UK’s housebuilders hope to feel the benefit of a peace dividend

As Donald’s Trump’s push to end the conflict in the Middle East shows signs of faltering, the UK’s besieged housebuilders will be watching closely.

Housebuilders have faced a tough few months. Following “signs of positivity” in January and February, with increased site visits from potential buyers and higher web traffic to online property portals. Steve Turner, executive director at the Home Builders Federation, said the US attacks on Iran, which began in late February, had “killed” that momentum “stone dead”.

The conflict has “reset the macro backdrop”, wrote Anthony Codling, real estate analyst at Royal Bank of Canada, in a note. “Mortgage rates have risen, the Bank of England has shelved rate cuts, consumer confidence has weakened, and the spring selling season has disappointed.”

As a result, “housebuilding has stalled massively”, said Turner. In the first quarter of the year, the number of registrations for an energy performance certificate, used by the industry as a proxy for the number of completed homes, fell to just over 48,000. This is the lowest figure since the second quarter of 2020, when  the country was in lockdown.

And with two-year fixed mortgage rates now 0.8 percentage points higher than they were before the conflict started, according to the Bank of England, UK house prices have begun to decline: in the three months to May, they fell 0.2%, according to Halifax – the first quarterly drop in a year.

But there were signs last week that, with hopes of a peace deal in the offing and transit through the Strait of Hormuz picking up in fits and starts, conditions for housebuilders were beginning to improve — only for Iran to close the Strait again on Saturday.

Last Wednesday, figures from the Office for National Statistics showed a surprise lull in inflation, which stayed flat at 2.8% in May, 0.2 percentage points lower than economists had expected. And on Thursday, the Bank of England’s monetary policy committee held interest rates at 3.75%.

Builders now hope the peace deal will improve economic conditions further. If the strait’s reopening causes inflation to fall further towards the Bank of England’s 2% target, easing increases in the cost of materials, that “would help” to stimulate housebuilding, said Tom Hawkins, head of residential development at estate agent Hamptons.

And the knock-on effect of lower inflation would be to give the Bank space to cut interest rates, lowering the cost of borrowing for developers and making mortgages more affordable. “If inflation starts to get closer to the target, that’s the only time we’ll see interest rates move,” Hawkins said.

Turner said a peace deal could “release pent-up demand” among buyers. “Clearly, a change in consumer confidence, and potentially any impact on interest rates, would be very welcome,” he said. But he added that the sector wasn’t holding its breath. “We’re probably prepared that the best-case scenario would be that rates stay where they are for the rest of the year,” he said.

“These days, we’re trying not to predict too far into the future. There’s always something around the corner which no one was expecting.”

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