Tipping point inevitable for construction industry as housing market takes massive hit

According to the latest PMI data by IHS Markit and CIPS, the headline construction PMI remained below 50 and dropped slightly further to 48.4 in January 2023, down from 48.8 in December 2022. The fall comes as housing activity saw a steep drop to 44.8, with commercial activity also falling to 48.2.

New orders remained stable at 48.1 in January, indicating that there has been some stabilisation in supply chains, material costs and lead times, however, with the housing market taking a massive hit and major government-backed projects being pulled, businesses are heading towards a tipping point.

Kelly Boorman, partner and national head of construction at RSM UK, said:

‘The latest fall in the headline construction PMI for January to 48.4 comes as no surprise and is a clear indication that challenging times are ahead. This month’s decline follows a period of bad weather conditions – causing delays to major projects and exacerbating an already fragile pipeline of work, as businesses are already seeing major government-back projects being pulled altogether. Although supply chains, cost of materials and lead times are stabilising, we are unlikely to see any shift upwards at all, as not many businesses have the cash flow to invest and protect their supply chains.

‘More worryingly, housing activity has taken a massive hit, with housebuilders seeing a slowdown in volume of work due to the fall in consumer demand, which, in the long term, shows the challenges ahead for providing rental properties and meeting ambitious housing targets in the UK. This, coupled with the decline in commercial activity, indicates there is a real slowdown in the pipeline and strongly suggests that businesses will be heading towards a tipping point in Q3 2023.’

She added: ‘In the coming months, vulnerable businesses are likely to be eyed up for acquisitions but it’s going to become increasingly difficult for the sector, with limited visibility of pipeline. As such, many businesses are considering their financing costs and looking to fixed term contracts in a bid to protect turnover, labour and ensure continuity.’

Thomas Pugh, economist at RSM UK, said:

‘The impact of huge rise in interest rates over the last year on the UK economy is starting to become evident. House prices have fallen for four consecutive months and mortgage approvals for new purchases have more than halved from their August peak.

‘The recent 0.5 percentage point (ppts) rise in interest rates will pile on the pressure in the first half of this year. What’s more, we suspect the Bank of England will raise interest rates by at least another 0.25 ppts before it stops its tightening cycle. That’s because even though headline inflation is now falling, core inflation, which strips out volatile energy and food prices, and wage growth are still well above levels that the Monetary Policy Committee will be happy with.

‘In addition, households’ real incomes are likely to take another dip in the first half of this year, which will reduce households’ ability to save for a deposit and pass affordability checks.

‘As a result, we expect demand for housing to remain subdued and for house prices to fall by 5 – 10% from their peak. However, households’ real incomes should start rising again in the second half of this year and interest rates are likely to start being cut in early 2024, which will offer support to house prices.’