Housing slowdown starts to bite economy hard

LONDON (Reuters) - Construction activity fell at its sharpest pace in at least 11 years in June, a survey showed on Wednesday, in one of the clearest signs yet of how falling house prices are hitting the wider economy.

The news coincided with a plunge in homebuilders' shares after Taylor Wimpey, the sector leader, said it failed to raise the extra capital it said it would just two days ago when it warned of a "significant downturn" in the housing market.

The construction sector's travails brought on by plunging real estate values were glaringly apparent in the Chartered Institute of Purchasing and Supply's construction PMI which fell for the fourth straight month to 38.8 from 43.9 in May.

That was the weakest reading since the survey began in 1997. The housing sub-index was also the lowest ever, falling to 25.6 in June from 32.7. Any reading below 50 signifies contraction.

"The construction sector looks to be in for an extended, very difficult time," said Howard Archer, economist at Global Insight. This adds to the serious problems currently facing the UK economy."

Falling house prices also meant consumers were able to take out much less equity from their homes in the first quarter, Bank of England figures showed, removing an important prop for consumer spending.

Until recently, rising house prices have encouraged Britons to refinance home loans to free up cash for other spending. But that trend appears to have turned.

The housing downturn which has seen the number of people moving virtually halve in the last few months has already hit furniture stores hard while rising prices and falling consumer confidence are getting other retailers worried.

Marks and Spencer, issued a shock profit warning on Wednesday and warned a consumer downturn was likely to be deep and long.

"This is definitely a retail slowdown and we don't know where it is going," said M&S chairman Stuart Rose.

HIGHER INFLATION

After a decade in which they trebled, house prices have been falling at monthly rates not seen since the crash of the 1990s.

Approvals for new home loans, meanwhile, have tumbled to a record low as cash-strapped lenders make borrowing much harder, pointing to even sharper house price falls in the months ahead.

With two-thirds of households owning their homes, consumer confidence has also tumbled.

The central bank looks unlikely to cut interest rates as it did in previous slowdown as soaring global oil and food prices have pushed up inflation to its highest level in more than a decade.

Economists say all this adds up to seriously bad news for the economy, which is already expected to slow to its weakest pace since 1992 this year.

"Every previous major housing downturn has been accompanied by a sharp slowdown in the growth of household spending," said Jonathan Loynes of Capital Economics.

"Things are likely to be even worse than we had previously thought, with a strong chance that the economy enters a technical recession."

(Additional reporting by Christina Fincher, Mark Potter and Marc Roca, editing by Mike Peacock)