UK market view: Q4 2022

After another disruptive quarter, which contained a range of issues adding to business uncertainty, we have cut our forecast for tender prices in 2023. It seems highly likely that the UK is already in a recession and that GDP will fall in 2023. For the moment, we do not expect tender prices to drop into negative territory, but this is not impossible.  

Despite GDP declining in Q3, potentially marking the start of a recession, construction output rose a respectable 0.6%. New orders rising by 6.4% also suggests the industry is entering the recession with a moderately healthy pipeline.  

The output of all new construction work remains marginally lower than where it was back in Q4 2019. The non-housing public sector and private commercial sector are two notable laggards. With construction vacancies rising to 49,000 in September, they equalled March’s record high, and helped keep construction pay growth above 5%. However, this positivity in the labour market should reverse as the market tightens.  

A final issue that a recession might alleviate is material prices. Even if they only rose 2.4% in Q3 and in September had their first month-on-month drop in over two years, annual material price inflation is still very high, having risen by over 40% since the pandemic. Unfortunately, the significant number of insolvencies in each of the first three quarters of the year implies that the damage from higher material costs is already being felt.  

Financing costs are a growing problem. The era of low interest rates, which is likely to have encouraged speculative developments as well as increasing real estate values, is now over and without it, some projects may no longer get the green light. With the Bank of England having consistently raised the base rate over the past year, it now stands at 3.5%. Borrowing costs for mortgage holders and for developers are even higher, leading to expectations of both house and commercial prices starting to fall, which may dampen construction demand.  

One of the main reasons for reducing our forecast is the potential for a slump in the housing market. As the largest sector in construction, a reduction in residential activity will have an outsized effect on the industry, dragging down demand for materials and workers. With many forecasters, including the Office for Budget Responsibility (OBR), predicting a fall in house prices, the report takes a more in-depth look at what this means for housebuilding.  

Download the report to read more.