Construction output is forecast to fall from a record-high level and contract by 6.4% in 2023, according to the CPA’s Spring Forecasts.
This is a downgrade from a fall of 4.7% expected in the Winter, driven primarily by sharp falls in the two largest construction sectors – private new housing and private housing repair, maintenance and improvement (rm&i) – together with recent government announcements of delays to major infrastructure projects.
Private housing new build, and private housing rm&i account for around 40% of total construction output. These two are the sectors in which demand is most affected by a macroeconomic backdrop of falling household incomes and higher interest rates. In infrastructure, the third-largest sector, growth is expected but has been downgraded from the Winter Forecasts owing to government delaying HS2 work at Euston station and work on major road schemes.
A wider recovery in economic growth in 2024 is expected to boost demand for both new build housing and rm&i activity and total construction output is forecast to return to growth, rising by 1.1%.
What is the outlook for private housing?
Private housing is the sector forecast to experience the sharpest contraction in 2023, with a 17.0% fall in output in 2023. Following the government’s disastrous Mini Budget last Autumn, interest rates rose to a 14-year high. The resulting higher mortgage rates combined with broader cost of living increases and falling real incomes led to a significant weakening in homebuyer sentiment – and a sharp drop in demand heading into this year.
Continued pressure on household budgets and the absence of stimulus for homebuying in the Budget, particularly first-time buyers, means that demand from a key segment of the market will remain subdued. The forecast assumes a pickup beginning in the traditional Spring selling season with mortgage interest rates settling at current levels – lower than at the end of 2022 but still significantly higher than 12 months ago and the ultra-low rates of the last decade.
However, a gradual improvement in demand will need to be maintained throughout the Summer and beyond to shore up house builder confidence to start new developments and drive the recovery in building activity in 2024.
Private housing rm&i
This is similarly exposed to the fall in real incomes but is also experiencing slower demand. This is due to the fading impact of the one-off boost to activity during and immediately after the pandemic, when increased working from home, a ‘race for space’, and accumulated savings and housing wealth saw households investing in large improvements projects.
A drop in planning applications in the second half of 2022 and the return of competing spending decisions such as overseas holidays point to a reduced pipeline of improvements work and discretionary r&m projects for this year. As a result, output is forecast to fall 9.0% in 2023, which is partly offset by strong activity on energy efficiency retrofit and solar/PV work, before a broader economic recovery that drives output growth of 2.0% in 2024.
How will this affect the timber supply chain? Nick Boulton, our head of technical and trade policy gives his take on the CPA Forecast:
“New house building and RM&I are two of the key sectors for timber and timber products, so our members will be looking at this with some concern.
“After the ‘KamiKwasi’ budget in September, which directly led to interest rates rising to a 14-year high, this downgrade in the forecast is unsurprising. Higher mortgage rates along with broader cost of living increases and falling real incomes mean the ability of people to secure mortgages, invest into their homes, or move along the property ladder is weaker.
“While these figures might appear bleak, it is important we keep perspective. While housing contractors are building at slower rates, it is worth noting that the starting point for these figures comes after a record high-level of activity following the recovery from the pandemic. The longer-term outlook for the timber supply chain is strong.
“The timber supply chain provides a low-carbon manufacturing base, construction system, and building products – all of which are crucial to achieving net zero.
“Confidence in our ability to compete in this market can be seen in softwood imports, with January 2023 seeing an uptick on the previous year and suggesting that despite the significant fluctuations in the past two years the long term trend continues to rise.”