By Ana Nicolaci da Costa and David Milliken
LONDON (Reuters) - British construction output rose modestly in the fourth quarter of 2013, led by the greatest amount of new housing since the first quarter of 2008, providing some evidence that builders are responding to rising property prices.
The country's construction sector - which accounts for 6.3 percent of gross domestic product - has benefited from a sharp pick-up in the housing market which has been supported by government-sponsored schemes and record low interest rates.
But the pace at which new homes are coming on to the market has lagged behind demand, pushing up house prices and pricing some people out of the property market despite government efforts to do just the opposite.
"Good news for the economy on the construction front with a ... rebound in output in December providing reassurance that the sector's recovery remains firmly on track," said Howard Archer, chief UK economist at IHS Global Insight.
Construction output rose by 0.2 percent in the last three months of 2013, a slowdown from 2.6 percent in the third quarter but stronger than the 0.3 percent fall pencilled into preliminary gross domestic product data for the fourth quarter.
The upward revision to fourth quarter construction output was helped by a 2.0 percent rise in production in December after a 4.0 percent fall in November.
Britain's economy grew by 0.7 percent in the three months to December according to an initial ONS estimate last month, contributing to its strongest annual growth since the financial crisis. The ONS said the upward revision to quarterly construction output would not be enough to impact GDP.
On the year, output is up 6.3 percent, compared to a 2.0 percent rise in November, the biggest rise since September.
The data comes after a survey of purchasing managers showed earlier this month that British construction saw its sharpest expansion in January since August 2007.
British construction output slumped after the financial crisis and is still 12.2 percent below its pre-crisis peak, a weaker state than in manufacturing or the services sector.
But house prices are up nearly 9 percent on the year, according to mortgage lender Nationwide.
This is the biggest rise since 2010, and fears of a possible bubble prompted the Bank of England in November to announce it would scrap the part of its Funding for Lending Scheme that supports mortgage lending.
But this alone is unlikely to stop further rises in house prices. The government expanded another scheme to help home-buyers with low deposits in October, and on Thursday the Royal Institution of Chartered Surveyors said its members expected prices to rise by 6 percent a year over the next five years.
The ONS said that total housing construction in the fourth quarter was 19.8 percent higher than a year earlier - the strongest increase since the fourth quarter of 2010.