Scottish Housing Market Review: Q4 2022

10. Lending to House Builders, Insolvencies & Construction Prices

Lending to House Builders

The value of loans outstanding to UK firms involved in the construction of domestic dwellings rose by £1.9bn from February to March 2020, an increase of nearly one-third (31%), as shown in Chart 10.1. The sudden increase likely reflected the need for credit to fund short-term liabilities owing to Covid-19 restrictions on construction activities and home moves, which had adversely affected firms' income. In addition, firms may have drawn down funds as a precaution, given the economic uncertainty.

From May 2020 to September 2021 the value of loans steadily decreased, falling below pre-covid levels. However, the value of loans seems to have returned to pre-pandemic levels, with the value of outstanding loans for 2022 so far 0.7% below the same period in 2019, despite the sharp increase in construction material price inflation (compare Chart 10.3).

Source: Bank of England

Insolvencies

Chart 10.2 shows that during the pandemic insolvencies of construction companies registered in Scotland fell from 48 in Q1 2020 to 15 in Q1 2021, with a similar proportional fall evident for England and Wales, likely due to the business support in place. However, with this support unwinding and new build construction material prices increasing (as shown in Chart 10.3), insolvencies for construction companies registered in Scotland appear to have returned to pre-pandemic levels, with 48 insolvencies in Q3 2022, a decrease of 9.4% on Q3 2021 but the same level as the 2016 – 2019 average for Q3. For construction companies registered in England and Wales, however, insolvencies have increased above pre-pandemic levels, with an annual increase of 38.1% on Q3 2021, reaching 989. This is also 41.5% above the 2016 – 2019 average for Q3. This is the third highest level of registered company insolvencies in England and Wales over the last ten years, only behind the level in Q1 2022 (1,044) and Q2 2022 (1,048).

Source: The Insolvency Service

Construction Prices

Data from the ONS on the annual change in the construction output index price of new build housing (public and private), which covers the range of costs associated with building new public and private housing, shows an annual increase of 10.5% to September 2022 (Chart 10.3).

Data from BEIS (also illustrated in Chart 10.3) shows that the annual growth rate in the cost of construction materials used in new house building, which had reached as high as 24.0% in June 2022, has been moderating more recently, to stand at 10.1% in October 2022. The annual change has been driven in particular by gravel, sand, clays and kaolin, including aggregate levy (56.7%) and insulating material (+51.2%). The largest annual decrease in prices in October 2022 came from imported sawn or planed wood (-19.9%) and particle board (-9.7%).

Source: ONS and BEIS