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City is undaunted by the bad news

FINANCE City Site

CONSTRUCTION and building materials companies were responsible for only one of the profit warnings recorded by Ernst & Young among quoted firms in the second quarter.But the industry is sure to figure more prominently in its third quarter survey.

Last week alone brought profit warnings from McCarthy & Stone, Bovis Homes, MJ Gleeson and Baggeridge Brick.

Yet with many of the concerns about the UK housing market already priced into shares, the City's reaction to the bad news was fairly muted.McCarthy & Stone's share price, for example, was down by little more than 1 per cent over the week.

For once the City is probably more optimistic than the industry on its prospects and the outlook could be transformed by a rate cut later this summer.

Indeed, given the scale of the downturn in volumes, many of the quoted house builders have done well to hold sales to the extent they have.Bovis Homes' first half reservations were just 3 per cent down on the period last year and it still managed a gross margin of 33 per cent, although it noted there remains 'considerable uncertainty over the robustness of the UK housing market' Barratt's private completions were down by just 1 per cent in the year to June although its forward sales are 12 per cent lower.

As in the last housing downturn, McCarthy & Stone has proved more vulnerable as its elderly customers struggle to sell their existing homes to trade down to one of the firm's sheltered units. Its completions in the year ending August could be down by 10 per cent.

Yet, if anything, the housing slowdown seems to be having a more brutal impact on the UK-orientated materials companies.

Baggeridge Brick said annual demand for UK bricks is at historically low levels and having abandoned a planned price increase, it is cutting output.With energy costs rising, the firm warned that profits for this year will be significantly lower than market expectations.