Construction PMI: Slowdown in housebuilding will lead to chronic lack of supply warns RSM UK

06 July 2023

According to the latest PMI data by S&P and CIPS, the headline construction PMI for June fell below 50 for the first time since January to 48.9, down from 51.6 in May. The decrease comes as housing activity fell for the fourth consecutive month to 39.6, reflecting the significant slowdown in the housing market due to interest rates and inflation. 

The data shows a decrease in housing activity, future activity and new orders to 39.6, 62.8 and 49.4. Input prices have seen a sharp fall to 48.9, down from 57.7 in May, reflecting a slump in commodity prices and falling demand during Q2 2023. However, industry optimism remains as major infrastructure projects continue to bolster the current pipeline of activity. 

Commenting on the data, Kelly Boorman, partner and national head of construction at RSM UK, said: ‘This month’s fall in the headline PMI reflects the drop off in activity the industry has been braced for, with sharp falls in new orders, future activity and input prices pipelines are likely to contract with a big market slowdown on the horizon. In addition, input prices falling to 48.9 from 57.7, is a sign of exacerbated market conditions in Q2 2023 as demand falls for both products and labour and new material pricing negotiations pass through to projects following a fall in commodity and raw material prices. The ongoing decline in housebuilding is expected, given the downturn in the market as rising interest rates and inflation continue to weaken demand, especially among those looking to buy property for the first time. The housing activity index falling to 39.6 is at the lowest level since the pandemic in May 2020. With mortgage rates set to rise above 7%, this is going to hammer affordability for first-time buyers and those with low deposits. It is therefore no surprise that housebuilders are slowing down their pipeline of work and acting cautiously to protect their margins. In addition, registered social landlords are also scaling back on work, which is concerning because the UK is already falling behind its affordable housing targets. In the future, this is likely to lead to pent up demand and a chronic lack of supply.’ 

She added: ‘However, it’s not all bad news for the construction industry, as we continue to see large infrastructure projects awarded and works undertaken, ensuring skilled labour remains in the UK and contributing to overall industry optimism. Furthermore, sector insolvencies were down in June, implying that businesses remain resilient to the difficult economic climate. That being said, we’ve seen an unwinding of problematic contracts, resulting in some poorer financial performance, which may lead to refinancing challenges and further administrations. We’re certainly seeing a hardening of the market and cautious management of subcontractors, which, coupled with frustrations relating to the government’s planning reforms, means that for now, many businesses are doing what they can to avoid risk and stay afloat.’

Thomas Pugh, economist at RSM UK, said: ‘Financial markets are now expecting interest rates to peak at 6.5% and pricing in a chance they could reach 7%, that would push mortgages over 8%. As a result, it seems almost certain that house prices have further to fall. We are still expecting a 10% peak-to-trough drop in house prices, but the risk is clearly that if mortgages do go above that fall will be significantly larger. 

‘However, we’re not expecting a 2008 style crash in prices for three key reasons. First, to some degree higher interest rates will be partially offset by an easing in the cost-of-living crisis as inflation falls back rapidly over the rest of this year. That will allow households’ real incomes to start growing again. 

‘Second, the labour market is likely to stay tight and even though the unemployment rate will probably rise over the rest of this year it won’t surge, meaning that there won’t be a wave of forced selling, which is normally required to generate a large fall in prices. 

‘Third, as evidenced by the further drop in the housebuilding component of the construction PMI, the supply of new housing is constrained. Given the chronic shortage of homes in the UK this structural imbalance is unlikely to allow large falls in prices. 

‘In better news, the input prices component of the construction PMI fell sharply in June from 57.7 to 48.9, the first time it has dropped below the 50 no-change mark since January 2010. This will partly reflect the recent slump in commodity prices feeding through into lower costs. But it probably also represents a lack of demand making itself felt in more competition. Indeed, this is a further sign that goods inflation at least is set to slow sharply over the rest of this year, which should drag headline inflation down to around 4.5% by the end of the year.’

Kelly  Boorman
Partner, Head of Construction
Kelly  Boorman
Partner, Head of Construction