The housing market in the UK is set to face a significant slump this year, with a report from PwC indicating that house building will fall by 21.1%. This decline is due to the combined effect of rising interest rates and the broader squeeze on the cost of living, which is weakening demand in the residential new-build sector.
The Impact of Rising Interest Rates
The figures from PwC reveal that the expected slump in house building is on par with the decline witnessed in 2020, during the midst of the pandemic, when output shrank by 20.8%. The report suggests that while housebuilding recovered strongly in 2021 and 2022, it is now heading for a significant downturn in 2023. The soaring interest rates, currently at 5.25% and anticipated to rise further this month, are considered the primary driver behind this trend.
Paul Sloman, an expert at PwC, explains that as borrowing costs for mortgages reach their highest level since 2008, a decrease in sales enquiries and slower decision-making among prospective homebuyers is to be expected. Consequently, house builders will focus on preserving cash and constructing only what they can effectively sell.
The Road to Recovery
While the immediate outlook seems challenging, PwC’s report also points towards potential green shoots and a prediction of a return to strong growth in the housing market in 2024 and 2025. However, it is important to note that this projection depends on various factors, including the stabilization of interest rates and improvements in the overall economic climate.
Impact on Commercial and Industrial Construction
The report by PwC highlights that this year, new-build output is set to decline by 7.8% overall when considering commercial and industrial construction as well. Commercial construction is predicted to fall by 0.4% due to uncertainty surrounding the return to the office, whereas industrial building will experience a modest increase of just 0.9%. The recent surge in warehouse construction, driven by the demand for online shopping, is expected to taper off.
Resilience in Repair and Maintenance Work
Despite the challenges faced by the new-build sector, repair and maintenance work within the construction industry has proven to be more resilient. Many households have chosen to improve their existing homes rather than go through the process of moving, leading to sustained demand in this area.
Broader Economic Impact
Additional data from BDO, an accounting firm, further supports the notion that rising interest rates are impacting the wider business environment and posing a potential risk of dragging Britain into a downturn. Their findings indicate a decline in business output and a consecutive decrease in employment for the second month in a row. This conservative approach towards hiring reflects businesses’ response to the higher interest rate environment.
BDO partner Kaley Crossthwaite warns that we can expect a slump in output, optimism, and employment in the final months of 2023 due to rising unemployment and increased rates for businesses.
The Overall Economic Landscape
These concerning developments in the housing and business sectors come amidst a challenging economic backdrop. Recent projections indicate a 0.2% fall in July GDP figures due to adverse weather conditions and strikes. Bank of England governor, Andrew Bailey, has also acknowledged that the interest rates are reaching the “top of the cycle,” suggesting that we may anticipate further challenges ahead.
Considering the current circumstances, potential property investors should be cautious and well-informed about the UK housing market’s likely trajectory. While a significant slump in house building is projected for the near future, experts predict a return to growth in the coming years. However, this recovery is contingent on factors such as the stabilization of interest rates and improvements in the overall business and economic environment. Ultimately, investors should carefully evaluate the risks and opportunities before making any investment decisions.