Property construction in turmoil

Even by recent standards today has been a truly negative day for the UK property industry – with a host of sources pointing to a major slowdown in the market.

Chief among them is the Royal Institution of Chartered Surveyors (Rics), which reports construction levels in the UK economy slowed for the first time since 1995 during the first quarter of this year.

While 19 per cent more chartered surveyors reported a fall in construction orders than a rise in the industry as a whole, it was new-build homes leading the charge into the abyss.

Demand for private residential property fell at the fastest rate in the survey's history, leading Rics to question the government's long term housing targets.

"If this pattern continues then the industry will have to start making significant cut backs. This downturn will also have a negative effect on housing targets, which will not be achieved at current levels of output," argues Rics senior economist, David Stubbs.

Gordon Brown has promised two million new properties will be build by 2016 – at a rate of 250,000 new homes annually – with a further one million, carbon-neutral, properties added by 2020.

However, success in meeting this target is growing increasingly unlikely, with the actual level of new homes coming on stream each year expected to fall as low as 100,000 according to some estimates.

Falling price scare developers

With prices falling – now by 6.3 per cent year-on-year to June according to Nationwide - there is simply no incentive for developers to build the homes required by the government.

Releasing a trading statement today Taylor Wimpey explains the market is now experiencing a "significant downturn", severely liming the financial potential of new-build properties.

The housebuilder reports reservations of new UK houses were 45 per cent lower in the 26 weeks to June 29th than they had been the year before, and 29 per cent of orders in the period were cancelled, compared with 19 per cent a year previously.

This has prompted Taylor Wimpey to cut 900 jobs and scale back its construction agenda. In response the FTSE 100 saw shares in the company tumble 54 per cent – to 27.25 pence – leading an industry wide slump.

Persimmon saw prices fall 18 per cent to 238 pence a piece, Barratt followed south with a loss of 29 per cent and Bellway also saw losses of over 12 per cent.

Developers have all seen a similar pattern emerging. With fewer mortgages available – with the Bank of England reporting historic lows earlier this week – there is less demand in the market, causing prices to fall and thus reducing the incentive to build.

Furthermore, evidence from Chartered Institute of Purchasing and Supply (CIPS) also suggests the future is far from bright, finding construction activity lurched into the red during June – compounding fears expressed by Rics.

In response the government has today announced a new "national clearing house" is to be established, allowing developers to approach the Housing Corporation with "robust proposals" to sell their leftover social housing.

Housing minister Caroline Flint explains: "There is an overwhelming case for building more housing and we must remain as ambitious as possible. But we also have to be flexible and responsive enough to adapt to the current economic climate.

"We have to acknowledge not only the difficulties faced by individuals and families, but by house builders too.

"My objective is to put together a package of the best possible proposals, working with industry and others to minimise the problems we currently face and create the conditions for a rapid recovery."

However, only £200 million has been committed to the scheme, allowing for purchase of fewer than 1,500 homes - even at the relatively modest price of £150,000, well below the present average.

Compare this to the target to build three million new homes, and the scale of the task facing the government is thrown into sharp relief.

Indeed, this fixation on social housing may actually prove detrimental to the market.

Imposing excessive regulation on the developers – in the form of ecological standards or the Homes for Life scheme (making homes suitable for occupants over the course of their whole life) – makes developments more expensive, again reducing incentives to build.

Given that prices are presently falling, the incentive to build is reduced further still.

These wider concerns place the much publicised debate on eco-towns into perspective. Even if all ten towns are built – with between 10,000 and 20,000 homes in each - they will provide a fraction of the necessary properties. And their completion is still far from certain, with the Conservative party promising to scrap the policy earlier this week.

While the government could seek assistance in meeting its ambitious targets from a number of other sources – for example, bringing derelict properties back into use, or forcing landlords with empty properties to open them to the market through increased taxation on empty homes (as seen with commercial property recently) – these are likely to provide only marginal benefit.

A fall in land costs - possible precipitated by opening up government owned property – would also provide a financial boon for developers and spur building.

Yet, in the present circumstances, the government can go little more than look for ways to reduce the bureaucratic burden on the industry, and hope for swift recovery in the wider property market.

Chris O'Toole