Surging building costs could hit plans to solve housing shortage

Soaring construction costs will undermine government plans to solve the housing crisis by building thousands of cheap homes, a leading business analyst warned yesterday.

Soaring construction costs will undermine government plans to solve the housing crisis by building thousands of cheap homes, a leading business analyst warned yesterday.

Experian said housebuilders had seen their costs surge 16 per cent this year and faced another 12 per cent increase in 2005. It warned the rises, combined with signs of falling prices, would squeeze builders' profit margins and make them less willing to build low-price homes.

Its warning came as a property website reported the fifth successive monthly drop in property sale prices and a leading estate agent issued a profits warning, prompting a collapse in its shares.

John Prescott, the Deputy Prime Minister, has announced plans for more than 500,000 new homes in the South-east, while the recent Barker report identified a need for 70,000 new private and 21,000 new public sector homes a year.

James Hastings, at Experian, said: "This alarming inflation rate is likely to have serious ramifications for builders' ability or inclination to meet the ambitious targets set out by the Barker report."

He said increasingly higher rates commanded by skilled labourers such as plasterers, plumbers and electricians were rendering new build far less viable. Mr Hastings added that the builders' predicament had been exacerbated by escalating costs of brownfield reclamation and local planning constraints. He said: "The slowing property market, especially in London and the South-east, combined with spiralling labour inflation and higher land costs, is effecting a tourniquet on builders."

John Slaughter, a director of the House Builders Federation, said much affordable housing involved an element of cross-subsidy by the industry through the planning system. He said: "If their other costs are going up there's clearly less headroom to subsidise affordable homes."

No one at the Office of the Deputy Prime Minister was available for comment.

Meanwhile Hometrack, a property website, said the price of the average home had dropped 0.6 per cent since last month's survey. The 0.6 per cent drop was the same as in October, and matched the biggest fall since the slump in property prices after the terrorist attacks of 11 September 2001.

Although prices are up 1.9 per cent so far this year, Hometrack said that masked a fall of almost £3,000 or 1.7 per cent since June. John Wriglesworth, its housing economist, said: "The month's price fall confirms beyond doubt that the housing boom is well and truly over. With the excess supply of unsold properties increasing, further house price falls are inevitable over the coming months."

The survey heightened fears in the City that the property market was teetering on the brink of a more substantial fall.

Countrywide, the UK's largest estate agent, issued its third profit warning in as many months, saying the number of transactions in the pipeline was down 33 per cent on a year ago. Its shares fell 18p to 280p.