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Homebuilders stocks slump as UK house building falls at steeper rate

homebuilders A builder working for Taylor Wimpey builds a roof on an estate in Aylesbury, Britain, February 7, 2017.  REUTERS/Eddie Keogh
Analysts are not keen on homebuilders' shares after housebuilding activity contracted. Photo: Eddie Keogh/Reuters (Eddie Keogh / Reuters)

The UK construction sector continued to grow as a whole in May, as order books and new business rose sharply, but the ongoing deterioration in housebuilding led to a drop in the share price of homebuilders.

The S&P Global/CIPS UK Construction Purchasing Managers’ Index picked up slightly to 51.6 in May, up from 51.1 in April and above the neutral 50 mark separating growth from contraction for the fourth successive month.

It was the fourth month in a row where activity improved, and was the strongest upturn since February. However, the performance across different construction categories varied widely.

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S&P Global’s monthly poll of purchasing managers at building firms found that housebuilding activity was dampened by worries about the impact of higher interest rates and subdued market conditions. It contracted at the steepest rate since May 2020 last month.

Excluding the pandemic, only the 2009 recession saw worse downturns in house-building.

Commercial building was the best-performing segment but worries about the impact of higher interest rates and subdued market conditions continued to dampen housing activity.

Read more: UK mortgage approvals slump after interest rate hikes

Residential work underperformed the rest of the construction sector by the greatest margin since October 2008.

Tim Moore, economics director at S&P global market intelligence, said: “May data highlighted a mixed picture across the UK construction sector as solid growth rates in commercial and civil engineering activity contrasted with a steeper downturn in house building.

“Rising demand among corporate clients and contract awards on infrastructure projects meanwhile underpinned the fastest rise in new orders since April 2022.

“However, cutbacks to new residential building projects in response to rising interest rates and subdued housing market conditions resulted in the sharpest drop in housing activity for three years.”

Housebuilders' shares tumbled on the back of the figures with Persimmon (PSN.L) leading the losses, after slipping 0.79%.

Read more: UK house prices fall as interest rate rises set to push mortgages higher

Barratt Developments (BDEV.L) lost 0.45% and Taylor Wimpey (TW.L) retreated 0.72% as analysts are concerned about the slump in housing activity.

Interest rates offered by lenders for new mortgage deals have surged over the last two weeks, as higher-than-expected inflation data prompted investors to bet that the Bank of England will be forced to raise borrowing costs further.

Many economists think this could trigger renewed weakness in the UK’s housing market.

James Bailey, director and deals leader for Housing at PwC UK, said: “The latest PMI data confirms the challenges faced by the housebuilding sector. Rising interest rates, reduced mortgage availability and affordability, and wider caution around household finances against the cost of living crisis will all continue to shape the outlook for the remainder of the year."

Supply conditions continued to normalise in May, as highlighted by the greatest improvement in vendor lead times since August 2009.

This helped to alleviate cost pressures across the construction sector, with the overall rate of input price inflation easing to its weakest for 32 months.

Staff numbers continued to rise for the fourth consecutive month, as construction companies remained optimistic about future growth.

Watch: How much money do I need to buy a house?

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