Construction industry shrinks along with housing as costs flare

Previously agreed projects have been postponed, according to purchasing managers who work in the industry

All three parts of Ireland's construction sector, including housing, contracted in June for the first time since the onset of the inflation crisis, with some previously agreed projects having been postponed, according to a leading survey of the industry. 

The findings of the survey of purchasing managers who work in the building industry, as tracked by the BNP Paribas Real Estate index, starkly show the fallout from "a steep" increase in building materials and labour costs, with employment levels "stagnating" and the first fall in output for 21 months. New orders are also falling at a quickening pace.   

Most building purchasing managers surveyed said input prices rose sharply in the month.

"Continued severe price pressures led to a drop-off in enquiries, with new orders falling at a sharp and accelerated pace," BNP Paribas said. 

As a result, total construction activity fell for the first time since early-2021 when the sector was impacted by Covid-19 restrictions

The overall index that measures output across all three parts of the construction industry fell sharply, to 46.4. Any reading either side of 50 marks the difference between growth in output and contraction in construction.  

Housing output

Two parts of the industry, commercial output — which includes  office and retail projects — and civil engineering, posted sharp output declines in the month. The third component, which tracks housing output. also slipped slightly below 50. 

BNP Paribas said that the fall in output in housing in June was "only marginal", but the finding may still trouble Government and other policymakers about the prospects of new housebuilding being hit hard by the escalating costs.  

The Central Bank las week pared its forecasts for new home completions, citing among other factors escalating building costs

It sees 23,500 new home units being built this year, 27,000 in 2023, and 31,000 units completed in 2024. Its forecast for new homes is well below the 35,000 units many economists say will need to be built each year for multiple years before supply can come anywhere near to matching demand. 

Across the industry, "respondents noted a lack of enquiries, with some indicating that previously agreed projects had been postponed due to price pressures" in June, the construction survey shows.      

John McCartney, director and head of research at BNP Paribas Real Estate Ireland, said that June was "a watershed" for the industry. 

A recurring theme is that costs are rising faster than the value of delivered properties, squeezing viability

On the output of commercial projects, Mr McCartney said the fallback also in part reflects "that the existing pipeline of Dublin office development looks sufficient to cover short-term net absorption in the market".  

Fall in business confidence

Separately, the Cork Chamber of Commerce also signalled a fall in business confidence, albeit from an elevated level, amid the cost-of-living crisis. 

Its quarterly survey found businesses want skills shortages, costs, and housing to be the Government's top concerns in the budget. 

"While cost of living was identified as the top priority for Budget 2023, 47% of companies identified supply-side stimulus for housing as needing to be addressed," said chamber president Ronan Murray.  

Escalating costs and consumer sentiment were worrying firms. 

"Housing shortages have moved from becoming a social problem to a key problem for business," Mr Murray said.