Housebuilding in the UK took a significant hit in August, falling at the second-fastest pace since the first COVID-19 lockdown. This decline reflects the impact of high interest rates on demand, according to a closely watched survey by S&P Global/Cips UK Construction Purchasing Managers’ housebuilding sub-index.
The Numbers
The housebuilding sub-index dropped to 40.7 in August, down from 43 in July. This is the second-lowest level since May 2020, and the lowest reading since spring 2009, excluding the pandemic period. A reading below 50 indicates that the majority of companies are reporting a contraction.
The decline in housebuilding activity also contributed to a drop in the overall construction PMI, which fell from 51.7 in July to 50.8 in August.
Additionally, the sector saw a decline in new order volumes for the second time in three months, with the steepest drop since May 2020.
Factors Impacting Housebuilding
Rising interest rates and subdued market conditions are the main drivers behind the slump in housebuilding activity. The Bank of England has raised interest rates from a record low of 0.1% in November 2021 to 5.25% last month, with the expectation of further rate increases in the near future.
These high mortgage rates have made homeownership financially unattainable for many people, leading to a decrease in demand for new builds. Prospective buyers are also holding back due to concerns about the near-term economic outlook.
Future Outlook
The latest PMI survey indicates that the downward trend in housebuilding seen in official data is likely to continue. In the three months leading up to March, new housing starts in England were estimated to be 37,810, down 12% from the same period in 2022 and 27% below their peak in Q2 2021, according to government figures published in June.
Implications for Property Investors
For potential property investors, this decline in housebuilding activity can have significant implications. With reduced supply in the market, there may be fewer options available for those looking to purchase buy-to-let or residential properties for investment purposes.
Additionally, the decrease in demand and potential decline in property prices could present opportunities for investors to negotiate better deals and secure properties at lower prices. However, it’s essential to carefully consider the current economic climate and the potential risks associated with investing in a market experiencing a downturn.
Commercial Building Activity and Civil Engineering
While housebuilding activity has taken a hit, commercial building activity in the UK has continued to expand, with a reading of 54.2 in August. This indicates stability in the commercial property sector, offering potential opportunities for property investors interested in commercial real estate.
Similarly, the civil engineering sector also saw growth, although slightly below the previous month’s levels. This suggests that infrastructure projects and public works are still ongoing and could present investment opportunities in this sector.
Conclusion
The sharp decline in UK housebuilding in August highlights the impact of rising interest rates and subdued market conditions on demand. For potential property investors, this presents both challenges and opportunities. While there may be fewer options available in the residential property market, the commercial property sector and civil engineering projects continue to offer potential avenues for investment.