Construction Activity in The UK Shoots Up in June on Prospect of Stamp Duty Holiday

Summary

• The IHS Markit/CIPS construction PMI in June rebounded to 55.3 from 28.9 in May
• Housing construction firms had been lobbying with the government for a stamp duty holiday as it would provide an immediate boost to demand and prevent widespread job losses
• Halifax house price index showed that despite the uptake in construction activity in May and June, house prices have fallen by 0.1 per cent in June compared to May

The housing construction activity in the UK has shown a sudden and sharp growth in June that has taken many by surprise. In the construction sector PMI survey conducted by IHS Markit/ CISP for last month, it was seen that the sector has actually entered into an expansionary mode despite most of the other sectors remaining deep in the red. The PMI index, which characterizes the industry as expanding or contracting at the point of 50, registered an index figure of 55.3 for June against an index figure of 28.9 registered in the month of May. Among the various reason that is being sighted for this sharp rise in construction activity, in the hope that the government might offer a stamp duty holiday, which consequently would entice some home buyers to hasten their house-buying decision in anticipation of a monetary gain.

The effectiveness of a stamp duty holiday in boosting housing demand

Stamp duty is a levy charged by the government for the transaction value of a property sold in the United Kingdom. The burden of this levy which ultimately falls on the buyer is imposed gradually according to the increasing value of the property. The current levy structure in the UK is three tired. In the first tire properties up to the value of £1,25,000 are not charged any levy, for properties up to the value of £2,50,000 , a 2 per cent levy is charged for the excess value from £1,25,000 to the actual selling price and for properties with values over £2,50,000 till next £6,75,000, the levy is charged at 5 per cent.

The government is planning to target the lower end of the housing market, by increasing the bottom end of the levy threshold to anywhere between £3,00,000 to £5,00,000. This move, while not impacting the higher end of the market, will give a big boost to the lower segment of the market, where a high volume growth may be witnessed. This proposal which is currently being purported for a six month period, if implemented will stimulate demand up to spring next year and will go a long way in helping in the recovery of the housing and construction market in the UK.

The case of expanding construction activity and falling house prices

Though the civil construction activity showed a marked jump in activity levels in June, the housing construction segment was the one which showed the maximum upheaval, when compared to the civil engineering and commercial work. Ironically, the HALIFAX housing price index for the month of June showed that house prices have actually fallen by 0.1 per cent in the month of June compared to May. The implication being that this increased activity levels in the industry may not be met with sustainable demand in the coming few months. The impact of the above is being seen in the slower hiring and increased redundancies of employees who are currently under furlough. Supply chain disruptions continue to affect the industry even after over a month of the lockdown being eased, which is spiking up the input costs and would ultimately impact the final prices of houses.

So while the industry as on the whole is seen to be growing, there are sharp structural headwinds in the form of supply chain disruptions, fall in labour demand and sluggish demand for houses, which could play spoilsport in the full recovery of the sector in the coming few months.

The effect of the coronavirus pandemic on work and lifestyle of ordinary citizens

The coronavirus pandemic has brought about a major change in the way people live and work. While work from home facilities have made life a lot easier for people to attain a greater level of comfort by staying at home and delivering the same level of productivity. It has also made people more conscious of the risks of living in a highly crowded city like London. Since the opening of the Lockdown, several property websites in the country have reported increased interest among residents of large cities for houses in smaller cities and semi-urban areas. The motive for this change in perception, though it can be attributed to many other things, the work from the home facility and the future position of the post-pandemic world seem to be the most overwhelming factors. This phenomenon is clearly visible in housing prices of London, showing a marked weakness compared to house prices in other parts of the country, that has been witnessed post easing of the lockdown.

Conclusion

The government's proposal to reduce stamp duty for the housing sector is definitely going to be a welcome move as it will bring about some incentive, alluring the decision making of home buyers who have otherwise postponed many of their spending decisions because of the pandemic. The construction sector has been the leader among all other industries in fighting its way through the bad economic conditions and actually reaching an expansionary phase. This momentum of the industry needs to be supported as it could lead to the recovery of many other industries which are directly related and other non-related industries as a spill-over effect. The construction sector is also one of the largest employers of skilled and non-skilled workmen in the country. A sustainable revival would ensure that more and more people could be brought out of furlough. The problem of supply chain disruptions is a major problem for the industry and needs to be resolved at the earliest. Finally, the sentiments of the average British consumer would improve when an all-round recovery across industries is witnessed. This will give a sense of hope and assurance of job security and livelihood protection to people, who would be encouraged then to come out and spend more.