UK Construction PMI: are we on the cusp of a bubble?
Following the release of the UK Construction PMI this morning (4 June), Brendan Sharkey, Head of Construction and Real Estate at MHA MacIntyre Hudson, believes that the construction sector might be in a bubble, with strong but temporary demand, looming prices rises and the upcoming end of some government support:
“Today’s PMI shows that demand in the construction sector remains strong and everyone has plenty of work. However, in truth many developers would prefer a steadier, slower recovery. This heated market is accompanied with the spectre of a coming bust to end the boom.
“A bust is far from being a foregone conclusion but it is a danger to watch out for. Hopefully the sector will have a softer landing and we will just see the housing market quieten down, possibly by September, rather than crash and burn.
“One potential pitfall comes from demand. With the current Stamp Duty Land Tax (SDLT) holiday ending at the end of June, and with some of the current interest in moving house perhaps liable to fade away as the country reopens, demand could start to stutter.
“The other potential problem is inflation and the rising costs of construction materials, such as timber, cement and plasterboard. Some firms might not have priced this into their current contracts and could be caught out. They might think they have taken on lots of work only to find it is not actually profitable, an easy mistake to make in an industry that usually operates on thin margins at the best of times. The bigger firms are liable to weather this much better than smaller contractors, as they usually have better contracts and more influence with suppliers.
“Land scarcity is also a related problem. Getting viable land at the right price for smaller building ventures is becoming more of a problem, and might be another snare for smaller developers. Overall we’re in strange times and it is exuberant periods of expansion like this that test the industry as much as the downturns.”