migrants.
He said: “It’s still too soon to talk of a recovery in the construction sector — new orders are simply flat — but with [the Bank of England benchmark interest] rate likely near its peak and supply chain issues having been resolved, it’s increasingly looking like a sharp sector-wide downturn has been avoided.”
