After five rises in interest rates, turmoil in the financial markets has finally foreshadowed the end of the 12-year housing boom. New figures from Rightmove suggest a 2.6% monthly drop in asking prices across the country. However, this is at odds with Halifax estimates of an increase of 0.4%, and commentators are likely to wait for official data before concluding that prices are definitely on the wane.
But the data adds to the gloomy picture of the UK housing market revealed by the Royal Institution of Chartered Surveyors. Its latest survey was the most downbeat for two years, as property agents seeing price falls outnumbered those reporting gains. Further, there is widespread belief among observers that the easy credit, which fuelled the boom, has come to an end. Nonetheless, analysis by Oxford Economics points to robust long-term prospects for the British housing market.
A limited supply of houses has ensured a mismatch between demand and supply. Moreover, a reduction in average household size has led to numbers increasing faster than population growth, which itself is accelerating. Yet the number of housing starts in 2006 was 232,000, slightly fewer than in 1983. Between 2001 and 2006, adds Oxford Economics, a rise of 1.16 million households was met with an increase in the housing stock of just 968,000.
At present, activity in construction is at a nine-and-a-half year high, underpinned by a marked rise in new orders, report the Chartered Institute of Purchasing and Supply (CIPS) and NTC Economics. The index which measures the overall performance of the industry rose from 61.8 in July to 64.8 in August, and reflects expansion in all sectors, but with growth strongest in commercial building projects such as shops and offices.
A less positive finding from CIPS was that the cost of construction materials and products accelerated further in August, to the strongest for three months. Government figures for August show that factory gate prices rose by an overall average of 2.4% annually – up marginally from the previous month. But the price of wood and wood products from UK suppliers increased year-on-year from 10.9% in July to 11%. Imported wood and wood product prices rose at a yearly rate of 12.7%. The cost of builders’ carpentry and joinery is now 6.5% higher than in August last year.
Factory gate prices of furniture rose by an average of 2.6% between July and August, and now stand 4.3% higher than in August 2006, compared with a year-on-year increase of 5% in July. The latest CBI distributive trades survey finds high street furniture outlets enjoyed the second largest annual rise in volume sales of any retail sector during the first half of August, with 46% of businesses reporting a yearly improvement, up from 43% in July.
However, this contrasts with results of the British Retail Consortium’s survey, which indicates that demand fell back below year-earlier levels. Beds, bedroom furniture and upholstery slowed, while fitted kitchens and bathroom sales were largely discount-driven.
The hopes of furniture makers are little raised by the Nationwide Building Society’s spending index, which tracks consumers’ willingness to spend. It dropped seven points to 79 in August, close to the all-time low of December 2006. And sentiment about making a purchase of a major household item fell to a new low. Fears about unemployment helped drive down the overall index of confidence. Almost one in three people are negative about the number of jobs available in six months, which is consistent with an increase in the number who believe the economy will be in a worse state by then. Concerns about the impact of a credit crunch on the wider economy have led analysts to cut their forecasts for UK growth. According to the Ernst & Young Item Club, which uses the same computer model of the economy as the Treasury, the worst-case scenario would see growth reduced by around 1% in 2008 and 2009.
