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‘Wrecking ball’ of inflation and interest rates triggers steepest drop in housebuilding since lockdown

housebuilding
housebuilding

A “wrecking ball” combination of high inflation and high interest rates have triggered the steepest drop in housebuilding since the May 2020 lockdown.

Home building activity slowed at the fastest rate in 32 months between December and January, according to S&P Global.

Experts blamed higher borrowing costs and soaring prices for creating uncertainty over demand for new properties.

John Glen, of the Chartered Institute of Procurement and Supply (CIPS), which helped compile the survey, said: “The wrecking ball of higher inflation and interest rates has knocked the UK’s residential building output to its weakest since May 2020 as stretched mortgage affordability impacted on the building of new homes.”

Housing activity fell from 48.0 in December to 44.8 in January, according to the S&P Global and CIPS UK construction purchasing managers’ index (PMI). Any reading below 50 signals activity is shrinking.

Output across the whole construction sector remained weak in January. The headline rate was 48.4 in January, only marginally better than the 48.8 registered in December.

Employment fell for the second consecutive month, with jobs disappearing from the sector at the fastest rate in two years.

However, confidence hit a six-month high following tentative signs of improvement in the economic outlook and rising sales enquiries.

Samuel Tombs, of Pantheon Macroeconomics, said the optimism was “premature” as the property market downturn “likely will accelerate in Q2, following the end of the Help to Buy equity loan scheme at the end of March”.

The scheme allowed first-time buyers to purchase new build properties with a 5pc deposit and a 20pc equity loan, or 40pc in London. Launched in 2013, the scheme typically supported around 50,000 new home sales a year.

“Only the civil engineering sector likely will be insulated from the slump,” Mr Tombs said, citing a planned 9.3pc increase in public sector investment from April.

Just over 210,000 new homes were built in the 12 months to April 2022 according to official figures. Capital Economics has forecast the number will fall to just 190,000 in the 2023-24 financial year.

The Tories promised to build 300,000 homes a year by the mid 2020s in the party’s 2019 manifesto, however, the drive to build more homes has since been watered down. In December, housing secretary Michael Gove abandoned the official target in response to rebellion from Tory backbench MPs.

Mr Glen said: "The continuing price pressures for energy and wages still remain a concern, along with the highest level of job shedding for two years and building skills remaining in short supply.”