Your browser is no longer supported

For the best possible experience using our website we recommend you upgrade to the newest version of your browser.

Your browser appears to have cookies disabled. For the best experience of Construction News, please enable cookies in your browser.

Welcome to the Construction News site. As we have relaunched, you will have to sign in once now and agree for us to use cookies, so you won't need to log in each time you visit our site.
Learn more

Industry can weather the sub-prime crisis

Could it be that the construction industry is about to succumb to the vagaries of the financial markets? In which case, how much could you lose? By Nigel Shilton

In which case, how much could you lose?

To answer these questions and understand why a collapse in the US sub-prime mortgage sector is sending shockwaves around the globe, we need to appreciate the factors that have come together to create this crisis.

Firstly banks have been making increasingly risky loans by throwing cash at the sub-prime sector.

Defaults have risen as the low rates have ended, and rising interest rates and unemployment levels have done nothing to slow them.

Increased risk

In itself this would not be enough to cause a wider crisis. But, firstly, there has been a trend in financial markets towards taking on increased risk at apparently lower rewards.

And secondly, due to the repackaging of mortgage lending, no one really knows who is carrying the financial risk of sub-prime loans.

Financial institutions have lost confidence, not only in their traditionally higher risk clients, but also in each other.

So should the UK construction industry be worried?

Objectively, the net impact on the global economy should be limited in the UK house prices have continued to increase and interest base rates have risen by only 1 per cent in two years.

But less credit-worthy firms and individuals will find it much harder to borrow at affordable rates which impacts both contractors and developers alike.

Indeed, on high value schemes we are already finding some developers are struggling to find debt at the right price, or to find it at all.

Now that the debt markets have scaled back we might find that merger and acquisition activity falls in the final quarter of 2007 only to explode again in the New Year when the debt markets start with a clean sheet.

So while there may be losers in the financial sector, the construction and house building sectors are well placed to weather the storm.

Nigel Shilton is construction partner at Deloitte & Touche