New private house-building is at a 50-year low, according to an analysis of the latest official data by The Independent, adding to the evidence that the UK is in recession.
Although construction only accounts for 6 per cent of GDP, the weakness in the rest of the economy means the building industry's state is almost sufficient to push the UK into a slump. It also jeopardises the Government's targets for new housing.
The downturn is being fuelled by the credit crisis, which has seen mortgage products disappear rapidly. The decline in the supply of new mortgages again helped pushed the Nationwide house price index down. It fell by a further 1.7 per cent last month, leaving average UK property prices down 12.7 per cent on this time last year, their 11th successive monthly fall and the sharpest decline in the history of the Nationwide's survey. Prices are slipping more quickly now than in the last housing recession in the early 1990s.
The International Monetary Fund yesterday predicted that the US and the global economy might enter recession, while Marks & Spencer announced its worst sales slide in years.
Based on the decline in private house- building this year – around 30 per cent lower than in 2007 – 2008 is shaping up to be the worst year for housing starts since at least 1957. The Office for National Statistics figures suggest that about £5.6bn of private housing will be built this year, beating the previous record low, set in 1992, of £5.7bn.
The credit squeeze is throttling the construction industry and the effects of the crunch are likely to spread. The Bank of England said yesterday that "Concerns about the economic outlook and falling collateral values contributed to this tightening in credit availability. Default rates, and the losses following default, on lending to households and private non-financial corporations had risen over the past three months, and were expected to rise further."
The Bank's report also pointed out that demand for credit had fallen, as consumers and companies became more nervous. Michael Saunders, an economist at Citi European Economics, said there was "a consistent and gloomy picture of tightening lending standards, weak credit demand and rising defaults". He added: "The survey highlights the vicious circle, with banks cutting back on lending to companies and households because of the worsening economic outlook, a reduced appetite for risk and reduced availability of funds. In turn, reduction in the supply of credit exacerbates the downturn – which will reinforce the reluctance of banks to lend."
A run of weak news on the economy – which recorded zero growth in the second quarter – has heightened predictions that the Bank of England will cut interest rates when the Monetary Policy Committee meets next week. Howard Archer, the chief economist at Global Insight, said: "We expect interest rates to be cut from 5 per cent to 4.75 per cent, but would not rule out a 50 basis point cut to 4.5 per cent. Further out, we expect interest rates to come down to 3.25 per cent in 2009 and would not rule out a drop to 3 per cent."