Labour and Materials Challenges Persist, Despite Positive Signs of Market Confidence
As we progress in Q2 2023 construction activity continues to be under pressure. Most parts of the UK saw a weakening in project starts during the three months to February. The North East was a relative bright spot, with project starts increasing 19% during the period although they remained -20% down on a year ago.
The South East followed a similar trend, with the value of project starts increasing 5% against the preceding three months but remained -27% behind the previous year. Project starts in London and the South West weakened, slipping by 18% and -15% respectively against the preceding three months and were 46% and 34% lower than a year ago.
Some areas of the UK fared worse, including Scotland where the value of project-starts fell 31% against the preceding three months to stand 35% down on a year ago. Yorkshire & the Humber experienced the sharpest decrease against both the preceding three months (-53%) and the previous year (-61%). Wales, Northern Ireland, the East Midlands, West Midlands, and the North West also suffered falls in project starts against both the preceding three months and the previous year.
According to the National House Building Council (NHBC), positive data relating to homes registered to be built in the first 2 months of 2023 show some signs that developers are starting to feel more confident about the market following the uncertainty that existed at the end of 2022.
Inflation is likely to cool off in 2023 (6.2% in 2022) but is expected to remain higher than normal, with an average of 4.7% expected for 2023. The 20% increase in construction materials costs seen in 2022 will not be repeated in 2023 but nevertheless, inflation may still remain a headwind, particularly for SME house builders who have less ability to forward order and store materials.
However, according to our clients, the availability of most construction materials has improved in the first quarter of 2023 and delivery times are approaching normal for most materials. Some clients are even reporting a reduction in prices for certain materials such as timber which was unthinkable in 2022!
The materials requiring high energy use in their production process will continue to remain under pressure due to the sustained high cost of energy, notwithstanding the recent easing in energy prices. However, most clients now feel more positive about cost inflation and a recent NHF survey also indicated that developers consider moderate cost rises now to be manageable as we move into Q2 2023.
The UK labour market remains tight. The unemployment rate during the three months to January remained low at 3.7%. The ONS estimated that there were 1,124,000 vacancies in the UK during the three months to February, 51,000 fewer than during the preceding three months. The number of job vacancies has been falling since about mid-2022 but remains high by historic standards.
In the construction industry, the availability of skilled workers also remains tight as we move into Q2 2023 with inflationary pressures on workers’ own income being such that some construction companies have been struggling to maintain a steady workforce. This can result in extensions to the programme and in turn, impact the overall cost. The challenge for SME housebuilders is the shortage of skilled workers. According to the FMB, 44% of SMEs reported difficulty in recruiting carpenters, and 42% reported difficulty in recruiting bricklayers.
In reaction, developers are typically lining up the next development early in order to provide a seamless transition of their labour to keep them on.
The recent impact of interest rate rises to the current Bank of England base rate of 4.25% and the effect of affordability for mortgage finance has no doubt negatively impacted house prices, particularly in secondary regions and locations. However according to the latest data from Rightmove, the housing market is on a much more stable footing than previously thought, with prices rising an average of £3,000 or 0.8% in March 2023.
This is possibly a function of the sheer demand and lack of available stock in the market which appears to be keeping prices stable in the face of arguably normal historic economic conditions. Assetz Capital are ready to assist in finance solutions for developers thinking of bringing a scheme to the table, as we now move into more positive economic territory in Q2 2023.