House building craters to weakest level in 14 years amid Bank of England interest rate rises
The Bank of England’s series of aggressive interest rate hikes to pull back raging inflation is wreaking havoc on house building, dealing a blow to first time buyers hoping to get on the property ladder any time soon, a closely watched survey out today shows.
According to S&P Global and the Chartered Institute of Procurement and Supply’s (CIPS) purchasing managers’ index (PMI) for the UK construction industry, the volume of homes being built in Britain is running at its lowest level in 14 years, aside from the pandemic when the country’s construction sector was mothballed for a short while.
The pair’s residential work index fell to 39.6 in June from 42.7 in May, pushing it far below the 50 point threshold that separates growth and contraction and to the weakest level since April 2009 when the credit crunch was in full swing.
A deep seated slump in home building pulled the overall construction industry into recession territory, with the PMI down to 48.9 last month from 51.6 in May.
It means both the manufacturing and construction industries are now shrinking. Britain’s services sector, which contributes about £2 in every £3 of gross domestic product, is still growing, keeping the composite PMI in a positive standing.
Home builders have responded to amplifying expectations that the property market is on course to slow sharply due to mortgage rates racing above six per cent. Some economists have forecast mortgage rates may hit seven per cent this summer.
Those tighter lending conditions have priced potential buyers out of the market, raising the chances of home builders’ stock going unsold, prompting them to scale back supply.
Red hot property demand has been colliding with chronically low supply for years, keeping house prices at record levels. According to building society Naitonwide, prices climbed 0.1 per cent over the last month to over £262,000.
“Higher mortgage rates have triggered a plunge in housebuilding,” Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said.
Mortgage rates have been on the up since the Bank of England started hiking interest rates in December 2021. The central bank has lifted borrowing costs 13 times in a row to a near 15 year high of five per cent.
Britain’s inflation problem is emerging as the worst in the rich world. According to the OECD, the UK is now the only country in the G7 where inflation is rising, up to 7.9 per cent in May from 7.8 per cent in April.
Office for National Statistics data chimed with that analysis. They said inflation remained unchanged at 8.7 per cent in May, while core and services inflation topped seven per cent.
Bank Governor Andrew Bailey and co may be forced to send borrowing costs to a peak of 6.25 per cent to finally stamp out price pressures, financial markets reckon.
Analysts at Wall Street investment bank JP Morgan said in a note to clients Bank Rate – the UK’s official rate – may have to hit seven per cent to squeeze out inflation.