House building target is under threat

With the chancellor\'s proposal about graded mortgage assets still ringing in my ears, I hear house builder Bovis Homes has reported falling volumes. With the company recording a 6% drop in profits and home completions, it has obviously felt the power of the liquidity crisis.

Although a decrease in volume and profitability is never good, the fact that the decline is only 6% is not a disaster.

But worse news came from Bovis’ competitors. Taylor Wimpey reported a 19% fall in orders and declines of 19%, 10% and 7% were re- ported by builders Persimmon, Redrow RWL and Barratt respectively.

Unsurprisingly, Bovis says it expects to sell significantly fewer houses in 2008 than it did in 2007 and it won’t be alone. With potential purchasers finding it more difficult to secure mortgages it’s only natural that house builders will re-evaluate their plans, so there’s a danger that the volume of homes built in the coming year will dip.

Although the army of Nimbys and green campaigners will welcome the news that fewer developments will be squeezed onto recently sold back gardens or ex-school playing fields, the reality is that the UK needs more housing. The government recognises this and last year raised its annual house building target from 200,000 to 240,000 by 2016.

According to the National House Building Council, builders have delivered an average of 166,000 new homes each year since 2000, so output needs to increase considerably to meet Whitehall’s target of three million new homes by 2020.

With builders revisiting their construction plans, the government’s targets are under pressure. No wonder organisations such as Bovis are calling for action.

Its chief executive Malcolm Harris says in-terest rates must be cut but the base rate is not the only problem. As readers are aware, the liquidity crisis is maintaining its grip on LIBOR and fewer mortgage deals are available as a result.

The spread between LIBOR and the base rate is creeping back up towards last December’s level and the chances of a rate reduction are remote to say the least. What’s needed is decisive government action to restore confidence in mortgage assets and the financial system as a whole.

While the chancellor’s plan to establish a gold standard for mortgage assets shows he wants to be seen to be doing something, the idea has not been thought through. There are many concerns, the biggest being that it won’t do the job.

The liquidity crisis has spread its contagion to the mortgage market, the housing sector and now the construction industry. If nothing is done, it’s only a matter of time before it infects the whole economy.