Drop in Housing ‘dashing hopes of ministers to show government’s housing policies are generating development’ Guardian


Britain’s construction sector suffered an unexpected decline in January, heightening fears of a broader slowdown across important sectors of the economy.

Figures showing a 5% drop in the construction of new homes after the Christmas break have been released only days after the Office for National Statistics reported a slump in manufacturing.

The fall in output across both sectors will prove embarrassing for George Osborne as he prepares for a budget that will set the agenda for elections in less than two months. Despite efforts to rebalance the economy towards manufacturing and business investment, it has come to rely even more heavily on services and consumer spending to drive growth in the last few months.

Making matter worse for the chancellor, the recent GDP figures showed business investment growth had slowed in the last quarter of 2014 to a rate not seen since the immediate aftermath of the financial crisis in 2009.

The governor of the Bank of England, Mark Carney, indicated in a speech earlier this week that economic headwinds would delay a rise in interest rates, possibly beyond 2016. A rise in the value of sterling against the euro and some other currencies has also hit exports, which Osborne hoped would expand at a faster rate as the economy recovered.

The decline in construction in January accelerated a slowdown in activity seen last year, dashing the hopes of ministers keen to show that the government’s housing policies are generating development across the UK.

Construction industry output in January was down 2.6% on the previous month, dragged down by the decrease in housebuilding, the Office for National Statistics said. Within the figures there was a smaller decrease in infrastructure building, of 2.4%, thanks to major projects such as Crossrail.


A sharp fall in the number of mortgage approvals, especially for first-time buyers, was blamed for the decline, as homebuyers found themselves constrained by more stringent lending rules. Housebuilders, wary of creating a surplus of homes and triggering a price fall, have halted some developments until the economic picture becomes clearer.

The figures could pose a difficulty for George Osborne as he prepares for a budget because he has enjoyed rising tax receipts from stamp duty and the construction industry has been a strong source of income tax revenue.

The coalition has relied on private housebuilders to accelerate the number of housing starts in the absence of local authority building. The business secretary, Vince Cable, has promoted schemes to support private developers, but was only able to declare 137,000 new home starts last year compared to a peak in 2006 of almost 180,000 and an estimated need of between 220,000 and 300,000.

The data surprised City economists who had pencilled in a solid rise in activity following a recent industry survey that showed a healthy rate of growth in the construction sector. The Chartered Institute of Procurement & Supply (CIPS) activity index picked up in January from a 17-month low in December, to 59.1 from 57.6. Any score above 50 represents growth.

The ONS said: “Taken together, the factors constraining demand such as weak mortgage lending and high house prices, coupled with those constraining supply such as skill shortages and tight funding conditions, may have limited construction output growth in January 2015.”

Output is now 3.1% below the level of a year ago, which is the first time it has registered an annual decline since May 2013.

Construction firms have complained in recent months about the difficulties they face finding skilled staff. Almost 60% of respondents to a survey by the Royal Institution of Surveyors reported that material shortages, skill shortages or financial constraints were impeding further growth in the sector, while the proportion of respondents reporting labour shortages across all of the main trades climbed to an all-time high of 48% with bricklayers most in demand.

Chris Williamson, chief UK economist at Markit, said: “It seems like activity in the sector is set to slow this year, led down by a cooling housing market. Companies also look to be reining in their investment spending, hitting growth of commercial construction.”

Markit produces the CIPS survey and has maintained a more bullish outlook for the sector, which is thriving in London where hundreds of sites are under development. Williamson said there were signs that the situation was not as bad as portrayed by the official figures, with dividend distributions to shareholders among homebuilders in the FTSE 350 expected to rise by about 50% this year.

He said: “Healthy dividend payouts indicate that the sector is still in rude health and faring really rather well.”

Rob Wood, chief UK economist at Berenberg bank was optimistic about a return to growth in the housebuilding sector and the broader construction industry. He said: “Housebuilding slipped in January reflecting softer housing market conditions. With interest rates extremely low, real incomes improving and consumer confidence riding high.

We remain optimistic about the economic outlook and about the chances of the housing market turning up again, especially given the apparent bottoming of the widely watched RICS survey. Still, new housing orders fell in the fourth quarter, which means it may be a couple of quarters yet before housing construction improves.”


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