Despite widespread speculation that the housing bubble will soon burst, the latest figures point to continued strength in the market, while plans for increased government spending on construction will add further impetus to the demand for building products.

However, the north-south divide in construction activity is set to continue, according to a new report by Construction Forecasting and Research. It predicts that output in the south and central regions will grow by 5% per year between 2002-2004 – twice as fast as in Scotland and the north of England, where it will rise by only 2.5% a year.

Poor economic conditions in Scotland and the North will hamper demand for industrial and commercial construction, in contrast to the buoyant service sector and consumer demand in the southern and central regions, which are boosting office and retail developments. However, all regions are forecast to benefit from public spending on schools and hospitals, while infrastructure is expected to see the greatest increase in activity, driven by rising investment in transport.

Latest evidence

The latest evidence of the pressure on housing supply is provided by news of the fastest rise in prices for two-and-a-half years. The Royal Institution of Chartered Surveyors says that most of its members report rises of between 2-5% over the three months to April, and that prices are expected to rise further.

But the RICS also sounds a warning note. Overpricing is beginning to meet resistance from buyers and crucially important first-time buyers are finding it increasingly difficult to enter the property market.

A separate report from the Council of Mortgage Lenders cautions that it expects the market to slow later this year, but argues that a modest rise in interest rates would leave mortgages still affordable ‘for the vast majority of borrowers’.

The CML report reveals that the number of loans for house purchase fell in April to 108,000, from 110,000 in March. Although mortgage lending reached a new peak, the value of loans for house purchase declined from £9bn in March, to £8.8bn, while re-mortgaging accounted for a record 41% of total gross advances in April.

Consumers’ income will play a key role in determining their future appetite for borrowing to fund property purchases. Earnings in the economy as a whole grew annually by a three-month average of 2.9% to March 2002, down from 3.4% in the three months to December. In the private sector growth fell to 2.6%, from 3% in December.

Consolidation continues

On the supply side, consolidation is continuing with the takeover of Prowting by fellow housebuilder Westbury, which became the sixth-largest housebuilder by volume. Meanwhile new house starts increased in total by 8% in the first quarter of this year compared with a year earlier, and private sector starts rose by 10%. Orders placed with contractors for new private housing rose in volume by 3% in the first quarter compared with the same time last year, and total housing orders were reported up by 6%.

The volume of orders for new industrial buildings fell at an estimated annual rate of 27% in the first quarter, as manufacturing sector profitability and investment shrank, and orders for new commercial projects slipped 13%. In contrast, contracts for new infrastructure projects rose 14%.

A survey from the Chartered Institute of Purchasing and Supply indicates that activity continued to expand in all sectors of construction during April. The strongest growth was in housing, where activity is the highest for nine months. New public sector contracts helped to produce the largest expansion in civil engineering activity since August 2000.

Average prices of construction materials rose in April at the sharpest rate since October 2000, according to CIPS, and lead times for materials accelerated for the second successive month, to the fastest pace for 15 months.