James Parker examines what recent trends say about the housebuilding sector.
It seems that the commercial and industrial construction sectors’ losses are somehow private housebuilding’s gain. Despite a raft of challenges, it takes a lot to knock this sector for six.
The key Purchasing Managers Index results for August from IHS Markit have reported a strong rise in housebuilding activity, set against cost rises, increasing concerns around Brexit and labour, and contrasting poor performance in other sectors. There has been a significant drop-off in industrial and commercial sector work, and the question is, why does housebuilding keep doing so well?
One answer, of course, is that demand is always there, we are still some way short of the 250,000 homes per year target needed to meet near universally-accepted goals to service the growing UK population. But there also has to be something about the inherent resilience and financial clout of the housebuilding sector. Despite concerns rising over the cost of imported materials as the pound remains weak since last June’s Referendum, and a high proportion of construction materials coming from overseas, many housebuilders have somehow managed to lower their margins, absorb the hit and not yet pass it onto their customers.
How much longer can this last?
This was the finding of the Construction Products Association’s Construction Trade Survey, which asked main contractors as well as SMEs and product manufacturers whether contractors were upping their tender prices to match the rises in material costs. While 88 per cent of main contractors said they had seen materials costs rise in Q2, “almost half of main contractors opted to keep tender prices unchanged, leading to a fall in margins.”
However, their inherent resilience is shown by the fact that despite this drop in profits, Q2 was the 17th consecutive quarter of growth for the construction industry, in the context of falls in order books in commercial and industrial sectors. This has to mean that major housebuilders are doing much of the heavy lifting when it comes to working lean and mean to squeeze out profits where they can, not to mention to some extent building when it works for them on land they already own.
Are prices set to rise?
But how much longer can this last? If the pound continues on its weaker path for the foreseeable future, as many predict, then materials imports will become more expensive. Eventually, either housebuilder's put up their prices or are forced into a break-even or worse situation by lowering prices to placate clients. That has echoes of the last recession and will not be where they want to look for savings.
One commentator from the surveying side of the business (Andrew McFarlane of DM Hall) recently said that with nearly a quarter of UK building materials coming from overseas, many suppliers are “actively seeking alternatives to traditional markets” to combat the price increases.
Will this mean more indigenous UK product manufacturers getting a look in? Or with UK manufacturers such as brick suppliers struggling to absorb energy price increases will it be the more depressing but realistic prospect of cheap imports from far-flung corners of the globe, with less quality control, flooding the UK with inferior, but labelled ‘equivalent’ alternatives?
Or with UK manufacturers such as brick suppliers struggling to absorb energy price increases will it be the more depressing but realistic prospect of cheap imports from far-flung corners of the globe, with less quality control, flooding the UK with inferior, but labelled ‘equivalent’ alternatives?
Price rises of up to 35 per cent in essential construction materials have been reported this year, and components such as plasterboard and insulated are reportedly rising at their fastest rate in 25 years.
If this pattern of inflation continues, something will have to give.
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