Strong housing market fuels UK construction industry rebound


The rebound in UK construction activity accelerated in September, supported by a mini-housing boom that helped the economic recovery even as tightening restrictions clouded the outlook.

The IHS UK purchasing managers’ index for construction rose to 56.8 in September from 54.6 in the previous month. This is the fourth consecutive reading above 50, which indicates the majority of businesses have reported improving activity.

The reading beat the 54 forecast by economists polled by Reuters and signalled the fastest pace of growth in nearly five years.

Line chart of Purchasing managers' index, below 50= a majority of businesses reporting a contraction showing UK construction activity rebounded in August

“Following August’s slowdown, growth in UK construction activity rebounded strongly in September,” said Eliot Kerr, economist at IHS Markit. “There were faster increases in activity in both the housing and commercial subsectors, which more than offset a sharper decline in civil engineering work.”

The strongest performing category was housing, where builders registered a sharp expansion in activity for the fourth month running. Panellists mentioned a release of pent up demand among the reasons for the strength of new orders.

The UK construction sector also benefited from a stamp duty holiday for purchases of homes valued up to £500,000, which was introduced in July and lasts until March.

Pent-up demand and lower taxes generated a mini housing boom in the summer with surging house transactions and prices, despite the unprecedented hit to economic activity in the second quarter.

September’s PMIs suggest that the expansion of the sector continued until the end of the third quarter.

Growth in construction, which accounts for about 7 per cent of the economy, supports the wider economy via demand for building materials and housing goods.

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In July, the last month for which official data are available, construction was the most depressed sector compared with pre-pandemic levels in February, despite a strong recovery that month.

The PMI survey showed that work undertaken on commercial projects also rose strongly, increasing at the quickest pace for more than two years. In contrast, civil engineering activity fell for the second month running and at the sharpest rate since May.

Activity in the construction sector was stronger than in the other parts of the economy. Earlier in the week, the final PMIs for manufacturing and services showed a slowdown in the growth levels, to 54.1 and 56.1 respectively.

The UK construction reading was well above the 47.5 for the eurozone, where builders have struggled to secure new work amid the Covid-19 outbreak.

Yet, economists warned that the strength in the sector might not last.

“Despite this month’s increase in activity, there’s still a feeling that this is the calm before the storm for construction,” said Max Jones, relationship director at Lloyds Bank commercial banking’s infrastructure and construction team. “The next few months hold a few key milestones — namely the nature of the UK’s future relationship with the EU and the end of the furlough scheme.”

Moreover, a recent rise in mortgage rates “poses a serious threat to the recovery in housebuilding”, said Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics. A scaling back in office space as more people work from home could also result in a long-lasting decline in commercial construction.

“We continue to expect, therefore, the recovery in construction output to hit a ceiling at a level about 5 per cent below its pre-Covid peak.”

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