House builders should look to 2024 has an opportunity to start building again. House prices are not tanking, mortgage rates look to be going down this year, construction workers and materials are more available than they were. We will consider each one in the article below.
1: House Price Recovery Continues Alongside Improving Mortgage Rates
The Nationwide House Price Index reports that UK house prices rose for a third consecutive month in November, despite a Reuters poll of economists forecasting a 0.4% fall. This marks the first time that homeowners will have seen the value of their property rise for at least three months in a row since Summer 2022.
Prices rose 0.2% month-on-month in November, resulting in the annual rate of house price growth increasing from -3.3% in October to -2.0% last month – the strongest improvement since February 2023. These latest figures provide further evidence of a resilient property market despite broader economic considerations. Nationwide notes this improvement follows the view that the Bank of England’s move to hold the base interest rate once again means soaring mortgage costs will start to drop, fuelling more activity in the housing market.
The Base Rate has remained at 5.25% since August 2023, a decision made possible through previous increases in interest rates working successfully to bring inflation down according to policymakers. Inflation has fallen from over 10% in January 2023 to c. 4.5% towards the end of 2023, however Bank of England Governor Andrew Bailey has highlighted the need to keep interest rates high for a while longer in order to “get inflation all the way back to 2%”. Despite indications that the Base Rate is unlikely to drop until well into 2024, the rate freeze has been enough to encourage a more competitive mortgage market with an easing in mortgage rates already visible over recent weeks and lenders expected to offer further reductions in the new year. In turn, the number of sales agreed in November were at pre-pandemic levels, making it the strongest month for activity since March 2023.
With the average house price now at £283,615, Halifax reports that property prices have held up better than expected – falling by a relatively modest -1.0% on an annual basis and still £40,000 above pre-pandemic levels. The resilience in hour prices this year continues to be underpinned by a shortage of available properties, rather than a significant strengthening of buyer demand. Recent mortgage approvals figures show an increase in activity levels, thought to be the result of improving affordability conditions for homebuyers. With mortgage rates easing, buyer confidence is expected to increase – resulting in people being more inclined to progress their purchases.
2: Construction Activity Declines And Construction Costs Reach A 14-Year Low
According to the December edition of the S&P Global/CIPS UK Construction PMI, UK construction companies reported a decline in business activity in November for the third consecutive month. The decline follows another sharp fall in residential building activity, with elevated borrowing costs and subdued demand for new housing projects also being cited among the main construction activity barriers.
At the same time, purchasing costs significantly dropped, resulting in the largest sector-wide reduction in 14 years. Lower raw material prices and increased competition among suppliers combined with a backdrop of continued falling demand have all been linked to the purchasing cost downslide.
As for overall industry activity, the latest figures show that total activity stood at 45.5 in November, slightly down from October’s 45.6, remaining below the 50.0 no-change value for the third month in a row.
Meanwhile, housebuilding in November (index at 39.3) was identified as being the weakest-performing segment followed by civil engineering (43.5). Residential development project cutbacks and a general slowdown in overall activity due to unfavourable marketing conditions have been linked to the latest index rating, which will exacerbate the bigger-picture housing undersupply challenge.
3: Number Of Construction Workers In Work Drops For The First Time In A Decade While Supply Chain Pressure Eases
Concerns relating to near-term demand not only led to lower purchasing activity, but also a reduction in construction worker employment for the first time in ten months (S&P Global/CIPS UK Construction PMI).
With workforces being scaled down to reflect current activity levels, the continuous downward drift in input buying over the last six months also reflects reduced workloads and a lack of new project starts. Increased price competition among suppliers and falling raw material costs are said to be the two main areas fuelling the input price decrease. Despite this, November figures show that the sector emerged from a period of intense supply chain pressure, with average lead times among vendors shortening for the ninth successive month.
Falling prices for materials, particularly steel and timber, spare capacity among suppliers and weaker demand for construction inputs have all contributed to these latest indicators. However, transportation delays continue to hamper some supply chains.
Therefore, with most of the volume house builders taking a pause in their new site starts now may be the chance for SME house builders to take up the slack. We still have a housing shortage and first time buyers are still looking for their first home. First time buyers prefer new houses as they are ready to move in and require no further work. Some are even completely fitted out with fittings and appliances ready to move in. this is important for first time buyers as all the costs are including in the house purchase price so they do not need to search around for additional finance to cover these costs.