Output by the UK construction industry continued to grow in the first half of 2004, but the pace of expansion is set to slow over the next two years.

Official figures show that construction output in the year to the end of the second quarter of 2004 rose 6% compared with 2003. Within the total, the volume of new work was up 6%, and repair and maintenance output rose by 5%. Early estimates suggest 3% annual growth in output in the third quarter.

But concerns about the weakening housing market, and cost inflation, have led one major broker to slash its forecast of earnings by British housebuilders.

Morgan Stanley says profits could be eroded by tight labour supply, higher building material costs and higher clean-up costs for brownfield sites. Further, it now expects house prices to hold at 2004 levels instead of growing by 4% next year. Most at risk, says the broker, are high-volume builders such as Barratt, Persimmon and Wimpey.

Of more immediate worry for the suppliers of timber and wood-based building products is the downturn in the number of home sales, which could rapidly feed through to a slowdown in new construction work. Estate agency Countrywide says transactions in progress during October were down by a third on a year earlier. The British Bankers Association reports house purchase loans fell 35% annually in October, while the Council of Mortgage Lenders says mortgage approvals were down for the third month in a row.

Optimism in the construction industry dipped to its lowest level in three years during October, although the Chartered Institute of Purchasing and Supply says its monthly index of activity remained well above the no-change mark of 50, at 55. But that compares with 56.8 the previous month.

Housing activity

The seasonally adjusted housing activity index slipped to 55.3, from 57 in September, while the commercial sector index dropped to 56.7 from 57.6. Civil engineering activity increased for the second month in a row, but “the rate of growth was again modest”.

The total number of homes started in England in the third quarter was up 13% compared with a year earlier at 45,400, according to official figures. In the same period 38,500 homes were completed.

UK-wide figures from the National House Building Council show a total of 48,909 applications to register new home starts in the third quarter of 2004, up 9% on the same period in 2003. The market share of timber frame house starts in the same quarter in Great Britain rose to 13% from 12% a year earlier, while in Northern Ireland the proportion rose from 6% to 7%. However, some timber frame houses are privately built and are not included in the data.

Looking to future demand for timber building products, officials estimate that the volume of new construction orders placed with contractors in the third quarter of 2004 for private-sector housing orders rose by 9% compared with the second quarter and was 30% up on the third quarter of last year. Public and housing association orders fell by 3% in the quarter but rose by 29% on the same period in 2003.

Orders for commercial projects fell by 10% between the two latest quarters but were unchanged year-on-year. Contracts for industrial buildings rose 4% on the quarter but dropped 19% on a year before. New contracts for infrastructure work fell by 22% and by 14% between the two latest quarters and compared with the third quarter of 2003 respectively.

Forecasts

Longer term prospects for construction are expected to show a 5% rise in total output of new work this year, and annual increases of 5% next year, and 3% in 2006 the following year. Experian Business Strategies adds that repair and maintenance output will rise nearly 2% this year, but will slow to less than 1% in 2005 and 2006.

Meanwhile capital investment by the construction industry slumped by 18% in the third quarter, and was 15% down on the same period last year. And newly published official figures show that total spending by the industry on research and development in 2003 dropped by 14%.