Indicators of demand for housing remain robust, and most point to increased strength in this and in other construction sectors despite the prospect of further interest rate hikes.
However, the immediate impact of the August rise in the base interest rate from 4.5% to 4.75% was sharp. Initial worries about home sales sent estate agents’ shares tumbling in the aftermath of the rise, while housebuilder Persimmon slid 4%, Barratt Developments lost 5% and Bellway fell by over 4%.
But for timber businesses which supply the construction industry, the key question is whether further interest rate rises are in the pipeline. Some analysts argued that the pre-emptive strike against inflation made further significant rises unlikely, but others judged that the 0.25 percentage point rise is insufficient to remove the Bank of England‘s concerns about inflation, or to stem the potential for future wage and price pressures.
The Bank subsequently sent a clear signal in its quarterly Inflation Report that a further increase will be needed to tame above-target inflation. Economists reacted by forecasting that rates would be at 5% by the end of the year – a level which had already been priced in by the money markets.
But in the medium-term the housing market looks set to remain resilient. Demand – as evidenced by mortgage approvals – was well above average in June and the pace of house price inflation speeded up to 5.9% in July from 5% in June, according to the Nationwide Building Society. The Royal Institution of Chartered Surveyors believes that the rise in interest rates will have little effect in dampening the market, with enquiries from prospective buyers up for the 14th successive month.
Construction activity overall strengthened during the second quarter, according to a joint poll by the Construction Products Association and the Construction Confederation. It suggests that the rise was due to a recovery in government-funded projects including new non-residential work, and in housing and non-housing repair and maintenance.
The construction purchasing managers’ index reveals that overall activity accelerated in July, improving markedly on June’s five-month low and rising to the highest level since April. All the sectors covered by the survey saw increasing activity, and in civil engineering this was the first improvement since last September.
Purchasing activity also continued to recover in July, following May’s slight decline, at the strongest rate since March. However, members of the Chartered Institute of Purchasing and Supply report strong price increases.
To meet the demand for construction materials, the latest official figures indicate that output of builders’ carpentry and joinery expanded by nearly 3% in the second quarter, to an annual growth rate of around 1%.
Meanwhile, figures from the Department of Trade and Industry show that new construction orders placed with contractors rose in volume by 4% in the second quarter, and by 6% annually. The largest quarterly rise was for infrastructure projects (up 32%), while the largest annual increase – 48% – was in orders for commercial buildings.
Looking at future demand for construction-related timber products, economic forecaster Experian expects that output will grow by 2.9% in 2006 overall, driven by an upturn in commercial activity and a pick-up in infrastructure construction. It adds that prospects for the housing market, which has weathered less buoyant conditions so far this year, are now for strong growth, in both the public and private sectors.
Market and Business Development provides a further glimpse of the future for construction. It sees government investment as vital to the achievement of an expected 12% growth in the outlook period 2007-2011. New construction is set to account for 57% of the industry’s output by 2011, compared with 55% during 2006, indicating a decline in repair and maintenance work as the period progresses.
