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Reflecting the impact of high interest rates on demand, UK home construction fell last month at the second-fastest rate since the first Covid-19 lockdown, a closely watched survey showed.
The S&P Global/Cips UK Construction Purchasing Managers sub-index for homebuilding, a measure of activity in the sector, fell to 40.7 in August from 43 in July, the second-lowest level since May 2020. A reading below 50 indicates that most companies reported contraction.
Outside of the pandemic, it was the lowest reading since spring 2009, and the sharp drop was the main factor that pushed the headline construction PMI down to 50.8 in August from 51.7 the previous month.
New orders for the sector also fell for the second time in the past three months, the biggest drop since May 2020.
Tim Moore, economics director at S&P Global Market Intelligence, which compiled the survey, said: “UK construction firms experienced another downturn in homebuilding activity in August, as rising interest rates and subdued market conditions reduced client demand and new build projects. of.”
The Bank of England raised interest rates to 5.25% last month from a record low of 0.1% hit in November 2021. Markets are pricing in further rate hikes later this month.
The latest PMIs suggest that the homebuilding trend in official data may be accelerating. New housing starts in England were estimated at 37,810 in the three months to March, down 12% from the same period in 2022 and 27% below their peak in the second quarter of last year, according to government data released in June.
“High mortgage rates have made home ownership unaffordable for many, leading to lower demand for new construction,” said Giulia Bellicoso, an economist at Capital Economics.
Homebuilders also said potential buyers were hesitating to buy because of concerns about the near-term economic outlook, the survey showed.
Euro zone PMI data also showed homebuilding contracting at the fastest pace since April 2020, when markets were largely shut down by Covid-19 restrictions.
Contrary to housing construction, the UK’s commercial construction activity continued to expand in August, with an index of 54.2, basically unchanged from the previous month. Likewise, the civil engineering industry also saw growth, although at a lower level than in July.
Gabriella Dickens, economist at Pantheon Macroeconomics, said: “Now that the economic uncertainty is lower than during the COVID-19 and Brexit era, companies appear willing to move forward with capital projects and are able to do so because their balance sheets It’s in pretty good shape.”