Surveyors have given their most pessimistic evaluation of UK housebuilding since the beginning of the pandemic. Their observations for the three months leading up to September indicate a decreasing trend in construction output, further contributing to the already critical housing supply shortage.

The Royal Institution of Chartered Surveyors (RICS) revealed that its housebuilding workload activity index, a gauge that showcases the balance between expanding and contracting workloads, fell sharply. It dropped to -26 in the third quarter, a stark decline from -12 in the preceding three months. To provide some context, this figure closely mirrors the -27 score observed at the pandemic’s outset in the second quarter of 2020. At that time, the construction industry had almost come to a standstill. This current score is the second lowest since the financial crisis of 2009.

Why the Decline?

Several factors are contributing to this dip in construction activity:

• Interest Rate Increases: There have been rises in interest rates which directly impact borrowing costs. This has affected builders, consequently weakening the demand for housing. Notably, the Bank of England escalated interest rates from a record low of 0.1% in November 2021 to a staggering 5.25%.
• Challenges for Builders: RICS linked the fall to the hurdles housebuilders are now facing, such as slower sales and stricter pricing dynamics.

What Does the Future Look Like?

Surveyors’ forecasts for the upcoming year are not optimistic. The construction sector, contributing approximately 7% to the UK’s economy and employing over 2 million people, is anticipated to continue shrinking. This comes after the sector already witnessed decreased output in July and August. The broad construction sector’s workload index dropped to a net balance of -10, reminiscent of the early pandemic period when it dived to -36.

However, not all is bleak. Some growth is being observed in public sector-commissioned infrastructure and construction work, offering a silver lining in these challenging times.

The Domino Effect on Housing Affordability

As housebuilding slows, the scarcity of available homes further exacerbates housing affordability. RICS’s chief economist, Simon Rubinsohn, commented, “The increasing challenges around the housing market are manifesting as a decline in the construction rate of new projects.” This reduction in housing supply could persist for at least another year, making it even more difficult for first-time buyers or those exploring the rental market.

Impact on Businesses and Employment

A significant number of surveyors mentioned experiencing decreased demand, the highest since the end of 2020. This reduction in demand is influencing their business strategies, as elevated mortgage rates make homes less affordable for many families.

While about 40% of those surveyed stated they faced difficulties recruiting professionals such as bricklayers, carpenters, and electricians, the industry expects this challenge to diminish as workloads decrease.

Addressing the Housing Crisis

Sam Rees, a senior officer at RICS, emphasized the need for an organized, all-encompassing plan to address the housing crisis. He acknowledged the government’s commendable goal to build one million new homes by the end of this parliament. However, he also pointed out the lack of clear details on how this objective will be achieved.