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UK developers have reached a “tipping point” on building costs due to slowing construction and easing energy prices, according to one of London’s biggest housebuilders.
Rob Perrins, chief executive of Berkeley Group, said: “We are just getting to that tipping point . . . We are seeing deflation in our build costs for the first time” following a period of sharp price rises.
UK housebuilders were hit with big increases to building costs as inflation pushed into double digits, weighing on the sector. But after peaking earlier this year, those cost increases are now near zero or even falling according to analysts.
The shift comes after developers slashed their output this year as higher borrowing costs have hit prospective buyers, resulting in a drop in demand for construction materials and contractors.
Berkeley, which specialises in building large, urban blocks on former industrial land, said sales of new homes were roughly a third lower than last year over the six months to the end of October, in line with many of its peers. The company said it is building around 10 per cent of London’s new private and affordable homes.
“One way you could look at it is that sales are only down 35 per cent,” Perrins said. “There is a nervousness on the part of the consumer, in part because of the lack of a feel good factor.”
Berkeley’s update comes after large housebuilders Persimmon and Taylor Wimpey both flagged easing build costs last month. Persimmon said in November that costs had been more stubborn than expected at the start of the year, but that price rises were starting to slow.
Berkeley reported a 4.6 per cent rise in profit before tax to £298mn in the six month period, and extended its profit guidance by one year. It is now targeting £1.5bn in pre-tax profits between the current year and spring 2026 — implying a modest reduction in its forecast. Shares fell 2 per cent in early trading.
But Perrins said falling inflation should ultimately lead the Bank of England to cut interest rates, which would kick-start house sales.
The year-on-year increase in the cost of materials to build new homes in the UK peaked close to 25 per cent last year on average, but has fallen close to zero this autumn, according to analysts at Jefferies, who said some prices were falling.
“The majority of these cost decreases reflect timber and steel, albeit inflation across other build products have moderated to close to flat since the summer,” Jefferies wrote in a note on Thursday.
Many key materials, such as bricks and glass, are very sensitive to volatile energy prices. “With weaker demand and falling energy costs, there was more tension around price negotiations going into 2023,” said Aynsley Lammin, analyst at Investec.
However, he warned that labour costs could remain a pressure for builders. “Wage inflation will present a challenge and need offsetting,” in 2024, he said.