UK Housebuilding Faces Fastest Decline Since Pandemic Onset

The UK construction sector has witnessed its steepest downturn since the early months of the Covid pandemic, casting significant doubt on the government’s pledge to deliver 1.5 million new homes by 2029. According to the latest S and P Global purchasing managers index PMI, activity across the building trade tumbled to 44.3 in July, down from 48.8 in June. Any score below 50 highlights contraction. Analysts had forecasted no change, but the July reading marks the weakest result since May 2020, when the housing market was temporarily frozen.

Despite the government’s recent planning reforms aimed at increasing the availability of land for new developments, residential construction in July experienced a pronounced drop. The sector also recorded accelerated declines in civil engineering projects and commercial building, with employment levels shrinking for the seventh consecutive month. Many firms have begun to scale back their workforce in response to escalating employer national insurance contributions, up by £25 billion, and diminishing demand.

Interest rates set by the Bank of England have been pared back steadily, with the base rate now at 4.25 percent after peaking at 5.25 percent. Despite these reductions, which are designed to encourage borrowing and investment, weak demand prevailed throughout July. The central bank is poised for another potential rate cut of a quarter point in the coming weeks.

Feedback from industry figures paints a stark picture. Joe Hayes, principal economist at S and P Global Market Intelligence, reports a renewed and sharp contraction, particularly in the housing sector, while forward-looking indicators suggest that construction firms are bracing for a protracted slowdown by purchasing fewer materials and trimming their payrolls. Gareth Belsham of Bloom Building Consultancy bluntly described the data as tough medicine for the industry.

There are tentative signals suggesting that the sharp drop in output could prove temporary. Lending to commercial real estate developers has picked up, and some economists caution that the PMI can be volatile and at times a poor guide to the underlying strength of the sector. Nationwide reported a 0.6 percent rise in average house prices for July, now standing at £272664, with property transactions rising by 13 percent in June compared to May. Yet, the longer term prospects for a sustained recovery remain uncertain amidst ongoing headwinds for the sector.