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Last year, private housing accounted for 29% of new-build construction work in Great Britain, its highest proportion for 15 years, with the volume of work rising 30% since 2001. This has been a significant factor in the reported continuing shortages of traditional labour such as bricklayers, carpenters and plumbers.

The government wants 1.1 million new houses to be built by 2013, but will the rising trend of the past three years continue?

House price surveys point to a trend of static or falling prices. In December, sales volumes were 30% lower than the year before. Most City economists expect that house prices will fall again this year. Mortgage approvals are now 40% lower than a year earlier and are at their lowest level for nearly a decade.

The new-build housing market in London has been feeling the effects of the five rises in interest rates since November 2003. First time buyers鈥� percentage of total sales is at its lowest for decades and increased incentivisations to woo buyers are evident across all levels of the market. Many of the top UK housebuilders, including Taylor Woodrow, Bovis Homes and Countryside Properties, fell short of their previous unit sale forecasts for 2004 as the market slowed.

However, demand 鈥� although slowing 鈥� remains relatively strong in London and the main urban centres across the UK, with the trend for high-density and high-rise apartment blocks, as the principal component of major mixed-use developments, continuing unabated. These include numerous schemes of 25 to 50 storeys being taken to planning in London, Liverpool, Leeds, Manchester, Birmingham and Glasgow.

The trend is also for increasingly smaller units in order to keep their appeal in affordability terms to both the first time buyer and investor markets.

Major developers remain optimistic that values will plateau as opposed to slump, and the need for a massive volume of more affordable homes is likely to feed the market for the next decade. In and around London this will include the regeneration, expansion or creation of new residential destinations including King鈥檚 Cross, Stratford, Woolwich, Croydon, Cricklewood, and Elephant & Castle.

The Construction Products Association forecast a tailing-off of the growth of private housing new-build that was seen in 2003 and 2004 鈥� but not a fall:

2003 2004 2005 2006 2007

% change year on year 13.2 12.0 6.0 1.0 1.0

Materials

DTI figures show that construction materials prices for new housing work and for repair and maintenance rose 4-5% over the year to November 2004, but prices for new non-housing work went up 10.9%. The surge in materials price increases was largely, but not exclusively, because of steel. Fabricated structural steel prices are shown to have risen 60% and concrete reinforcement 56%.

For the moment, there seems to be a bit of a lag in the pressure for upward price movement with distributors holding large stocks of steel. Producers have found it hard to implement planned price increases for the beginning of this year.

Nevertheless, upward price pressures continue. Worldwide steel consumption rose 8% a year between 2002 and 2004 and demand is forecast to grow between 3% and 5% during 2005. Steel output has continued to grow and new capacity is being built around the world but a tight supply鈥揹emand balance is expected to continue this year. The cost of shipping, one of the factors blamed for the rise in steel prices last year, had fallen by the middle of 2004 but, by the end of November, had surged back to record highs. Iron ore, coal and coke prices are expected to maintain their high levels or rise further.

However, MEPS, a steel industry analyst, expects European strip prices to decline from the spring onwards, as imports from non-European Union suppliers are sucked in and a 10% decrease is forecast over the year. Rebar has recently been subject to negative price pressure due to oversupply and a fall in scrap prices. Prices are forecast to fall during the winter before rising again in the spring. MEPS believes prices for structural sections may have peaked.

But other materials have risen in price at the turn of the year. Cement, aggregates, ready-mixed concrete, asphalt products and bricks have all been the subject of price increases. A number of block manufacturers plan price increases over the next month or two.

The pressure on raw material costs could ease over the coming months as oil prices and other commodity prices start to slip back as world demand softens, leading to a reduction in material price inflation as the year progresses.

Regional markets

In terms of construction activity, of the English regions, Yorkshire and Humberside and the North-west have seen the strongest growth over the past couple of years, though Wales has fared even better. A new European Regional analysis by Experian has identified south-east Wales as 鈥減unching far above its weight鈥� as a magnet for employment on a par with Madrid and Ireland.

North-west

Since the 1996 bomb that destroyed much of the city centre, Manchester has undergone complete regeneration. Retail and office construction has transformed the appearance of the city. Since Liverpool was nominated as European City of Culture for 2008, the focus for development has begun to swing westwards. The biggest scheme now under way is the Paradise Street scheme, involving the redevelopment of 17 ha of city centre land, providing shops, leisure, hotels and housing. Liverpool Vision鈥檚 拢120m conference arena scheme is also about to begin on site. Construction work in the city is valued at some 拢1bn and cranes will dominate the skyline until 2008.

好色先生TV International is about to embark on the construction of three new printing plants around the country including one in Knowsley. Further afield, Stockport has unveiled a masterplan for a 拢500m regeneration and Salford has chosen a consortium to work up major regeneration plans to keep the industry busy for the next decade.

Construction market conditions in the region are as follows:

• The higher-value projects are dominated by four or five major contractors who are busy enough to pick and choose their projects
• Small to medium-sized contractors still have capacity and are actively seeking work
• Bricklayers are in shortage throughout the North-west, and Merseyside is experiencing difficulty in satisfying demand for virtually all trades
• As elsewhere, two-stage tendering is becoming more prevalent and design-and-build continues to be popular for a wide range of projects
• With more work around, contractors are becoming more risk averse, particularly in the areas of design responsibility, ground conditions and statutory services
• Historically, construction prices in Manchester and Liverpool were about 20% lower than in London but that margin has now halved
• There is real concern that, with major schemes already on site and a number more to start over the next 12 months, the Liverpool market is in danger of overheating during 2005
• Over the next year, tender prices are forecast to rise by 6%.

Forecast

The strength of new orders secured by contractors during 2004 will ensure high capacity utilisation in most regions through 2005. New work output is expected to rise by forecasters such as Experian and the Construction Products Association by 2.7-4.5% over the high levels of 2004.

The economy may not be as strong as Gordon Brown might suggest. Surveys show that business sentiment has dipped. Independent forecasters believe GDP growth this year may be nearer 2.5% than the Treasury鈥檚 forecast of 3-3.5%. Company profit warnings jumped last year and investment intentions may be scaled back if profits fall.

Construction price rises over the year ahead may be higher than recent trend because of:

• Materials prices still rising at an all-time-high pace
• Nationally agreed labour rates up by between 3% and 10% during 2005
• Construction output continuing to rise
• Increased capacity limitations.

The degree of rise may be tempered by:

• Economy softening
• Investment easing back
• Capacity limitations slowing down the programmed release of public sector projects
• Whether public finances will allow spending levels to be maintained after the election.

Davis Langdon鈥檚 forecast of tender price inflation over the next 12 months is for prices to rise 4-5% in Greater London and between 4% and 6% in the rest of the country. During the following year, 4Q05 to 4Q06, construction output is still forecast to rise further but programmed public sector health and education work will be required to offset a probable decline in private housing construction. Prices in Greater London are forecast to rise 4-5% again, as more office development is likely to be under way, but some of the regions may experience an easing in capacity restrictions, limiting price rises to 3.5-4.5%.