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Fears of higher interest rates drove housebuilding down at a pace only seen during the heights of the pandemic and global financial crisis, though strong commercial building meant that the construction sector as a whole grew.
According to the S&P Global / CIPS UK Construction PMI, residential construction has now fallen for six straight months, with the current decline the sharpest since May 2020. The residential PMI reading for the month was 42.7, with any figure below 50 representing a decline.
Besides the spring of 2020, the last time housebuilding fell this quickly was in early 2009.
“Worries about the impact of higher interest rates and subdued market conditions continued to dampen housing activity,” the report said.
Mortgage rates have skyrocketed in recent weeks as lenders expect the Bank of England to keep hiking its base rate in order to tackle stickier-than-expected inflation. The average rate of a two-year fixed-rate mortgage is now well above 5.5%, while buy-to-let rates approach 6%.
Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply (CIPS), said:
"Though overall output in the construction sector showed an improvement for the fourth month in a row, the steepest drop in house building activity since April 2009, barring the initial pandemic lockdown in early 2020, will send a chill down the spine of the UK economy.
"The residential sub-sector is closely linked to consumer confidence and levels of spending. A further hike in interest rates is expected this month, and along with the relentless increase in the cost of living is making buyers hesitate about purchasing homes.
But Thomas Pugh, economist at RSM UK, said the decline in demand will not lead to house prices falling.
“We’re not expecting a large slump in prices for three key reasons,” he said.
“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. This means 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 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.”
Yet the commercial building sector showed no such difficulties, with a PMI reading of 54.2. The level of divergence between commercial and residential building was the highest since 2008.
This meant that overall construction output was up, with the PMI coming in at 51.6, ahead of the expected 50.8.