Residential construction slowed in May as inflation bites

Home-building slowed in May, two reports show, as developers warned that inflation prompted a “massive slowdown” in apartment construction.

Residential building eased in May, continuing a decline dating back to last autumn, according to the latest BNP Paribas Real Estate Purchasing Managers’ Index (PMI).

Meanwhile, a report from the Chartered Institute of Building (CIOB) warns that inflation has been rising so rapidly during the lead-in times to projects that some are no longer viable by the time work is due to start.

“Participants involved in the residential sector pointed out that there has been a massive slowdown due to these viability challenges, particularly in building apartments,” the CIOB report said.

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The institute adds that apartments are the very type of building that Government is keen to encourage in its efforts to tackle the now years-old housing crisis.

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Construction price inflation hit 14 per cent year-on-year by the end of February, according to official estimates, although more recent trends indicate the overall rate is easing.

Housing activity slowed more sharply than the rest of the Irish building industry in May, according to the Construction PMI, a key barometer of activity in the industry.

The May reading for the overall industry was 49.4. The index takes 50 as its benchmark, with any number below that indicating a slowdown on the previous month, and any figure above it showing growth.

Housing Activity slid to 43.9 in May, the eighth consecutive month that residential building declined, the index shows.

Costs continued rising in May, but John McCartney, director and head of research at BNP Paribas Real Estate Ireland, pointed out that they did so at their slowest rate since August 2020.

He said that this, combined with ongoing demand and increased new orders, “is giving rise to greater optimism about construction viability”.

[ Housing starts continue to rise despite hike in construction costs ]

Other figures show that prices for materials such as cement, steel and timber have stabilised, although at high levels following two years of inflation.

However, labour and finance costs continue to rise as the industry ups wages to lure workers and lenders pass on central bankers’ interest rate hikes.

Linesight, the multinational quantity surveying and consultancy firm, recently predicted that increased interest rates, a skilled labour squeeze and high costs would slow Irish construction in the short term.

The firm believes that the industry will shrink by 4 per cent this year.

The CIOB report, Building Up Ireland: Professional Insights from the Construction Sector 2023, maintains that inflation has deterred developers from building offices speculatively while they have mothballed other projects.

However, the PMI shows that commercial building, which includes offices, factories and other business premises, grew in May, recording a reading of 53.7.

Civil engineering, mostly large, State-funded infrastructure projects, was the weakest performer, slumping to 43.9.

Overall, new orders increased while builders continued to hire staff, indicating that the industry is poised to grow in coming months.

[ Cost of building hundreds of schools soars amid construction inflation ]

Mr McCartney points out that the Republic’s population “continues to rise strongly”, generating natural demand for new building, particularly homes.

The CIOB report notes that foreign direct investment, population expansion and economic growth are fuelling construction in the Republic, where output topped €30 billion last year, according to most estimates.

However, it says that the industry is weaker in Northern Ireland. The UK’s Construction Industry Training Board forecast a 1.2 per cent dip in building work in the North this year, although the body predicted that this would recover in 2024, with growth hitting 2.4 per cent in 2027.