Construction companies indicated that challenging business conditions persisted during October, with business activity falling for the second month running, amid a lack of new work to replace completed projects.
According to findings from S&P Global and CIPS UK, fragile client confidence and elevated borrowing costs were cited as reasons for weaker sales.
Improving supply conditions and falling demand contributed to a renewed decline in purchasing prices.
Moreover, the latest decline in input costs was the steepest since August 2009.
Reduced workloads also led to a decline in subcontractor charges for the first time in over three years.
At 45.6 in October, the headline S&P Global and CIPS UK Construction Purchasing Managers’ Index™ (PMI®) – a seasonally adjusted index tracking changes in total industry activity – was up slightly from 45.0 in September.
However, it was still the second-lowest reading since May 2020 and signalled a marked decline in total construction activity.
House building decreased for the 11th successive month in October and at a much steeper pace than elsewhere in the construction sector (index at 38.5).
Falling work on residential construction projects was linked to a lack of demand and subsequent cutbacks to new projects.
Civil engineering activity also decreased sharply in October (index at 43.7); the rate of decline was the fastest since July 2022.
Meanwhile, there were signs of stabilisation in the commercial building segment, with activity falling only marginally and at a slower pace than in September (index at 49.5).
Total new work fell for the third month running in October, and the rate of contraction was the joint-sharpest since May 2020.
Survey respondents widely commented on a lack of tender opportunities and lengthier decision-making among clients due to concerns about the broader economic outlook.
Tim Moore, economics director at S&P Global Market Intelligence, said: “October data highlighted another solid reduction in UK construction output as elevated borrowing costs and a wait-and-see approach to new projects weighed on activity.
“House building decreased for the eleventh month running and once again saw a much steeper downturn than other parts of the construction sector.
“There were signs of stabilisation in the commercial building segment, however, with output falling only slightly since September.
“Total new work continued to fall more quickly than at any time since the initial pandemic lockdown period, which contributed to shrinking demand for construction products and materials during October.
“Competitive pressure on suppliers to pass on lower commodity prices resulted in the fastest decline in input costs since August 2009.
“Sub-contractors meanwhile cut their charges for the first time in more than three years in response to a further downturn in workloads during October.”
Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply (CIPS), added: “High interest rates and low consumer demand for new homes continue to drag down the UK construction sector, with a lack of new tender opportunities and a cutback of existing projects being reported across the house building industry.
“The silver lining is that high borrowing costs are having their intended effect of putting the brakes on rising inflation.
“Previously suppliers were able to hike their prices in response to soaring demand. Falling construction activity has now tilted the negotiations in favour of buyers and suppliers are having to pass on lower prices for raw materials like timber and steel.
“Supply chain pressures are also easing as a result of the lull in new work, with better availability of raw materials, a reduction in transportation costs and an improvement in supplier delivery times.
“More subcontractors are available for work and some are reducing their prices in reaction to the falling demand.
“However, there is no doubt that UK construction is in a difficult period and there will likely be further challenging months to come.
“Despite commercial building activity continuing to fall there were signs of stabilisation within this sub-segment, and this may provide a glimmer of hope which the wider construction sector will keep a close eye on as we move into next year.”
Reaction:
David Robinson, co-founder at Wildcat Law:
“’We have all the time in the world’ would be appropriate lyrics for housebuilders currently.
“They are counting on the fact that they can sit on land, often with planning permission in place, and wait until conditions are more favourable.
“After reaping the rewards of a number of bumper years, many have deep reserves so do not need to build developments at what they perceive to be below market value.
“Instead they will wait until buyers are in a position to pay a premium again or until the government blinks with a general election looming and introduces a new incentive scheme.
“Either way, the only houses being built over the next few months will be existing projects or smaller developers who cannot afford to sit on projects.”
Gary Bush, financial adviser at MortgageShop.com:
“UK builders need to grow some. For too long, the construction activities of UK housebuilders have been tied to them suckling on the Government’s Help to Buy scheme.
“Now that the public money cash cow has ceased production, they need to get over it.
“Building activity existed before this property price-inflating leg up so they just need to get back to “business as usual”.
“These companies sitting on their land banks and waiting for the next gravy train to come along should trigger action from politicians, and fast.”
Justin Moy, managing director at EHF Mortgages:
“Builders are definitely slowing down the release of properties on new build developments, trying to offload those that are ready now and control prices for the next 12 to 18 months at least.
“Without a government scheme, builders will need to increase the number of smaller, more affordable properties built to attract those all-important first-time buyers, otherwise they will sit on their hands while this bad financial weather blows through.”
Ranald Mitchell, director at Charwin Private Clients:
“Housebuilders are taking to the hills and stopping production until the economic climate is more favourable for them.
“With the era of ultra-low rates now at an end, no more Help to Buy to prop them up, lower prices for the end product, higher costs and low consumer demand, it is no surprise they are halting or slowing new build activity.
“Many builders will be planning for 2024 and how they can resume activity at a sustainable level.”
Peter Stamford, director and mortgage expert at Moor Mortgages:
“The house-building sector needs a serious shake-up or there simply won’t be enough houses for everyone to live in at this rate.
“Great news, however, for any parents who want their children to live at home indefinitely.”
Bob Singh, founder at Chess Mortgages:
“Major builders placing projects on ice should come as no surprise in the current climate.
“The result is even less stock and hence reduced supply. This will help prop up house prices until building starts again in earnest.
“Builders are not going to build whilst there is no Government incentive in place, such as Help to Buy, and when there are so few buyers who can afford the repayments with such high mortgage rates.
“The next 12 to 18 months look very grim for the construction sector.”
Graham Cox, founder at Self-Employed Mortgage Broker SEMH:
“These are terrible figures. House building declined for the 11th consecutive month, with a lack of demand cited as the reason for new projects being put on hold.
“There was some good news for inflation though as input costs fell at the fastest rate since 2009.”
Scott Taylor-Barr, financial adviser at Barnsdale Financial Management
“There are several concerns that this report highlights, the key one being the reduction in new homes being built.
“We already have a shortfall in the number of properties required for the growing population and so this will further exasperate that issue.
“This in turn creates problems for any government, as pretty much all parties have made promises to build more homes, so how are they going to do that?
“If house building sees this large a fall simply due to the current level of interest rates, that creates an even larger issue, as it would suggest we have an economy that has now become dependent on ultra-low interest rates.
“Rates of around 5%, which pre-Global Financial Crisis, were seen as typical and average, are now an economic handbrake.”
Steven Hargreaves, mortgage and protection adviser at The Mortgage Co:
“While demand is weak and builders are unable to sell the properties they have already built, there is little motivation for them to continue building.
“The flipside of fewer properties being built is that it could keep property prices from slipping further.
“That’s one silver lining of this dire data, for existing homeowners at least. As in previous slowdowns, the bigger builders will likely land bank and build to order.”
Tim Murphy, founder & chairman at IP Global:
“The decrease in new property construction will support a halt to declining property prices.
“This is supported by Nationwide’s HPI, which indicated a 0.9% price increase last month, and the Bank of England’s decision not to raise the base rate further.”
