This month’s widely expected decision by the Bank of England to raise the cost of borrowing to 5.75% came as fresh evidence emerged that the housing market was already slowing. And the persistence of negative real earnings growth in the early months of the year, combined with higher mortgage rates, is expected to lead to continuing market cooling over the coming months. However, it will be underpinned for the foreseeable future by the fundamental outstripping of housing supply by demand.

The latest indication that the pace of house price inflation is easing comes from Halifax, which reports that June was the second successive month in which average national prices rose by less than 0.5%.

Housing market

Higher interest rates will dampen both new house sales and home improvement over the next two years, the Construction Products Association (CPA) predicts. Nonetheless, it suggests that total construction industry growth will strengthen to 3.1% this year – supported by new work, and by a modest recovery in repair and maintenance activity, which will be boosted by flood damage repair work. Annual growth is predicted to slow overall to 1.8% in 2008, before expanding again by 3.1% in 2009.

A sustained recovery in office development work is forecast to assist commercial sector growth over the next three years, with the London Olympics adding to the workload from 2008. Increased investment in regional distribution facilities will help lift industrial building this year, and the CPA expects a modest recovery in health service-related output over the forecast period, led by a growth in PFI projects.

A survey by the CBI and property advisers GVA Grimley underscores the view that demand for commercial property will pick up following “steady national demand” over the last half-year. The latest report from Savills shows that commercial construction activity rose strongly in May, with sharp increases in work on both public and private sector projects.

For the present, construction activity remains buoyant too, according to the latest survey of purchasing managers in the industry by the Chartered Institute of Purchasing and Supply. The headline index of activity measured 60.1 in June, up from 58.0 the previous month. A reading above 50.0 indicates growth, while a reading below 50.0 signals contraction. The rise in the index was underpinned by a widespread and strong increase in new orders. Here the index accelerated to 63.4 in June, from 58.9 in May.

The CIPS index of input prices indicates a strong rise but, despite reports of higher prices for timber, steel, glass and energy, June’s rate of increase was slightly slower at 68.7, compared with the previous month’s high of 70.2.

Construction product sales in the second quarter of 2007 set a record high in the life of the measure compiled since 2005 by the Ernst & Young and the Construction Products Association.

Imports

Imports of builders’ carpentry and joinery rose by 5% in the first quarter of this year and were 20% higher than at the same time in 2006; imports of kitchen furniture were broadly unchanged on the quarter but 3% lower on the year. In contrast, UK manufacturers’ exports of builders’ carpentry and joinery dropped by 13% in the year to the first quarter of 2007, after remaining flat compared to the fourth quarter of last year. Overseas demand for British-made kitchen furniture was up 17% between the two latest quarters, but was 7% lower year-on-year.

Looking to medium-term demand for timber and related wood products, new construction order volumes added to the pipeline during the three months to May rose by 6% compared with the same period a year earlier, and by 7% compared to the previous three months. Officials estimate that new orders placed with contractors for private housing rose 13% compared with the same period a year earlier, and orders for private-sector commercial buildings were up 2%. But orders for new industrial work fell by 15% annually.