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Opportunities in housing?

With the industrial and commercial sectors suffering severe falls in new build so far this year and serious concerns regarding publicly funded construction work (with government stating that capital expenditure will fall by 17 per cent per year up to 2013/14), a key issue for the industry is which sectors will be growing in the next few years. By Noble Francis

A somewhat surprising answer may turn out to be the housing market.

After the collapse in housebuilding following the financial crisis, which led to a collapse in effective demand and, consequently, a rapid fall in house prices between October 2007 and March 2009, housebuilders were left with a large excess supply.

But the end of 2008 and early 2009 saw intense destocking on both the home building and housing-related product manufacturing front, leading to new housebuilding falling to unprecedented lows.

This destocking could not continue forever and the last few months have seen a little optimism creeping into the housing market with recent rises in prices and new home starts.

The National Housebuilding Council reported that housing starts in Great Britain have risen throughout this year, albeit from the extremely low base. House prices have been quite erratic over the course of the year, due to the low number of transactions, but both Halifax and Nationwide reported that house prices increased in July, by 1.1 per cent and 1.3 per cent respectively.

RICS revised their forecasts recently and they now anticipate that house prices will not fall by 10 to 15 per cent in 2009 as they initially forecast but that the average house price at the end of this year will be slightly higher than at the end of 2008.

These price rises suggest that even with a relatively low level of demand, there is still a lack of supply, as people are generally only selling if they need to due to low prices available.

Furthermore, in the grand scheme of things, there is a long term demand for housing in this country that will need to be met.

Kate Barker, in her review of housing supply in 2004, suggested that this was 240,000 homes per year for England alone, and that was before the falls in housebuilding seen over the past couple of years.

After taking account of the falls and long term revised population estimates, it is likely that we are going to need around 290,000 homes per year to meet the housing needs. However, in 2009, we are only expected to produce around 100,000 homes for Great Britain. This implies that there is a pent-up demand in the long term.

There are, however, two key risks to the recovery in housing demand. Firstly, with unemployment continuing its rise towards three million in 2010, this could result in a fall in demand for house purchases and an increase in supply from those forced to sell, leading to further falls in house prices.

Secondly, recovery in the housing market is heavily dependent upon credit availability rising further and while it has risen over the course of this year, this has been from unprecedented lows and it will need to continue rising to make the pent-up demand for housing in this country effective.

On the supply side, there are concerns that even if demand does pick up then will the industry have the capacity to deliver. This is potentially an opportunity at a challenging time for the industry when sectors with bright futures are few and far between.

Noble Francis is economic director of the Construction Products Association