Annual housebuilding cost inflation continued to ease in 2Q 2023, according to new data published by the Building Cost Information Service (BCIS).

An update to the Private Housing Construction Price Index (PHCPI) shows annual growth of 6.5% in the second quarter, down from 9.7% in 1Q 2023.

Quarterly growth has also slowed, standing at 0.7% in 2Q 2023 compared with 1Q 2023. The last time quarterly growth was below 1% was 3Q2020 (0.4%).

In total 38% of PHCPI respondents pointed to an increase in subcontractor costs as the main driver of change in costs, and a quarter of respondents cited an increase in materials costs. For the third consecutive quarter, a small share of respondents reported a decrease in materials costs (6%).

Looking to 3Q 2023, the housebuilders surveyed said they expected to see an average 1% increase in costs.

Construction output figures, which have been declining since 4Q 2022, clearly demonstrate the continued pressure on the private housing sector.

In 2Q 2023, private new housing output was down 9.3% on the same quarter a year earlier.

There were decreases of 3.3%, 5.9% and 2.1% in quarterly growth in 2Q 2023, 1Q 2023 and 4Q 2022 respectively.

Source: BCIS, ONS

Against a backdrop of continued downturn in private housing output, BCIS forecasts the remainder of this year and the next to be just as challenging for the sector.

BCIS expects new private housing output to contract by 15.9% and 4.3% in 2023 and 2024 respectively, before returning to growth in 2025.

Chief data officer at BCIS, Karl Horton. said:

“The pressures on the housing sector, both as a result of a drop in demand and in the cost of resources, are clear to see – from the latest house price indices, which continue to slide, to fewer mortgages being taken out.

“Big housebuilders continue to report decreasing demand. We’ve seen shares in Barratt drop after the firm reported falls in profit and volume, Berkeley Group said its reservations were down by more than a third, and Persimmon reported last month that their estimate for completions this year is significantly less than what they delivered in 2022.

“Further, we expect to see the Bank of England’s Monetary Policy Committee increase the base rate this week, for the fifteenth time in a row. Continued interest rate increases will adversely impact housing affordability and heap more pressure on housebuilders.”

Cost impact of updated Building Regulations

BCIS continues to monitor the impact of updated Building Regulations on housebuilders’ costs. The estimated cost uplift for meeting Part L, as reported by housebuilders in 2Q 2023, stands at 2.8% – unchanged from the last quarter and down from 4.3% as reported in 2Q 2022.

Source: BCIS PHCPI survey

More than a quarter of respondents reported a combination of Air Source Heat Pumps (ASHPs) and increased insulation as their chosen solution to meet the requirements of Part L, and one-fifth selected a combination of PV (photovoltaic) and increased insulation. Another fifth selected a combination of gas boilers, PV and insulation, whereas 13% noted a combination of gas boilers and PV. The remaining respondents were split equally, reporting ASHPs, ASHPs and PVs, and gas boilers, PV and ASHPs, as their chosen solutions.

If you are a housebuilder and would like to participate in the BCIS PHCPI quarterly survey, please contact contactbcis(Replace this parenthesis with the @ sign)bcis.co.uk

For more information about BCIS, visit the website at www.bcis.co.uk