When the deputy governor of the Bank of England in charge of monetary policy publicly admits to not knowing what will happen to house prices, it is time to view the forecasts made by lesser economy watchers with extra caution.

A painless slowdown is possible. Property prices are already high relative to incomes and next year’s rise in national insurance contributions will take additional money from consumers’ pockets. Added to growing household debt, this could take some heat out of the market. And with interest rates at a 38-year low and unemployment at a 27-year low, it is difficult to identify what on the economic or political horizon would trigger a housing market crash.

Nonetheless, history suggests that the eventual price correction will not be pleasant. In the early 1990s prices fell by 13%. The housing market, and the consumer spending it generates, is important to the whole economy, and while the global recovery remains weak and UK manufacturing is in the doldrums, a crash in consumer outlays could tip the economy into recession.

Construction growth

A cooling housing market, and slowing demand for offices, is likely to reduce construction growth across the country, according to Construction Forecasting and Research. Total output will rise by 9% this year, with strong private sector house building and retail construction, but with further annual increases slowing to 7% in 2003 and 5% in 2004 as demand from the private sector weakens both for housing and commercial projects.

But the north-south divide in construction will be eased by a massive boost from the planned rise in government spending, predicts CFR. Infrastructure projects will lead to particularly high levels of activity in the north-west, Yorkshire and Humberside. New social housing is expected across the country, through regeneration schemes in the north and new affordable housing in the south.

Private sector ups and downs

Official figures on new construction orders placed with contractors indicate that private sector orders for industrial buildings placed during the third quarter of 2002 were down by 6% compared with a year earlier. But private commercial orders are buoyant, with year-on-year growth of 13%, and private housing orders up 5%. In the public sector, housing orders grew by 24% over the year to the third quarter and new infrastructure work was up 11%. Other public orders rose by 22% annually.

The latest on current business conditions in construction, from the Chartered Institute of Purchasing and Supply, shows activity growing at an increasing pace. Reflecting this, purchases increased at the strongest rate since April, accompanied by a lengthening of manufacturers’ delivery times to the fastest since December 2000.

Manufacturers of building materials have cheered up about business conditions since they were last surveyed by the CBI. The October poll shows that the number of companies operating below capacity fell from 81% in July, to 44%. But unit costs rose strongly over the past four months, and accelerated substantially from July. The volume of output is expected to fall over the coming months – in sharp contrast to the implications of the official data on new orders in the pipeline.

And there is little reflection of the strength of construction in figures on output by Britain’s timber product manufacturers. Total home and export deliveries of builders’ carpentry and joinery rose by just 0.5% between the third quarter and a year earlier, although kitchen furniture output was up 2.5%.

Overseas suppliers

Overseas suppliers increased their UK sales strongly in the first half of 2002. The total value of builders’ carpentry and joinery imports rose 9.9% year-on-year, with wooden windows and frames up 9.4% and doors and frames up 18.4%. In contrast, UK exports of builders’ carpentry and joinery dropped in total by 14.6%, as window shipments fell 8.5% and doors fell 7.7%.

The poor showing of British manufacturers in export markets may be due in part to the slowdown in construction in mainland Europe, while overseas manufacturers’ strong penetration of the UK market reflects greater sales effort to compensate for weak demand at home.