The number of homebuyers gaining approval for new mortgages slipped in February, after a strong start to the year. It is the first fall since November 2004, although approvals are at roughly the same level as in the spring of that year when the market was booming.

Nonetheless, there is concern that recent increases in house prices may be dampening market activity, and figures from lenders Halifax and Nationwide suggest that house price inflation continued to pick up in the year to March, to more than 5%. The Financial Times index climbed to 4% in the year to March, from 3.4% in January.

The pace of building activity accelerated for the second consecutive month in March, fuelled by housebuilding and commercial construction. Purchasing managers report an increase in new orders and in job numbers, and optimism remains high amid expectations of increased activity levels into next year.

Official figures indicate an increase of just 1% in the total volume of new construction orders during the three months to February, although orders rose by 9% compared with the same period a year earlier.

Construction demand

But the construction boom in the north of England has ended, as public sector infrastructure has stagnated, says Construction Forecasting and Research. Wales and the south of England will see the strongest growth in construction up to 2008, say the forecasters. But a marked slowdown is expected in all regions compared with the buoyant period 2000 to 2004.

Demand for construction products rose in the first quarter of 2006 for the first time in over a year, reports the Construction Products Association. Demand was particularly strong for lightside products, as new housing, school and NHS building programmes picked up.

However, UK output of builders’ carpentry and joinery dipped by 8% in the year to February, while demand at the factory gate for kitchen and other furniture dropped by 9% and 6% respectively.

High street sales of furniture rebounded in March, according to the latest CBI survey. Volumes were up year-on-year for a balance of 7% of retailers, suggesting the first annual increase since February 2005 and reflecting the strengthening housing market. Annual demand had dropped for nearly two-thirds of furniture outlets the previous month.

Nonetheless, most retailers continued to struggle for sales in March, with volumes down for the third month running. Sales at Homebase fell 5% in the five months to March, supporting B&Q’s recent report of a sluggish home improvement market.

Concern over the economic climate and employment prospects – where unemployment numbers are continuing to grow – is keeping consumers in a cautious mood. The March survey of household sentiment from Nationwide Building Society rose marginally, but remains well below the level of a year ago.

Continuing high energy costs remain a major risk to the short-term outlook for inflation and were a factor in keeping interest rates at 4.5%, according to Bank of England governor Mervyn King. In addition, they pose a threat to the wider economy by eroding the buying power of households and slowing consumer spending.

And hopes of lower oil costs have taken a hammering with a new forecast from the Economist Intelligence Unit of a further 10% rise in crude oil prices this year, on top of last year’s 43% hike.

Meanwhile, UK business failures over the next two years will be 1% of registered companies, or around 17,300, predicts accountant BDO Stoy Hayward.