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A recently published survey from S&P Global and the Chartered Institute of Procurement and Supply (CIPS) reveals that the Bank of England's aggressive interest rate hikes, aimed at curbing high inflation, are causing significant disruptions in the housing construction sector. This situation is particularly challenging for first-time home buyers who had hoped to enter the property market soon.
The survey, which closely monitors the UK construction industry through the purchasing managers' index (PMI), indicates that the construction of new homes in Britain is currently at its lowest point in 14 years, excluding the pandemic period when construction activities were temporarily halted.
In June, the residential work index of the pair dropped to 39.6 from 42.7 in May, significantly falling below the critical threshold of 50 that indicates growth or contraction. This decline brings it to the lowest level since April 2009, a time when the credit crunch was at its peak. The construction industry has entered a state of recession due to a significant and persistent decline in home building. Last month, the purchasing managers' index (PMI) for the overall construction industry dropped to 48.9, down from 51.6 in May.
This contraction in the construction industry, combined with the shrinking manufacturing sector, indicates a challenging economic situation. However, the services sector, which is a major contributor to the UK's gross domestic product (GDP), is still experiencing growth. As a result, the composite PMI remains in positive territory.
Given the increasing belief that the property market is heading towards a sharp slowdown, home builders have adjusted their actions accordingly. Mortgage rates have surged above six percent, with some economists even predicting rates to reach seven percent during the summer. These tighter lending conditions have made it difficult for potential buyers to afford homes, increasing the likelihood of unsold inventory for home builders. Consequently, they are reducing the supply of new homes in response to these market conditions.
For several years, there has been a clash between intense demand for properties and a persistent shortage of housing supply, resulting in record-high house prices. According to the building society Nationwide, prices have recently increased by 0.1 percent, reaching over £262,000.
The rise in mortgage rates has played a significant role in causing a sharp decline in house construction, as noted by Samuel Tombs, the chief UK economist at Pantheon Macroeconomics consultancy. Since December 2021, mortgage rates have been steadily increasing due to the Bank of England's consecutive interest rate hikes. With 13 rate increases in a row, the borrowing costs have reached a nearly 15-year high of five percent.
However, last month's unexpected 50 basis point rate hike had a significant impact on financial markets, leading to a rapid increase in average rates for both 2-year and 5-year mortgages. The United Kingdom is currently facing a significant inflation issue, which is among the most severe in the developed world. According to the OECD, the UK is the only G7 country where inflation is rising, reaching 7.9 percent in May compared to 7.8 percent in April.
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