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Homebuilders Offer Hope for U.K. Economy

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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The two elements of the U.K. economy that the Bank of England currently finds most worrying are the overheating housing market and the paucity of wage growth. Earnings reports this week from two of the nation's biggest homebuilders make for cheery reading on both counts.

Persimmon Plc, the U.K.'s largest homebuilder by market value, said today it completed 6,408 new homes in the first half of the year, a 28 percent increase from the year-earlier period. Bovis Homes Group, which mostly builds what it calls "traditional" family homes in the south of England outside London, said it sold 1,487 new homes in the first six months, a gain of 54 percent.

"The government has told us that we need 230,000 new homes per annum, and far be it for us to disagree with that," Bovis Chief Executive Officer David Ritchie said on a conference call. He expects to build about 3,650 homes this year, and reckons that "5,000 to 6,000 homes per annum is a very sensible target for the business."

With a dearth of supply contributing to a 27 percent increase in U.K. house prices outside London in the past year, evidence of an acceleration in the availability of new houses is welcome. Britain's economy is teetering between the feel-good factor when consumers see the value of their most expensive asset increase, and the choking effect of young families unable to afford to put down roots in their chosen communities. Shares of the two homebuilders, outpaced by the broader U.K. stock market in the past six months, are starting to catch up:

There's also optimistic evidence for those of us worried that the economic recovery is failing to deliver the higher wages needed to underpin consumer spending. Although Persimmon limited itself to saying that finding skilled workers for its building sites is "challenging," Bovis's Ritchie went into some detail, according to a transcript of the conference call:

In terms of sub-contract labor, there's pressure on groundworkers, bricklayers, and scaffolders. It felt like there was a real aggression in the first quarter of this year. I mean a lot of bricklayers, carpenters, plumbers really starting to talk about quite significant increases. They've bitten back. We bit them in 2008 by cooling down the rates and they bit back and we clearly have to accept some of that.

There's no direct correlation between national average weekly earnings, which dropped by 0.2 percent in the second quarter from a year earlier, and a carpenter able to demand a higher hourly rate because the pace of construction is accelerating. Still, with figures today showing annual inflation slowed to 1.6 percent last month from 1.9 percent in June, there's a glimmer of hope that real earnings may start to improve.

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To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net