Housebuilding cost inflation eases, in response to sector contraction

Annual housebuilding cost inflation as measured by the BCIS Private Housing Construction Price Index (PHCPI) stood at 9.7% in 1Q2023, down from 12.8% in 4Q2022. In 1Q2023, costs have increased by 1.4% in comparison to 4Q2022, down from a quarterly growth of 1.7% recorded for 4Q2022. This trend is in line with BCIS General Building Cost Index and All-In Tender Price Index, where annual growth for both has been easing since the peak in 2Q2022 – standing at 8.1% and 8.6% in 1Q2023, respectively.

Increases in the interest rate over the past 18 months by the Bank of England have significantly affected the housing sector. New construction output in the private housing sector has been declining since 3Q2022, recording two-quarters of a contracting output (quarterly drops of 5.3% and 2.1% in 1Q2023 and 4Q2022 respectively). On an annual basis, the private new housing output has slightly increased, as presented in the chart below.

Half of the respondents to the PHCPI survey attributed the increases in housebuilding costs to a rise in the materials’ costs, 36% noted an increase in subcontractors’ costs. Only 5% reported an increase in both materials and labour costs. For the second consecutive quarter, PHCPI received some reports of a decrease in the materials’ costs (9% of responses).

Housebuilders expect the building cost inflation to continue to ease, reporting an expected 1% increase for 2Q2023. April’s figures for headline (CPI) inflation and especially a high rise in core inflation indicate inflation is likely to be ‘sticky’ and to persist longer than previously thought. This is likely to result in further interest rate hikes in 2023, from 4.5% to a possible 5.5% towards the end of this year. Interest rate increases and consequent increases in mortgage costs will continue to adversely impact housing affordability and put more pressure on housebuilders. Demand is slowing, as reflected in  April’s data for residential transactions, which reported a 32% drop in comparison with the same period last year. Nationwide reports a negative annual growth in house prices since February 2023, standing at -3.1% and -2.7% in March and April 2023, respectively.

According to the latest data from the Department of Levelling Up, Housing and Communities, the number of private enterprise dwelling starts has dropped by 9.5% in 4Q2022, in comparison to 4Q2021. UK brick deliveries that can serve a proxy measure for house building starts show a 10.5% and 31.8% drop in 4Q 2022 and 1Q2022 when compared to the same periods of the previous years, further indicating a slowdown in housebuilding.

The introduction of the second staircase rule for new residential buildings over 30m has further contributed to a slowdown in the residential market; it is expected to have a particularly significant impact in larger cities, such as London, Manchester, and Birmingham.

With further monetary tightening expected this year and a sharp drop in housing starts, BCIS forecasts 2023 and 2024 to be particularly challenging for the private housing sector. BCIS expects the new private housing output to contract by 16.2% and 6.0% respectively, before returning to growth in 2025.

BCIS continues to monitor the readiness of the industry to meet the requirements of the Building Regulations. The estimated cost uplift for meeting Part L as reported by housebuilders in 1Q2023 stands at 4.9% – up from 4.4% as reported in 1Q2022.

Nearly 43% of respondents reported Air Source Heat Pumps (ASHP) as a chosen solution to meet requirements of the Part L, whereas 36% selected gas boilers and PV. 14% of the respondents reported selecting a combination of the above. The remaining respondents specified their selected choice as Gas boilers and PV combined with extra wall and floor insulation and Mechanical Ventilation with Heat Recovery (MVHR).

We would like to thank respondents to this survey for their contribution.

The PHCPI is based on housebuilders’ costs in constructing a standard house. The index is adjusted for changes in specification and reflects only the movement in the underlying direct costs to housebuilders.

If you are a housebuilder and would like to participate in the BCIS PHCPI quarterly survey, please contact contactbcis@bcis.co.uk

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