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Let industry catch up before intervening on housing

Despite Q1 figures showing a fourth consecutive quarter of growth for the industry, the underlying cause is still all about housing.

On an annual basis total output grew by 5.4 per cent, but sectors such as infrastructure and industrial, which are still anticipated to grow this year, declined by 4.8 per cent and 10.1 per cent respectively.

Remove housing from the figures, and new work output actually declined by 1.9 per cent. This should have been the talking point, but unfortunately, continued fears over a bubble meant that housing remained in focus.

According to the scaremongers, Help to Buy is driving the market into bubble territory.

However, it has been used on just 19,400 out of 980,000 or 2 per cent of transactions nationally. This is not to say though that the indirect effects aren’t important.

Government boost drives mortgage confidence

The support that government is providing to the demand side of the market continues to raise future price expectations, thereby lowering the default risk to lenders.

“A misguided remedy, such as a rise in interest rates to curb house price inflation, would have severe unintended consequences”

Lenders are becoming increasingly confident in the market and are issuing more mortgages. According to the BBA, mortgage approvals increased by more than 40 per cent in March compared with the same time a year ago.

So is there a bubble, as defined by both mis-pricing and high volumes? First, it is reasonable to argue that much of the housing stock is grossly overvalued.

In February, UK house prices increased by 9.1 per cent compared with a year ago, with the average price at £253,000.

High volume factor neglected

So there is evidence to show erratic pricing, but what about high volumes? Those eager to purvey the notion of a ‘housing bubble’ carefully neglect this second condition, but they shouldn’t.

“The optimum stance at the moment from policy-makers is to hold back and allow the rest of the industry to catch up”

In the final quarter of last year, starts were still 44 per cent lower than in 2007. The excessive house price increases over the past 12 months are due to insufficient supply, not excess demand.

What to do next? A misguided remedy, such as a rise in interest rates to curb house price inflation, would have severe unintended consequences for the rest of the industry, which remains vulnerable.

Holding fire on housing is best approach

The optimum stance at the moment from policy-makers is to hold back and allow the rest of the industry to catch up before making any intervention.

It is typical for any industry during the recovery to experience growth in certain areas and not others at the beginning, and hasty policy action can often bedestabilising.

Although a keen watch on the housing market should be advocated, the attention should be refocused on providing long-term supply side solutions where the real policy failures lie.  

The Construction Products Association anticipates a broadening of growth during the course of 2014 across infrastructure, industrial, and commercial sectors.

A knee-jerk policy response to house price inflation could hinder this growth.

Both construction and the economy are benefiting from the housing recovery, and over the medium term more intervention to steer housing onto steady ground will be required.

But at the moment, intervention is far too risky.

Kallum Pickering is a senior economist at the Construction Products Association

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