Build Build Build – Boom or Bust

June 4, 2021

Annual house price growth rose to 10.9 per cent in May, the highest level in nearly seven years.

Prices shot up 1.8 per cent month-on-month, following a 2.3 per cent rise in April, according to new Nationwide data. The new record average house price is £243k, up by almost £24k over the past twelve months.

A year ago, activity collapsed in the wake of the first lockdown with housing transactions falling to a record low of 42k in April 2020. However, activity surged towards the end of last year and into 2021, reaching a record high of 183k in March.

Manufacturing activity expanded at an unprecedented rate in May according to the closely watched IHS Markit/CIPS Purchasing Managers’ Index. The sector saw an index reading of 65.6 in May, a record high for the month-on-month measure. That topped April’s 60.9 and July 1994’s 61.0, the previous peak. An index reading of 50 indicates no change from the previous month.

Production was up at one of the highest rates since records began, while new export orders rose at a survey-record pace. Stronger demand came from the EU, US and China with growth boosted by the unlocking of economies from Covid restrictions and ongoing vaccination programmes.

This all sounds very positive but a shortage of raw materials and some supply-chain disruption has inevitably pushed up purchasing costs again by a record high. This is a particular challenge across the new build sector:

  • Housebuilders have currently sold many houses, but construction hasn’t started, meaning they can’t recover cost price inflation
  • Manufacturers and suppliers are contracted for fixed price periods and can’t recover cost price inflation until these end

The likely outcome is that house price inflation will continue and allow housebuilders to recover their profitability on the next batch of houses released.

More worrying is whether smaller manufacturers and suppliers tied to fixed term pricing can survive the losses and stay in business.

As the price increases are demand driven, any easing requires a portion of the market to say enough is enough and slow down or stop. This is the worst outcome for everyone, even the opportunistic raw material suppliers. Every bubble bursts if it is over-inflated. It would be better to take the long-term view and allow it to float along happily at a reasonable level.