UK construction slumps as safety regulation delays bite

UK construction activity fell at the fastest pace in five years during July, according to S&P Global's UK Construction PMI. The three sub-sectors – civil engineering, residential and commercial – all fell, but "a considerable drag" came from a drop in housebuilding.

The volume of new incoming work declined for a seventh month running. The pace of contraction was the most pronounced since February.

The report offers little insight into the causes, but a separate RICS survey sheds more light on the likely reasons behind the sharp decline – even if its own headline figures appear much more benign. Planning and regulatory delays were cited by 61% of RICS respondents as a key issue holding back construction. Confusion surrounding the Building Safety Act and a lack of resourcing at the Building Safety Regulator (BSR), the organisation that must approve all high-rise blocks, are now "a primary bottleneck", the release notes. 

Acceptable risks

UK residential construction faces all sorts of challenges, not least a lack of demand caused by higher borrowing costs and heavy taxation of off-plan investors, but delays and unpredictability caused by the BSR are arguably the most avoidable factors contributing to sharp drops in residential output in the UK's biggest cities.

Readers will now be familiar with the terrible run of Molior figures from London; the latest showed residential construction starts running at their lowest level since 2009. At this rate, 9,100 private homes will complete during 2027 and 2028, compared to the 176,000 homes the government is hoping for.

Ministers are aware and announced a package of reforms at the end of June, including "a new Fast Track Process, changes to leadership and fresh investment." Reports suggest the regulator is seeking to find 100 new staff by the end of the year, and it plans to bring building inspector and engineer capacity in-house. The current model, which involves recruiting an outsourced multidisciplinary team to review applications, is adding weeks to the timeframe for processing applications, reports Building Magazine. 

This is all sensible, if a little late, and it will take time to build a body of evidence to convince the more cautious developers that high-rise buildings present acceptable risks. We'll have more on this in our upcoming second quarter Residential Development Land Index. 

A hawkish pivot

Bank of England policymakers have for several weeks been giving speeches emphasising the progress made in tackling inflation. The pivot to fretting about slowing growth and a weakening jobs market was interpreted by investors as a sign that the base rate could sit as low as 3.5% by next summer.

That's why yesterday's tight vote, in which four of the nine members of the Bank's Monetary policy Committee voted to pause tightening, came as a hawkish surprise. Four of the remaining five voted for a 25bps cut, and a lone member wanted a bumper, 50bps reduction.

The minutes and subsequent press conference had plenty of cautious language, too. When asked if rates were still on a downward path, Governor Andrew Bailey said, "yes... I do think the path continues to be downward," before adding: "There is, however, genuine uncertainty now about the course of that direction of rates. I'll be honest with you, the point I was making is that I think that the path has become more uncertain."

Gilt yields and the pound climbed in the wake of the decision. The probability of another 25bps reduction before the end of the year fell to about 75%, having been fully priced in at the start of the week. 

The brace position

The best fixed rate mortgages have plateaued in the range of 3.7% to 3.8% and we'd expect that to continue in the short term until some positive inflation data or weak employment figures take some uncertainty off the table. The mortgage market is ultra-competitive and the lenders have repeatedly shown willingness to absorb a little short term volatility to hold onto market share.

The outlook for borrowing costs remains positive; the shift in the outlook as a result of yesterday's decision remains relatively small. Mortgage rates are still likely to ease a little by the year end, which will continue to underpin a moderate housing market recovery – though the autumn Budget is a sizable source of uncertainty. 

UK house prices rose 0.4% in July, the biggest monthly increase since the start of the year, Halifax reported yesterday. That brings the annual growth rate to 2.4%. “We expect low single-digit annual growth by the end of the year but that depends on the content of the autumn Budget,” Knight Frank's Tom Bill told Bloomberg. “Some parts of the economy are already adopting the brace position and buyers could begin to hesitate after the summer if speculation over tax rises persists.”