By PETER EVANS- The Wall Street Journal

U.K. home builders are continuing to struggle with weak demand even as their counterparts in the U.S. enjoy a housing recovery that is enabling them to ramp up production.

Construction was started on 98,020 new homes in the U.K. in the year ended Sept. 30, a 9% decline from the previous year and down from a peak of 183,000 in 2006, according to U.K. government figures.

That contrasts with the U.S. housing market, where consumer confidence is at its highest level in six years, and builders are putting up homes at the fastest pace in more than four years. They are encouraged by rising home-sale prices and increased demand stemming from the lowest mortgage rates in decades.

Part of the difference is that the U.S. economy is stronger. In November, the U.S. added 146,000 jobs, according to the Labor Department, while the rate of unemployment dropped to 7.7%, its lowest level since December 2008.

To be sure, the U.K. employment outlook also is brightening. The country added 40,000 jobs in the quarter that ended in October, according to the latest available figures from the Office for National Statistics. The unemployment rate fell to 7.8% from 8% in the previous quarter.

But the euro-zone crisis weighs heavier on the U.K. than on the U.S. Also, the U.K. has just emerged from a double-dip recession and faces a fresh round of austerity measures in the new year.

At the same time, prices are moving in different directions in U.S. and U.K. housing market. In the U.K., house prices are projected to fall between 5% and 10% in the next two years, according to Fitch Ratings, adding another disincentive for home builders.

Meanwhile, prices have begun to rise in many markets in the U.S., as demand has returned and supply has tightened. So far in 2012, the rise in prices has been the fastest since 2005, according to the S&P/Case-Shiller national price index.

Price increases play a big role in market psychology.

“In view of the tightening supply and other improving conditions, many potential buyers who were on the fence are now motivated to move forward with a purchase in order to take advantage of today’s favorable prices and interest rates,” said Barry Rutenberg, chairman of the U.S. National Association of Home Builders.

There are some positive forces at work in the U.K. home-building market. Many home builders have cash on their balance sheets, and land is cheap.

Also, the rate of home buying has been much slower than normal, indicating there likely is pent-up demand. More people in their twenties and thirties still live with their parents than at any time in the past two decades, according to the Office for National Statistics.

But fears over job security and falling real wages mean many potential first-time homeowners are unwilling or unable to save for a mortgage deposit.

Credit also remains tight in the U.K. Mortgage approvals have hovered around 40,000 to 50,000 a month for several years, compared with more than 100,000 a month before the financial crisis.

“House builders have done what they can, but there’s a limit to what private businesses can do to shape the market,” said Steve Turner, a spokesman for the Home Builders Federation, an industry association. “Ultimately, we need to see the banks lending more so people who can afford to service a mortgage can buy.”

Home builders in many areas also continue to face an arduous planning and government approval process. That may further restrict supply even if demand increases.

Because of the weak market, some home builders are reluctant to buy land in anticipation of new development, a process known as land-banking.

“The fact that house prices are slightly down means we’re not looking to grow our land bank,” said David Thomas, finance director at U.K. home builder Barratt Developments PLC.

Land-bank reductions indicate home builders are less prepared for a surge in demand if the U.K. market starts to recover, but any uptick is some way off, Mr. Thomas added. “Improvement is going to take time,” he said. “The banks have got to be looking at a stable environment before they start lending again.”

The differences between the U.K and U.S. markets are cultural, as well as structural, analysts say. In Britain, household debt remains high and bankruptcy is only a last resort, whereas in the U.S., many households have defaulted on repayments and started again with no debt, often in a different state.

“In the U.S., the private sector has deleveraged by mortgage default,” said Anil Jhangiani, director of corporates at Fitch Ratings Ltd., which carried out a recent study on U.K. home builders. “The U.K. should follow the U.S. housing recovery given time, but both remain fragile and face significant headwinds.”

Write to Peter Evans at [email protected]