Despite signs that the housing market is beginning to stutter, the possibility remains that higher pay deals combined with manufacturers’ success in passing on input costs rises will trigger another interest rate hike.

Tentative signs that recent interest rate increases are sapping the strength of the housing market have come with figures of slower demand for borrowing. The number of mortgage approvals fell by 11% in the year to December, and was down by three-quarters compared with November.

Further, Nationwide says that house prices rose by just 0.3% between December and January – the smallest increase since May last year. This leaves annual house price inflation at 9.3%, down from 10.5% in December.

Nonetheless, purchasing managers in the construction industry report a marked growth in overall activity during January, and confidence in the sector has risen to an 11-month high. Official figures indicate that new construction orders in 2006 were up 6% on the year, although fourth-quarter orders were unchanged on the same time a year earlier. Private housing orders in the fourth quarter were up 11% annually.


Corporate rationalisation continues apace in the construction sector. February saw Barratt Developments win a three-month battle for control of Wilson Bowden, in a £2.2bn deal which will make it the UK’s largest housebuilder by volume. Meanwhile Galliford Try confirmed its purchase of Linden Homes, making it one of the top 10 UK listed housebuilders.

Crest Nicholson reported a 2% rise in pre-tax profits, driven by a 22% rise in completions but with an increased proportion of lower-margin affordable housing. The number of homes completed in the UK by Taylor Woodrow rose by 1.4% last year and its order books improved by 30%.

On the supply side, official figures for UK output of sawmilling and planing reveal a 3.2% fall in 2006 compared with 2005, while veneer sheet and plywood rose by 0.9%. Builders’ carpentry, and chair and seat, output fell 1.9% and 1% respectively.

The beginning of 2007 brought promise of stronger output from the nation’s factories. The January poll of purchasing managers by the Chartered Institute of Purchasing and Supply and the Royal Bank of Scotland indicates that the industry has shaken off at least some of its earlier sluggishness.

A CBI survey showed that producers have had more success in passing on cost increases, with factory gate prices rising at their fastest in a decade. Official figures indicate that wood and wood product manufacturers’ prices rose by 5.5% in the year to January, but input costs were up by only 4%.

Pay deals

But unsettling news from the labour market is that pay deals jumped to 3.5% in the three months to the end of January, up from a revised 3% in the three months to the end of December. According to figures compiled by Incomes Data Services, admittedly from a fairly small number of settlements, pay increases are now at a six-year high.

Consumer confidence remains fragile. In its January survey GfK NOP finds a less optimistic view about both personal finances and about the economy. In contrast, people judged that now is a good time to make major purchases.

This is echoed in the latest CBI retail survey, which found that sales by furniture outlets were up in January compared with 12 months earlier for nearly half of all businesses. The British Retail Consortium‘s survey shows a yearly rise of 3.1% overall in like-for-like retail sales in January – up from 2.5% in December.

Looking ahead, Market & Business Development now forecasts that demand for timber and joinery will expand by a modest 1% annually between 2007 and 2011. It will be driven partly by an increased share in the construction market and partly by trends favouring timber for environmental and aesthetic reasons.