View from City Road: Little immediate hope to build on

WHEN captains of industry write to the Chancellor warning of the dire consequences of government inaction and analysts talk of recession turning to slump, it is normally time for investors to start buying. For housebuilders, however, times are anything but normal.

Housing volumes and prices have been falling since August 1988, making it the longest slump in the memory of even the oldest builder. The economic conditions for a recovery have been in place for at least 18 months. Interest rates are two-thirds of their peak in 1990 and below the 1980s average, rising incomes have combined with falling prices to make houses more affordable than for five years. Yet private sector housing completions in the first five months of the year fell a further 1 per cent.

The industry blames the continued slump on lack of confidence - fear of redundancy and of house prices falling further. But unemployment is likely to go on rising, at least until the middle of next year. And the more buyers stay out of the market, the more likely it is that prices will fall.

Housebuilders are now resigning themselves to living with the current level of demand for the foreseeable future. That could herald a further round of rationalisation as companies cut their costs to suit the lower level of demand - in some cases dramatically altering the shape of the business. The more they shrink, the more a return to 'normal' levels of profitability is deferred.

That means construction shares, despite hitting new relative lows almost daily, are still overvalued. And, given that housing fuels large sections of the economy, it is hardly surprising that the rest of the stock market is depressed.