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Uncertainty in housing leaves growth in doubt

ECONOMY - The house building market is facing an uncertain 2005.Will prices crash or rise? Whatever happens, the number of new builds could stay high, writes Brian Green

THE THIRD quarter of 2004 proved a milestone for the industry as output finally crashed through the £100 billion-a-year mark.

Breaking the £100 billion barrier at a time of solid confidence should mark 2004 out as a big year for construction. Even reality TV executives seem to have spotted potential in an industry that employs 2 million of the nation's working population.

The fact that Channel 4's series Bricking It focuses on house building is no surprise.

Housing is currently in the spotlight. Its growth rate has played a big part in pushing construction activity to its record level.

Contractors are so interested in it that they are again looking at speculative house building, reversing a trend that saw the once common contractor/house builder almost vanish.

The sector is garnering even more attention as it is teetering at the top of a boom in prices - creating a 'will it, won't it collapse?' debate.

In October all the market indicators were on red for the first time in years.The November figures drifting in are little better.

But will prices crash and will this cause a collapse in house building?

This is an important question for construction - particularly suppliers.For the 12 months to the end of September the annual growth rate for construction overall was 4.2 per cent.But housing-related work - public and private, new build and repair, maintenance and improvement - accounted for the lion's share, growing 8.5 per cent against 1.6 per cent for the rest of the industry.

New public housing work enjoyed spectacular growth, as expected from such a low base. But private new-build housing out-put grew by almost 15 per cent, the fastest in over a decade.

Encouragingly, growth in new orders is keeping pace.The level of private new-build orders are up 15 per cent for the year to October, compared with the same period a year ago. Emap Glenigan figures for all housing work show a comforting surge in contracts let (see below).

On the face of it this suggests another bumper harvest next year for the house building sector. And much of this is premised on the strength of the surging social sector, which has cash committed to it.

But more than two thirds of housing-related work is in the private sector and the precarious nature of the market, as regards house prices, does leave uncertainty over how aggressive private house builders will be.

If prices fall, will firms build more, to keep up turnover, or less, to preserve profit margins?

There is no simple answer. History suggests prices do drive market peaks and troughs. From the peaks in private house building in 1972,1978 and 1988 there were subsequent troughs where the number of homes built fell by between 20 and 30 per cent.

But history only tells us so much.We live in a changed world where tighter planning constraints have created, some say, pent-up demand.The huge surge in prices over the past five years generated only a modest increase in completions.And the industry has changed radically, with far more dedicated house builders and far fewer contractor/house builders.

Dedicated house builders have to build houses to make money, so will wish to maintain production. Contractor/house builders were more able to shift the emphasis of their businesses.

So who knows? Well, many argue there may be a mix of responses to falling house prices, with some firms increasing production and some scaling back.There will be a clutch of factors influencing a firm's overall strategy and its approach to individual sites.

Each firm's decision will firstly rest on its business imperative - whether it sees maintaining operating profit margins as more important than return on capital employed.

A second factor will be its land position - where it holds land, what price it paid and what view it takes about future land prices.

Does it feather production while waiting to buy land at reduced prices? A third factor will be its target market.

While the net effect of these decisions is hard to assess, there is one other factor that is of note in the current housing market: the much higher number of major flatted schemes in the mix.This is the result of the Government's PPG3 planning guidance.

Traditional housing estates of detached and semi-detached homes can be halted at almost any point. A 100-flat block, on the other hand, needs to be finished once work starts.

This means, especially in a shaky market, that only the bravest or most foolish developer will look to start a major block without a certain level of guaranteed sales.

With investors fleeing the market there is a fair chance that some - perhaps many - of the larger schemes that have planning permission and are due to start will be mothballed.This could seriously dent the number of homes built next year and take some of the gloss off what otherwise looks like a buoyant year for the £100 billion construction industry.Time will tell.