Cracks in the British economy are converging with the crisis at distressed developer Country Garden Holdings on a site in a deprived area of east London. The company, which purchased the land in 2018 with plans to construct hundreds of apartments, has yet to start building and is now facing a cash crunch. The British capital is also experiencing a collapse in new home sales, reaching an 11-year low due to surging interest rates and a cost-of-living crisis that is dampening demand. Access to the site has been closed, with little evidence of any construction work taking place.
Developers have slowed down housebuilding due to concerns about the economy and pressure from higher borrowing costs and inflation. This slowdown is negatively impacting construction firms, which are going insolvent at the fastest rate in a decade. The issues in the housing sector are just one indication that the British economy is beginning to stumble after a surprisingly strong first half of the year. Private-sector firms experienced their first contraction in seven months in August, and Bloomberg Economics predicts that higher borrowing costs will push the economy into a recession. “The impact of higher interest rates is only beginning to permeate through the economy,” says Niraj Shah, an economist at Bloomberg Economics. Elevated borrowing costs will cause more households and businesses to adjust their spending, ultimately denting overall demand in the economy.
To combat inflation, the Bank of England has implemented 14 interest rate increases since late 2021, marking the fastest monetary tightening since the late 1980s. The rise in borrowing costs has heightened the risk of corporate defaults, as some medium and large companies struggle with debts. The Bank of England has warned that certain firms may sharply reduce investment and employment in response to these challenges. According to consultancy Begbies Traynor, nearly 440,000 firms were already in “significant distress” in the second quarter, an 8.5% increase from the previous year. Many of these distressed firms operate in the construction sector, where private new housing output fell over 8% year-on-year in June.
The outlook has worsened since then. Builder Crest Nicholson has reported a progressive deterioration in its sales rate in recent weeks, which is now half of what was expected. Buckingham Group Contracting, involved in the redevelopment of part of Liverpool Football Club’s stadium, cited lost business as the reason for announcing its closure last week. Homebuilder stocks have plummeted approximately 40% since the Bank of England’s rate tightening began in December 2021.
In east London, the promises of luxury homes “setting a new standard in riverside living” at the Country Garden site have been defaced with graffiti, reflecting the frustration and disappointment surrounding the stalled development.