HALTING construction of new homes could be just the tonic for a punch-drunk housing market, according to JEZ DAVISON…

Jul 15 2008 by jez Davison, Evening Gazette

THIS has been the month from hell for the UK housing market - and the national economy. Mortgage approvals are down, the new-build market has shuddered to a standstill and housebuilders are laying off staff. Homeowners aren't trading up, first-time buyers don't have enough money for a deposit and, even if they did, liquidity has all but disappeared from the lending market.

This woe is spilling over into the wider economy. The British Chambers of Commerce's latest quarterly survey of about 5,000 businesses revealed slowing domestic sales and orders among manufacturers and service-related companies. Other firms have reported serious cash-flow problems and some economists believe the chances of avoiding recession are no better than 50:50.

Even the most optimistic analysts admit that the outlook is grim. But salvation from the most unlikely source could be lurking on the horizon.

Housebuilders have been lamented for putting housing schemes in jeopardy by slowing or stopping new-build projects. Yet this action (or inaction) could be the perfect antidote for the wider economy.

If housebuilders stop building homes, eventually there will be a chronic shortage of stock (local authorities have already complained about the lack of affordable homes). This shortage will push the value of existing properties upwards, reversing a recent decline that according to Nationwide has seen a 6.3% fall in UK house prices in the year to June.

Historically, house price rises have boosted consumer confidence and spending, which in turn has kept cash flowing through the high street and other service-related businesses.

Against this backdrop, perhaps the forlorn images of half-built homes on construction sites are a reason for optimism, not suicidal thoughts.

The housing slump won't be reversed overnight and the start of the recovery is, by all accounts, at least 12-18 months away. This translates into more short-term pain for business and homeowners. Although demand for homes has remained relatively buoyant, mortgage providers haven't recovered their appetite for lending and first-time buyers are still priced out of the market.

But, eventually, those who criticised the Persimmons and Barratts of this world for exacerbating the market's woes may find reason to be thankful.