House construction costs will rise by 16 per cent this year (almost seven times the rate of inflation) and 11.6 per cent in 2005 with the upwards trend continuing, according to Experian, the global economic forecasting group.

The Experian forecast raises questions about the government’s target for widespread new affordable housing in London and the South East. “The recent Barker report identifies the need for 70,000 new private and 21,000 new publicly owned homes a year, mainly in London and the South East, but the rising costs of construction are making this ambition unrealistic,” said James Hastings, construction analyst at Experian.

Increasingly higher rates commanded by skilled labourers like plasterers, plumbers and electricians, combined with escalating costs of brown field reclamation as well as local planning constraints, are rendering new build far less viable. 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’ margins.

Should demand for additional housing increase further, with extra pressure being exerted on areas of construction where capacity constraints are already starting to show, the situation may worsen for house builders. "However," said Hastings, "even as matters stand, 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.”

Inflation in publicly owned housing is slightly more tempered, rising at 7 per cent this year and forecast to stabilise at 3-4 per cent a year to 2008. Nevertheless, even at this level, social housing has come under pressure, with a number of the Housing Market Renewal Pathfinder areas citing increased costs of building as a serious barrier to completion of new projects within budget.

"It is not certain what the effect will be when and if Government takes planning decisions out of the hands of the local councils with the creation of Local Development Frameworks to oversee applications,” concluded James Hastings. “However, potentially turbulent times lie ahead for house builders, who are still expected to help deliver new housing projects, especially in London and the South East, while seeing their profits squeezed between a slowing property market and high inflationary pressures.”