UK Residential Homebuilding Being Impacted by Inflation and Declining Consumer Confidence

In May, the UK experienced the slowest rise in residential homebuilding in the past two years, the result of declining consumer confidence and skyrocketing inflation.

The construction purchasing managers’ index (PMI), compiled by the Chartered Institute of Purchasing and Supply (CIPS) and S&P Global, found that housebuilding activity fell to a figure of 50.7 in May, from 53.8 in April. Of note, the index is calibrated so that any figure above 50 denotes growth in activity, while any figure below denotes contraction.

The PMI is at its lowest recorded since May 2020 when the industry was in the depths of the first covid-19 lockdown, during which point most housebuilders were forced to shut sites while they figured out how to work safely. Since then, the housing market has enjoyed a prolonged boom, despite wider economic pressures. It is the third consecutive month that the growth rate has declined, after peaking in February with an index score of 61.5.

Gareth Belsham, director of the national property consultancy and surveyors Naismiths, said output in residential construction had “dipped alarmingly close to stagnation territory.”

“Housebuilders are more directly exposed to consumer confidence than any other construction sector; and on this evidence, some residential developers are taking their foot off the gas in response to the slowing economy and rising cost of mortgages,” Belsham added.

Tim Moore, economics director at S&P Global Market Intelligence, summed it up saying the near stagnation of residential construction activity came amid “signs of softer demand and a headwind from low consumer confidence.”

“Concerns about the business outlook were signaled by a fall in construction sector growth projections to the lowest for more than one-and-a-half years in May,” Moore added. “Around 19% of construction firms predict an outright decline in business activity during the year ahead, up from just 5% at the start of 2022.”

Higher borrowing costs and intense inflationary pressures were cited by survey respondents as factors likely to hold back growth over the next 12 months. 73% of respondents reported a rise in purchasing prices in May.