UK construction suffers eighth successive month of shrinking output
Construction output fell again in December 2019, according to data gathered from industry purchasing managers.
The downward turn continued across all three broad categories of activity and survey respondents attributed the latest drop in workloads to political uncertainty and subdued client demand in the run-up to the general election that took place on 12th December.
The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index scored 44.4 in December, down from 45.3 in November, and below the crucial 50.0 no-change value for an eighth consecutive month.
This means that this current period of falling business activity across the construction industry sector is the longest recorded by a survey for almost a decade.
Civil engineering was by far the worst-performing category within the construction in December, with activity falling at the fastest since March 2009. Anecdotal evidence implied that political indecision and delays with contract awards for new projects had led to falling business activity.
Latest data revealed a sharp drop in commercial construction work, which was partly attributed to clients opting to postpone spending decisions ahead of the general election and Brexit outcome.
House-building dropped for the seventh month running in December, although the rate of decline here was only modest.
Construction companies recorded a reduction in new business during December. On the plus side, the pace of decrease was less severe than the 10-year record low seen in August. The latest survey also suggested to the softest decline in staffing numbers in four months. Where a drop in employment levels was reported, survey respondents often claimed the non-replacement of voluntary leavers amid a lack of work to replace completed projects.
Despite the downturn, construction companies indicated that their optimism towards the year-ahead business outlook rebounded to a nine-month high. A number of firms suggested that greater clarity in relation to Brexit had the potential to boost order books in 2020.
Housing Index for the last decade.
Average UK city house prices have increased at an annual average rate of 4.4% per annum. While price falls in the latter part of 2018 suppressed the annual growth rate, these have dropped out of the annual growth calculation and explain the increase in the current annual rate of growth. The outlook for 2020 will be driven by affordability factors. We expect city house prices to increase by +3% over 2020 with above average growth in the most affordable cities and below average growth in cities across London and southern England.
Change of Government doesn’t shift fundamentals
While a new Government, and the prospect of a Brexit withdrawal deal becoming law in early 2020 will reduce uncertainty, neither of these will change market fundamentals in our view. While we expect a return of some pent-up demand in 2020 Q1 across all cities, affordability pressures will remain a constraint to demand and the scale of growth in 2020.
Marked difference in current and long run growth
There is a marked difference between the current and 10-year growth rates across UK cities (Fig.2). Cities in southern England have registered a marked slowdown in price inflation over the last 1-3 years with current growth rates well below the 10-year average – Oxford, Southampton, Portsmouth, London, Cambridge, Bristol.
London over the last decade – a tale of two halves
The performance of the London market over the last decade falls into two distinct phases, pre- and post 2016. Prices in London have increased by 74% since 2009, an annual average of 5.4%. Most of the price gains in London came in the years running up to 2016 when unsustainable growth stretched affordability levels which were compounded by multiple tax changes and weaker sentiment. The rate of price inflation has picked up recently as available supply falls and sales increase off a low base. Despite this, growth is still running at a third of the 10- year average. While there has been a 3-year repricing process, against the backdrop of lower sales, we expect affordability constraints to limit price growth in London over 2020.
Affordability fundamentals a key driver looking ahead
We have analysed the drivers of UK house price growth since 2009. The annual increase in prices is largely explained by the fundamentals of lower mortgage rates and rising incomes. There is little evidence that prices have been pushed higher by households increasing the amount of income spent on housing, as was the case in the years running up to 2007. This reflects greater caution on the part of buyers and new mortgage regulations testing affordability for new purchases.