Housebuilding falls sharply as mortgage rates rise

UK housebuilding has fallen at the steepest rate in more than a decade – outside of the pandemic years – as high borrowing costs impact demand, according to a closely watched survey.

The June downturn in housebuilding was “steep and accelerated”, according to the S&P Global/CIPS construction purchasing managers’ index (PMI).

Residential construction decreased at the fastest pace since March 2020, when the country entered COVID-19 lockdown for the first time.

When the lockdown drop is excluded, last month saw the fastest fall since April 2009, when the economy reeled from the global financial crash.

Survey respondents blamed high borrowing costs – caused by the Bank of England’s programme of rate hikes in response to stubbornly high inflation. Also identified as an inhibitor was the “subdued” outlook for the housing market.

Samuel Tombs, chief UK economist for Pantheon Macroeconomics, said higher mortgage rates have “triggered a plunge in housebuilding”.

He added: “June’s construction PMI suggests that interest rates now have risen far enough to push the sector into a renewed downturn.”

House prices have been falling after a significant rise during the pandemic.

However, the weak demand, combined with fewer supply bottlenecks, did help improve delivery times for construction services and materials.

There was a reduction in new orders across the construction industry for the first time since January, the survey said.

Also helped by the reduction in residential construction were purchasing prices, which fell for the first time in more than 12 years.

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While housebuilding slowed, construction companies said they had increased work on infrastructure projects.

The best performing segment of the industry was civil engineering, in which business activity rose at the second-fastest pace since June 2022.