For those not convinced that the credit crunch has spilled over into the “real economy”, a quiet chat with an estate agent or house builder may be worth the effort.

The news that  two more bidders have joined Barratt in walking away from English Partnerships’ flagship carbon challenge project at Peterborough because it is too expensive, looks ominous. This may well prove to be the first few drips in a torrent of rebuffs for the Governments’ grand housing plans as the industry looks to self preservation.

At a gathering in the East Midlands of house builders last week the mood was as sombre as it has been for 15 or more years.

The Home Builders Federation’s director of economic affairs, John Stewart, is not noted for doom mongering. He put it this way: “This is a serious downturn. Prices will probably continue to fall, with the damage to consumer confidence along with growing policy constraints leading to a down valuing of new build house prices. The situation could get worse before it gets better.”

This is not what the Government wants to hear. It wants 2 million new homes in England by 2016. A tough target anyway given that last year there were about 175,000 built. But that figure is now looking like a high-water mark with housing starts in the final quarter of 2007 already showing signs of flagging.

It’s fair to say the targets look shaky. Certainly house builders are not going to build houses they can’t sell. And as Richard Donnell of Hometrack notes in his latest Housing Intelligence newsletter, developers are already reducing output in the face of uncertainty.
But equally worrying for Government is its assumption that cash generated by builders would underpin funding for sustainable development, affordable housing and much more.

As Julian Birch at Inside Housing quite rightly asks, “What will happen to funding for affordable housing when so much of it is dependent on the market through section 106?”

The writing is pretty much on the wall if the view of Stewart Baseley, HBF’s Executive Chairman, are any guide. His comments at last week’s East Midlands gathering were unambiguous: “It is time for government to make some tough choices and to re-examine its approach to affordable housing.”

Expect more tactical withdrawals and yelps of pain from house builders as the credit crunch squeezes ever tighter around the housing market.