Brickonomics

Figuring out trends in housing, construction and property


Government must plan and act as if in the longer-term construction matters

Brian Green

In business certainty is a good thing. It may be less exciting for the crisis-management junkies we seem to be in Britain, but it helps us be more efficient.

There is however one certainty that is painful to experience. This is the certainty that an action or lack of action will lead to an unnecessarily destructive outcome.

Today the RICS launched its quarterly construction market survey. Its headline: “Private sector continues to provide forward momentum.”

It’s all pretty predictable stuff. Most firms see most sectors and most regions doing better than they were. Potted summary, things are on the up.

Sadly when I see such encouraging reports of the recovery of construction I am left pained and I have to say angry. This is not because I’m a miserable git who thrives on recessions, far from it. It’s great news that things have picked up. That we are building again. That we are investing in the necessary infrastructure to improve welfare and prosperity.

So why angry? Well I think there’s a clue in the juxtaposition of two graphs in the RICS survey release (see graphs below).RICS UK Construction Market Survey Q2  2014
With the welcome upside comes the inevitable and totally predictable pain of seeing an industry struggling to cope with the demands put on it. The lack of available skilled people. An already ageing workforce on average four or five years older than before the recession. Frantic scurrying to foreign shores in search or skilled workers while young folk at home remain untrained and unemployed. A backlog of work that needs to be done but that may not be because of calls elsewhere. Inefficiency and rising costs. A supply chain debating on how much to invest in case it all goes pear-shaped again.

As much as anything can be certain in the unpredictable world of construction this was the inevitable outcome of the nation’s political and economic choices made during the recession. This is not smarmy clever-dick hindsight. It was predicted by many at the time.

But it was not inevitable. There were cards that could have been played to avoid it. Here’s just one blog from 2011, despairing at policy. There were plenty more before that.

The policy makers got it wrong. The Government could have invested in construction. Housing and the refurbishment of housing at the very least. We knew we needed it and we had the skills and supply chain in place.

The question we now have to consider is what should policy makers do from here on?

My gut feel is they will do little or any great value. Cut a bit of regulation here or there, invest a bit here or there where the private sector investment is a bit light, so it appears that we are all sharing in the recovery. Who knows?

What it will not do is investigate aggressively how we can boost the level of home-grown construction workers. There are more than a million 18 to 24 year-olds not in education that are either unemployed or not economically active. Surely construction can help here and in the process help itself?

We firstly need to stop blaming the young for their own plight, as if they were a breed apart. For that matter we need to stop thinking that the answer lies in making construction appear hip to the kids.

Much has been done, but we need more solid research to find the barriers and find the incentives that might work. Then we need to devise a plan and appropriate schemes to be tested. This should lead to a massive programme of job training and mentoring that is followed through with proper in-work experience.

This must be led from the top. From the Government.

What will happen is much handwringing, innumerable conferences, seminars, debates, meetings and policy papers from a host of different interested but ultimately impotent parties. This will lead to a few tepid showcase policies.

As they already are, construction firms will reinvigorate labour-agency contacts in Poland, Lithuanian, Latvia and anywhere else where they feel they can find workers of adequate skills. And this will be accompanied by much tut-tutting about how you can’t find a young British worker prepared to put in a full day on a Monday or a Friday because they would rather bunk off and go clubbing.

In an industry characterised increasingly by the self-employed, there will be little room and less incentive to bring on young construction workers, to provide the mentoring they need, to have the patience it may take to turn wayward teenagers into working adults.

Meanwhile, in parallel with this will be the major inquiry into why the Germans and not the English win World Cups.

Here’s my patronising suggestion of the day: plan and act as if the longer-term matters.

Are we witnessing the start of another housing problem?

Brian Green

There’s something, no lots of things, desperately disturbing about today’s stories (examples here and here) telling of Government panic over potentially unflattering house-building figures released just before the General Election.

Where to start?

Let’s start with “starts”. These seem to be the housing figures in question.

On 20 February I tweeted: “For those not familiar with the terminology: you live in a housing completion, you don’t live in a housing start”

It was a jibe in response to a press release on the latest house building figures. They showed housing starts in England up 23% in 2013 on 2012. They also showed completions down 5% 2013 on 2012.

Mr Eric Pickles and his advisers chose to crow on the starts figure to gain immediate impact with the headline: “Housebuilding at highest for 6 years.”

Really?

To understand the starts figures you need to consider stock and flow and restocking effects in the house building world. You also need to consider what’s been happening on the ground in planning. (I did a blog with some charts that in part covers this point here.)

A better measure of how well house building has been doing in these official figures is the number of homes completed. I’ll not hang around explaining why even these are no perfect measure of success in terms of solving the housing problem.

I will however say that housing starts data are useful forward indicators for what might be built. So are planning approvals, net reservations, mortgage transactions and a host of other data. But they are not an accurate predictor of what will be built and when. And they are probably worse than some of the other indicators mentioned.

Starts figures are also very volatile. Naturally they swung up rapidly from a very low base. This produced impressive sounding percentage gains, the type politicians can’t help seizing upon.

Why did we see such a sharp upswing? Firstly because house builders needed to restock their much depleted production pipelines, which (collectively) had been run down during the recession. Secondly, because new land was coming through, after a few years of a slowing in applications and approvals, there were more sites to be opened, more starts to be made. Thirdly, because the production levels had to be readjusted upward to meet current demand the rate of starts had to rise. And there are other more subtle reasons for the rapid rise in starts.

Any smart fellow would realise that this probably would lead to an initial surge and then things would settle down, if not fall off slightly, but remain at a higher level.

The completion figures however relate to sales. Looking forward these will rise, but more slowly and more steadily than starts as the industry emerges from recession and transactions pick up.

The eagerness of the Government to claim credit over its opposition for “fixing” the housing market had them pick starts over the less impressive completions figures.

Now it seems they have twigged to the possibility that they will be hoist by their own petard, as the volatile starts figures might just dip at an inconvenient time. Poetic don’t you think?

This reveals four things, if not more:

  • The shallowness of politics and its concerns with how it looks rather than what it does;
  • The vanity among certain politicians, matched only by their delusion over the effectiveness of their actions;
  • The abuse to which politicians will put otherwise useful statistics;
  • The apparent crass stupidity over the workings of the housing market at the heart of the department notionally charged with solving its problems.

I’ll stop before I just repeat myself, but less politely.

There is of course another disturbing aspect to all this if the media reports are correct. The fear within the Government that it might look silly now appears to be driving housing policy.

To be quite honest, I’m a bit surprised by this. I’d naturally expected a simpler solution to this obvious potential trap, a switch within the department to ditch the starts data as the prime measure to highlight progress in house building and place the emphasis on completions. Obviously the growth rate would be much poorer and the level appalling relative to the past, but the likelihood is that it will at least be heading in the right direction as we enter full-scale election fever.

However disingenuous that might be it is preferable to tailoring a policy that impacts on the lives of thousands of people and is central to the economy to meet some spurious Government PR target.

But what do I know about politics?

Instead of drop-kicking the planners, shouldn’t we really half-nelson the rich?

Brian Green

The blame game over who’s responsible for England’s housing crisis and silver-bullet “here’s-the-answer” approaches to solving it is growing into a national sport.

Various interest groups, professions, political parties, social classes, business groups and their mouthpieces come under fire. Meanwhile, each fires back their silver bullet, with a crowd of suitably-armed commentators joining in.

With this kind of entertainment the lobby to encourage ITV to re-run World of Sport wrestling must be flagging.

With that sad image in mind, I thought I’d introduce a variant on the who’s-to-blame-for-the-housing-crisis spectacle, as a kind of surreal equivalent of tag-team wrestling. Tag teams always added extra fun and extra confusion.

This might not take off. But as a first attempt to mix up the debate I want to explore why we might want to half-nelson the rich rather than drop-kick the planners.

The question of who’s most to blame between between faceless planners with their endless red tape and nimby well-to-do homeowners is one that bubbles. But some data I’m currently exploring for a forthcoming project and a recent Shelter blog prompted me to present a few charts.

My thought was that in a wrestling match, these charts might just turn the crowd’s sympathy away from Big Daddy and Giant Haystacks (fighting the rich-homeowners’ corner) and provide a little more support for the wrestling fans’ love-to-hate tag team of Mick McManus and Steve Logan (in the faceless-planners’ corner).

To ensure a clean fight (as if) I’ve used some Barbour ABI planning data I had already structured. From this I derived a planning-rigidity measure to compare how easy it is to get planning permission by local authorities. The details are below along with the various data sources.

Before being bombarded with useful suggestions, I know it’s a crude measure. It doesn’t take into account how adaptions to behaviour or cognitive bias might lead those putting in planning applications to “tone down” plans that they might expect to be rejected or take a punt on the off chance when opportunity arises. It doesn’t take into account variation in the approach at different planning departments to pre-application discussion and a bucket of other effects. It doesn’t correct for other variables.

But I really think we’ll lose entertainment value if we dwell too much on the more delicate aspects of analysis. This is housing-data tag-team wrestling and it’s all about show, quick thrills and fighting dirty.

If you want detailed rigorous academic work on this, I can recommend Dr Christian Hilber and his colleagues at the London School of Economics. It’s extremely good value for the more sophisticated.

So, seconds out: Round One.

Wrestling 1

McManus, booed, grapples Big Daddy with data showing how the 50 local authorities with the highest median rate of weekly pay for blokes in full-time employment are clearly displaying more planning rigidity than those with the lowest pay.

Wrestling 2

Big Daddy retorts with a reckless body check to test McManus on median earnings. McManus dodges, Big Daddy falls on his face to ooohs from his fans. The 50 boroughs where median earnings are highest are clearly more likely to reject applications. He shouldn’t have gone there.

Wrestling 3

Meanwhile Logan, to jeers, leaps the ropes and fixes Big Daddy in an arm lock with powerful data on deprivation. The most deprived areas clearly are more planning friendly. The crowd didn’t like that. But, respect. It was a powerful move.

Wrestling 4

Giant Haystacks doesn’t like this one bit. He climbs through the ropes, but is floored as McManus, with a Diving crossbody, illustrates that where house prices to earning are greatest there’s clearly significantly more rigidity in the planning system.

Ding

At the end of round one you can sense a mood-shift in the crowd. They really don’t like that after-the-bell backchat from Giant Haystacks to the referee on the Kensington and Chelsea outlier. There’s clearly no love for the super rich here, even among the well-to-do fans supporting Haystacks. He claims the data show that you can pack a borough with rich people and have a pretty flexible planning response. But this raises more suspicion than support.

Seconds out: Round Two

McManus and Logan are obviously looking to exploit tenure differences in this round.

Logan’s Elbow smash on Big Daddy, with the force of data on renting and planning rigidity, certainly added much to the planners’ cause.

Wrestling 5

Wrestling 6

Wrestling 7

This strong data suggests that, far from it being awkward faceless planners at fault, tenure plays a huge part. He’s clearly looking to gain advantage here with the implicit suggestion that renters (by and large poorer people) tend to be more relaxed about new homes being built near them.

Wrestling 8

Logan follows up with a battering ram showing how homeownership is clearly linked with planning rigidity. The implicit link that homeownership is more strongly associated with the well to do hurts the rich-homeowners’ team.

Ding, the bell rings allowing Haystacks and Big Daddy to regroup after a pummelling.

Seconds out: Final Round

Wrestling 9

Leading for the rich-homeowners’ team Haystacks pulls what looks like a blinder with a drop kick that clearly lets McManus know that the relationship between planning rigidity and how many people own their home outright is extremely inconclusive. As he performs this tricky manoeuvre for a big man, he’s heard to scream “Don’t blame the grannies.” That wins a huge cheer from a large section of the crowd.

No one was really expecting that. The untested assumption was: old folk; probably UKIP; anti everything and bound to be a thorn in the developers’ side.

Wrestling 10

Logan’s furious. He dives into the fray trapping Haystacks with a Crossface chicken that demonstrates the relationship between the prevalence of households with a mortgage in a borough and the level of planning rejections.

Powerful stuff and it caught the crowd a bit by surprise until they considered the implications of leverage. They get it. There’s a hum as fans discuss the merits of the argument that people with mortgages have more to lose from falling prices and more to gain from rising prices.

With the fight clearly going their way, the faceless planners’ penultimate move, an Aided wheelbarrow facebuster, brings screams of “what about income inequality” from the crowd. They’re really up for it. Even the higher-earning homeowners with a significant vested interest in rising house prices. And would you believe it? McManus and Logan have got Dig Daddy and Giant Haystacks each in a Half nelson.

Wrestling 11

Ding, Ding

Saved by the bell. It’s over. A bruising battle. No submissions. But the planners clearly take it.

Their display in support of blaming rich folk rather than faceless planners for planning rigidity resonated with this crowd, who really are not appreciating the protestations from Big Daddy’s and Giant Haystacks’s corner demanding multivariate regressions.

Ah, but there’s some afters. McManus, in an unexpected move, strides up to the promoter Magnus Oligarch. “When I say rich people are more to blame than planners, I’m not just fingering you. It’s more like an upper-quartile thing.”

That may have blown it with this well-heeled crowd.

However much he goes on in the post-fight interviews about planning outcomes being a reflection of a political debate within the community and just one element of a complex of issues, I think he may once again be cast by the fans as the villain.

 

The planning-rigidity measure is derived from the number of planning applications made to each local authority for five homes or more refused or withdrawn divided by the number approved. The data covers all applications made over the decade 2000 to 2009 inclusive. It’s been multiplied by 100.

Data sources are a bit muddled for obvious reason of practicality. They are:

  • Planning data (for England only): Barbour ABI
  • Median Full-time male weekly pay: ASHE, via nomis (Crown Copyright Reserved)
  • Median earnings: ASHE, via nomis (Crown Copyright Reserved)
  • Income inequality, 70th percentile divided by 30th percentile male full-time worker 2013: ASHE, via nomis (Crown Copyright Reserved)
  • Tenure: Census 2011, via nomis (Crown Copyright Reserved)
  • Deprivation Index 2009: DCLG English indices of deprivation
  • Median house price to median earnings 2012: DCLG live tables Table 577

Do prostitutes and drug dealers really do more trade than construction firms or estate agents?

Brian Green

It’s a tricky job measuring economic activity and a bit thankless when its relevance is so frequently debated. But not normally quite as much as now.

The Office for National Statistics yesterday released details of its estimate of the impact on GDP of methodological changes to improve the usefulness of the statistics. Some of the changes are down to new standards adopted in the European Union.

Usefully, we hope, there will be an estimate for own-account construction – or self-build to you and me. This is expected to amount to about £4 billion a year.

There was, however, a bit more juice in some of the other amendments. What raised most eyebrows was that trades such as the drugs trade and prostitution will be included in the official estimates of GDP (gross domestic product).

It’s caused a few headlines and some puzzling reporting, along no doubt with tutting.

I read one suggestion that prostitution accounted for more activity than construction another that drugs and prostitution accounted for more activity than real estate activities.

Unless I am misreading something badly, this is of course bollocks.

The ONS estimates that “illegal activities (drugs and prostitution)” account for about £10 billion a year in terms of GDP. Exactly how the intermediate inputs will be taken into account I must admit I remain a bit hazy, but there will be intermediate inputs. Lighting and heating for cannabis farms for instance in the case of drugs. So the value added may be less, depending on how this is all recorded and how data are collected.

Anyway, broadly it means on average each person annually spends about £150 on these illegal activities. In reality the spending pattern on these goods and services is not evenly distributed. There will be big consumers and many (most) who are non-consumers.

I understand, though we must wait to see the final tables, that there will not be intermediate consumption of these services within the figures.

Now let’s look at construction. Getting straight matches is never quite as easy as you might think.

The most quoted figure for the industry is construction output. In cash terms that was about £121 billion in 2013. This figure includes bits that come from other industries, such as materials and rental firms. It doesn’t however include cash in hand jobs, which account for a slice of housing repairs and maintenance work. It doesn’t include work done by architects and other consultants. It doesn’t include work done in-house by firms in other industries.

If, however, we look at GVA (gross value added) at current prices (KKI3), which strips out intermediate inputs we end up with £85.4 billion. This does include some estimates for unrecorded activity picked up through spending patterns. But again it doesn’t include some activities most people would think of as construction-related such as plant hire and design. It doesn’t include construction work done in-house by firms.

Either way on any measure construction is an order of magnitude bigger than the estimates for prostitution and drugs activities combined.

As for real estate activities (KKL3), GVA here came in at about £155 billion in 2013. So the difference is even larger.

What worried me slightly was that there seemed to be those on twitter and journalists prepared to accept there might be more prostitutes and drug dealers in the UK than estate agents or construction workers.

However much you might try to avoid estate agents, surely that’s hard to accept.

Maybe I mix in different circles.

 

Is the deep-seated problem of housing supply really just about planning?

Brian Green

Does constraint on planning approvals restrict the supply of homes or does the demand for homes determine the level of planning approvals? Perhaps both work in tandem or parallel.

These questions have bugged me for years.

Here’s some fresh thought prompted by the release of the latest house-building figures and, in part, by concerns expressed over the weekend by Bank of England Governor Mark Carney about “a housing market that has deep, deep structural problems”.

The housing market is a complex system shaped by numerous factors often acting paradoxically. Planning laws shape the housing landscape. That’s the aim. But is planning really the overriding reason we don’t build enough homes in England and why they are so poorly distributed?

Planning’s central role in the housing debate is seldom challenged, though more so recently. It dominates the narrative in housing policy in England, which says restrictive legislation is why we build too few homes.

Policy makers recognise other factors, such as tight lending and the hefty deposits, choke demand and slow private house building. Hence Help to Buy and other variations on a demand-enhancing theme. But these are short-term measures to fix short-term market failures.

The collective brain of policy makers, supported by many academics and commentators, believes: “Fix planning and we fix the dysfunctional English housing market”.

What if planning isn’t the main problem?

If childhood taught me one thing it was the need to ask everyday whether the Emperor is wearing clothes. So let’s ask: is planning the root cause of England’s housing market ills?

Certainly I’m impressed by research showing the potency of planning restraint in shaping the English market. I’m convinced that planning is a factor in the mix.

I’m less convinced by a slavish acceptance that because it frustrates business it must be the problem.

Of course it restricts business. That’s its purpose. The alternative, no planning restrictions, would destroy economic and social value.

Anyway, here are a few charts drawing on the latest housing starts and completions figures and some statistics on planning and residential property transactions.

Some of what I’ll illustrate readers of brickonomics will have seen before, possibly a few times and I’ll warn now they pose more questions than they answer.

Planning q1 2014 1My favourite graph, one I’ve pumped out for years in the vain hope someone will explain it’s true meaning. It illustrates one of the closest relationships in the housing market. Sadly it’s one of the least studied close relationships I know.

Private housing starts and completions track property transactions remarkably. Crudely interpreted it suggests that across England as a whole since the late 1970s for every 10 homes sold one is a new build.

Nationally, house builders take a consistent share of the overall home sales and have done for years. The data also suggest house builders respond to changes in the level of transactions, rather than the other way around.

Fascinating, but so what? Well it poses a number of questions.

Firstly what happened in the late 1970s and early 1980s to cement this relationship?

Secondly, what drives this relationship? Coincidence seems far-fetched.

Thirdly, if house builders always build a 10% share of the homes sold, how does planning fit into all of this? How might a planning decision in Rotherham that leads to a development of 100 homes prompt 1,000 households in England to buy homes?

OK, that’s silly, but where’s the causal link here?

More importantly it suggests  that if we want to boost private-sector house building all we need to do is boost transactions, encourage more homeowners to move house more often. (Note with fewer homeowners and the problem gets worse.)

Planning q1 2014 2The second graph zooms in, using four quarter moving totals. It shows the lead up to the crash, the recession and the recovery.

We see wobbles in transactions in the 2003 to 2005 period with lesser wobbles in starts. Then, when transactions fall in 2007, starts plunge shortly after. No shock there. The best fit correlation suggests starts lag transactions by about 6 months.

Interestingly coming out of the recession starts seem to run ahead of transactions, although the number of home completions continues to lag. This seems to suggest again that house builders respond to market demand in a way that maintains the 10% market share.

This market share fluctuates and is also not even across England. Even so, for more than 30 years the relationship has held remarkably close to one in ten.

Let’s look at planning approvals. DCLG data are pretty dirty. The department doesn’t provide good statistical time series for planning. I’ve put the third graph together using quarterly individual releases. (I’ve produced a similar time series using Barbour ABI planning applications data, the key point is probably better made with that.) But for this blog I chose to use official data sources that can be easily accessed and checked.

Planning q1 2014 3The immediate question that springs from the graph is: if access to land with permissions was the big problem in the mid 2000s, why did house builders’ appetite seem to wane in 2005? Why did they put in fewer applications?

The pressure to boost house building was at a high, especially following the Barker report. Why was the tap turned down on the pipeline filling the stock of land with planning? Planning approvals fell from mid 2005, before plunging in late 2007.

Were developers responding to falls or a fear of fall in demand even in 2005? Certainly transactions dipped and so did house-builders’ reservations. Were developers spooked? If so we see again planning following demand, rather than supply following planning.

But then again, the mid 2000s was a period of extraordinary corporate activity in the sector, with major mergers and acquisitions, whereby individual house builders expanded landbanks through acquisition. Did this deflect them from seeking planning permissions? Were developers, at a corporate level, so frustrated with planning restrictiveness they chose to buy “oven-ready” land rather than battle planning authorities?

If we look at the period 2008 to 2012 what do we see? A significantly lower level of planning approvals than previously. Is this related to effective housing demand or planning restrictiveness? The former, surely?

Moving forward to the near present, we see a surge in approvals, albeit from a low base. What lies behind this?

It can be read in a number of ways. The Government would like us to read the data as saying the rise is down to its fundamental shakeup in the planning regime. It may be.

There’s of course an alternative reading. House builders seeking to increase their land supply in anticipation of a rise in future sales. The data clearly show rising planning approvals running ahead of transactions.
It’s unlikely that a rise in planning approvals prompted a spurt in householders moving. So we must assume we are seeing growing house-builder confidence and anticipation of a rising market.

There’s another explanation. The NPPF (National Planning Policy Framework) created an opportunity for developers to more easily win planning permissions through appeal against local authorities without an agreed Local Plan with a five-year land supply. Are they simply taking advantage of this once-in-a-planning-regime-change opportunity?

Planning q1 2014 4What we see in the fourth graph is how, recently, starts have increased after a rise in planning approvals. This suggests that house builders may well have been held back recently from expanding their operations faster for want of permissioned land. Note that the data show that the level of completions has been much slower to respond. But this does seem to support house-builders’ case (but not prove), that they are not gratuitously landbanking, as is the accusation in some quarters.

We also need to consider the restocking effect. Not only are house builder having to increase land supply to accommodate a rising replacement rate, they also have to increase the land within the production pipeline. Periods of rapid expansion can cause surges earlier in the production process that are not seen in the later stages.

Pinning down the cause of the rise in planning approvals is not easy given the timing. What’s down to the new planning regime? What’s down to increased demand?

What we can know is that the level of planning approvals as of the end of last year was still way down on the pre-recession level, even the best part of two years after the introduction of NPPF.

It is tempting to see the blue line in the fourth graph as suggesting that the NPPF has made the planning system more amenable to developers and led to this rise in approvals. Developers might, and do, say so.

The data, however, are far less clear. Worse still, the measures are awkward and very open to misinterpretation, given the complexity of timings and outcomes in planning decision making.

Planning q1 2014 5Let’s have a look anyway. The fifth graph plots planning approvals (four-quarter moving total) against the proportions of decisions made within 13 weeks and the proportion of those decided that are approved (four-quarter moving average).

Certainly on this showing things seem more free-flowing than in the past. The proportion of positive decisions has risen. But, of note, this rise came as the number of applications fell.

Again, there are a number of possible explanations. Maybe house builders pulled away from more controversial schemes. Maybe fewer applications reduced the political pressure on planning authorities to reject applications. Perhaps house builders improved their consultative skills with both the planning authorities and their communities.

What is clear, given the relatively high proportion of approvals is broadly the same as it was before NPPF, is that we have little evidence on this measure of a more permissive planning environment.

The intriguing correlation is that between the increase in approvals and the increase in approvals taking less than 13 weeks. Is this a reflection of a more effective planning regime? Or are house builders working harder to push through planning applications?

Taking all of these time series together the weight of evidence seems to point to the causal links running from market demand to planning approvals and then, inevitably, to the supply of new homes. The more demand in the market, the more house builders seek planning permissions, the more they build.

This, at face value, seems to dilute the strength of the widely-held view that the supply of new homes is limited by the planning system.

It suggests that to improve the supply of new homes we need to increase demand for new homes. This in turn seems to suggest (given the ratio of one new home sold for every 10 homes bought) the need to get more homeowners moving more often.

If we can’t? Well, that would point to a market failure and the need for state intervention.

Those who believe fervently planning is the central problem would argue that the balance of demand for new homes over existing homes would shift if developers were freer to build where demand is greatest. Perhaps, maybe house builders might increase to a ratio of two new homes sold for every ten house sales.

But as we keep saying the housing market is a complex system, with weirdly unpredictable interactions, reactions and feedback loops.

So, for instance, we should accept that a restrictive planning regime would almost inevitably create a context over time within which house-building firms operate in a particular fashion. Restrictive planning would also create a market over time within which home buyers behave in a particular fashion.

What’s more we’ve ignored other obvious critical actors, such land owners. How do planning restrictiveness, market demand, the level, quality, desirability and availability of existing stock and developer behaviour influence the land price, land-owners expectations and their willingness to sell at a price that ensures sufficient supply? It could be argued strongly that the real competition in house building, as our system currently operates, takes place in the land market.

Even stripped down to the few variables we considered above, its very tricky to establish what weight to ascribe to planning restrictiveness and what weight to ascribe to house-builders’ operational behaviour or demand (effective or potential) from home buyers.

One thing I am convinced of: policy makers need to broaden their curiosity and extend their debate on the housing market and house building. Obsessing about and demonising dysfunctional planning systems, faceless bureaucratic planners, “landbanking” house builders and the archetypal nimby may well be popular, but it’s high time we put more effort into exploring the problems more widely.

More a house-building recovery than a construction recovery – so far at least

Brian Green

Construction output grew 0.6% in the first quarter of this year. That’s up on an earlier estimate of 0.3% in the first release of the GDP figures. Work done in the first three month was 5.4% more than in the same period a year earlier.

That’s the very encouraging headline story from the latest ONS construction output data. And we can be more encouraged given the iffier-than-normal weather at the start of this year. This provides reasons to think that underlying growth is more than the figures posted might suggest.

You’d certainly might expect so, given the multitude of construction trade surveys registering sentiment somewhere between positive and ecstatic. It’s dead easy right now to get carried away with the exuberance in some construction circles.

No doubt things are getting better. There’s considerably more optimism about. But after a seven-year slide with a few bumps on the way from the 2007 peak to now, you’d expect to be enjoying better times.

As a point of reference, construction output in 2014 q1 remained 11.6% below that of q1 2007, according to the ONS volume measure.

So, is there a danger that our excitement is running ahead of us?

Nobody can hide the fact that house-building work has been expanding sharply and looks on track for more strong growth. Construction work attributed to private new housing in the first quarter of this year was up 23.1%, says ONS. Mind you it needs another 30% growth to get back to the level we saw in early 2007, which then was described as too little to meet the nation’s needs.

Public new housing is up too over the year. Here I’d be a bit cautious over drawing too much from this, because the distinction between what’s popped in the figures for the public and private housing sectors is increasingly blurred.

Either way new house building is storming compared to its dark days in the depth of recession. On top of this housing repair maintenance and improvement work has bounced back over the past year or so.

Outputq12014Graph1Bearing that in mind, look at the set of graphs splitting housing from other construction work and you get a clue that this so far is more a story about a house-building recovery than a construction recovery.

Outputq12014Graph2We’ve heard much from the Government over the past few years about the need to improve the supply side of the economy and invest in infrastructure. It’s bandied large figures about telling us of its investment intentions.

Well there’s a strong case to argue that it would be good if the Government’s pockets were where its mouth is. The data suggests infrastructure work is almost 10% lower now than when the Coalition took the reins four years ago and 4.8% down on a year ago.

Public other work is obviously down on the year ago as is public non-housing repair and maintenance work. That’s no shock given the cuts to spending.

But private industrial work (admitted a small sector and so quite volatile) is also down.

Outputq12014Graph3Growth in the private commercial sector has been very feeble to date. It’s down more than 10% from where it was when the Coalition took over and inherited what looks like in the figures a mini-revival.

Outputq12014Graph4Looked at in these terms the argument that the Government has built what looks like a recovery in construction on the back of late-in-the-day controversial sector-specific support (Help to Buy) appears to hold more water than George Osborne might like to drink.

Critics, myself included, long argued for more direct Government support for construction much earlier. This would have left the industry with far fewer supply headaches – a depleted and ageing workforce just one – than it now suffers.

Leaving irritation over the past aside and looking from where we are now, there’s plenty to cheer us, despite the rather lacklustre performance to date of non-housing construction work.

All the indicators worth looking at that illustrate what’s coming down the pipeline, architects and surveyor surveys for instance, suggest there is a surge in work heading for building sites around the UK.

There’s plenty too that has convinced the industry forecasters that construction growth will spread out from the housing sector this year.

However, today’s figures are a sober reminder that the recovery we see still has a way to go before it is established as a construction recovery rather than a house building recovery.

Even so, just the smell of better times ahead must make it hard for the wider construction industry not to get excited after seven lean years.

Forecasters see spring in the step of construction with fewer dark clouds on the horizon

Brian Green

The latest set of construction forecasts from Experian, the Construction Products Association and Hewes all exude greater confidence than those released at the start of the year.

There were few radical changes to the expected numbers above adjustments that would naturally be made to accommodate new data. But the sentiment is more encouraging, with concerns over downside risks easing.

Three forecasts compared April 2014Indeed Experian suggest that the balance of risk within its forecast has probably shifted to the upside. The downside risks of squeezed real earnings and renewed problems in the Eurozone have eased.

But the Experian forecast does highlight the relatively newer threat of a house price bubble as a growing downside risk. Meanwhile Hewes points to interest rate rises as a threat.

This does not take away from the fact that all forecasters expect strong growth this year and this in the eyes of Experian and the CPA will be maintained in the medium term.

Hewes, which tends to factor in more downside risks, sees the rate of growth slowing sharply after the election.

The consistent feature of all the forecasts is the strength of the new housing market. The consensus suggests more than 20% growth over the three years from 2013.

Both Experian and CPA are bullish on infrastructure, suggesting growth of about a quarter over the three years from 2013. Hewes view is significantly less optimistic with relatively low growth expected, but no contribution from Hinkley is included as it has yet to secure EU approval.

Another key difference is that Hewes does not foresee a sustained strong recovery in commercial building, whereas both Experian and CPA see a solid and increasing rate of growth. This is a huge sector and so has a large impact on the overall output. Hewes says its relatively cautious position relates to the susceptibility of the sector to higher borrowing rates.

The takeaway from these three forecasts is that the picture is brighter and there are more upside risks emerging while the downside risks ease.

But fragility remains with particular concern over inflation in the housing market and the potential impact of higher borrowing rates, should they come sooner rather than later.

The sorry side of the upswing in construction and why posturing politicians got it wrong again

Brian Green

For me there’s something dreadfully sad about the timing of the Government’s announcement that it is backing £36 billion worth of planned investment for 2014 and 2015.

It will, say the Prime Minister and Chancellor of the Exchequer, support 150,000 construction jobs.

This should be greeted with unfettered joy. But I’m afraid I can’t see it that way.

How do I see it?

Well imagine Government leading a construction industry motorcade, ignoring the road ahead, too busy scanning the crowd for adoration, unaware when to use the accelerator, the brake, or for that matter the gears. Behind all is in chaos.

A tortured metaphor, but hopefully you get the drift. Leaders should lead not preen and posture.

The right time to invest in construction was when industry output plunged and remained low. The Government suggested such spending then would upset the international money markets. Rubbish. Even in the extremely unlikely case that a well-judged increase in capital spending had annoyed these folk, it would have been worth doing in the long run.

There were warning calls: spend on construction or lose a generation of construction workers, professional and trade. Strong arguments were made: the taxpayer would get bargains if it spent more on construction in a recession.

The Government didn’t spend more on construction. It cut. The Construction Products Association estimate publicly-funded construction output, including PFI, fell 14% from 2010 to 2013 where it sat 27% below the pre-recession level. The industry lost a generation of professionals and skilled trades.

Now, conveniently timed before the General Election you might think, the Government parades its spending prowess and how it is “helping hardworking people and backing business with investment in better infrastructure”.

Good timing? For whom I wonder.

RICS1

Today what do we see? Yet another trade survey reveals the strains of an industry desperately trying to fill the gaps created by a prolonged and deep recession (see graphs).

The indicator of expansion used by the surveyors’ body RICS is a balance of those seeing growth against those seeing contraction in workload over the past three months.

It has hit a series high of 43. It’s the highest for 20 years. In the relative boom years before the crash the highest was 33, in the summer of 2004.

And the effect: rapidly rising input and outputs prices; rapidly rising skills shortages.

RICS2

Given that we most likely have yet to experience the full force of this upswing, there is every reason to expect these problems will increase. And fast.

For businesses and for the workforce this is great news. More work, more turnover, bigger margins, more profit, more pay.

But for clients, is the sudden surge in work a good thing? More cost, more delays, more uncertainty and the risk of lower quality.

There’s a further rather twisted irony, given the Government’s wider political priorities. Where will we find the 150,000 skilled folk to fill the jobs created over 2014 and 2015 by this investment? Increased immigration?

RICS3

It is absurd that the industry should be expected to go from famine to feast so swiftly, yet again. This is not the sign of a “well-run economy fixing the roof while the sun is shining”.

Construction should be seen and should have been seen as investment not consumption. Build now and build sensibly for the nation and you have it for many years ahead. Build now for the nation and your economy should run more smoothly. Build for the nation in a recession and it will cost you less in the long run. Build for the nation in a recession and you will preserve the skills you will desperately need when things improve.

When the private sector is steady on its feet again you can build for the nation a little less, having already put in place much of what you need. This will help to avoid overheating and skills shortages and uncertainties and rampant price rises. And it will cost the taxpayer less.

This is not knew wisdom.

It was wisdom ignored.

Now the consequence of this folly must be managed carefully if we are not to further damage the long-term future of the construction industry.

Strong growth expected for a construction industry on the mend, but fragilities remains

Brian Green

Construction should grow at an average annual rate above 4% for the next four years, if forecasters at the Construction Products Association are right. That’s solid growth.

The forecasters upped their expectation for 2014 from 3.4% to 4.5%. But more importantly in my view, the mood of the forecasters was less vexed by downside risks that might blow their forecast off course.

2014 Apr 15 graph 1 The top graph shows how much stronger the recovery seems now compared with a year ago.

Before getting overexcited, note the second graph, drawn from ONS construction output data. It covers just new work, not repair and maintenance. It shows that construction if not for house building construction would have been stagnant or declining.

2014 Apr 15 graph 2

Happily CPA’s forecasters expect this to change. Infrastructure should be very buoyant over the next four years averaging growth above 8%. Mind you, the big risk the forecasters highlights is the Government’s ability to deliver its promises. If it fails infrastructure activity will look far less impressive.

Meanwhile, non-residential building work should growth more modestly, averaging a bit less than 4%.

Growth in repair and maintenance work is expected to average around 2% to 2.5% over the four years.

2014 Apr 15 graph 3

In isolation the overall growth rate seems impressive. But it will be 2017 when construction output returns to 2007 levels. And with a fairly fast growing population you’d expect strong growth in construction.

Trying to put the construction industry’s performance and prospects into perspective is tough, especially when the “firehose” of construction data is turned up and we are fed frequent daily reports offering often contradictory data and commentary.

The release of the CPA forecast follows a few days after the latest official output figures, which, perhaps ironically, suggested a slowdown in February.

In my book one month’s data in construction is too unreliable a basis too much analysis, especially as the figures are likely to be revised. Still analysts and commentators confidently put the fall down to bad weather. Well, there certainly was bad weather, and it probably impacted on construction. But it’s hard to call precisely what effect it had on the published figures compared with other bad weather we have about the same time every year.

Anyway, I thought I’d pull a few charts together, focusing primarily on new work, which hopefully provide some guidance above and beyond the CPA forecast.

The first is the Markit CIPS PMI index. Now I’ve included this because it gets a huge amount of attention from non-construction economists and commentators.

It’s useful, but widely misunderstood and its limitations are seldom taken into account. Put simply, it measures, with a few statistical tweaks, the balance between the number of firms seeing things going and those seeing things going down. It uses a scale of 0 to 100, with 50 as no growth. For our purposes I scaled it on an axis taking 50 as zero.

2014 Apr 15graph 4 updatedThere are problems with types of indicator. They’re not volume measures so the line they plot doesn’t directly relate to levels of workload, which does catch some people out. It’s a measure of change and there’s a tendency for these indicators to exaggerate turning points. This can be very useful as it can provide an early warning signal.

But it also leads to nonsense interpretation by the unthinking or wilfully disingenuous (both are categories into which some politicians fall) who confuse a high reading with high output. In February this year the index hit 64.6 a level surpassed in only one month in the 2000s, when construction hit its peak.

When  a politician suggests “construction activity” is back to 2007 levels, they are talking bollocks and you can often trace their comments back to a misinterpretation of this indicator.

The next two graphs measure recent changes in quarterly output of new work. I’ve shown these on a cash basis (current prices) that is not seasonally adjusted and as a volume measure where the statisticians have sought to adjust for both inflation and seasonality.

Things look a bit better on a current price basis as you see. And as most firms think in cash terms, certainly short term, this will explain some of the bullishness. What is very clear again is just how strong housing is compared with other sectors.

The final graph I’ve chosen is taken from Barbour ABI data, which will tend to emphasise new work over repair and maintenance. This shows the 12-month moving average value of contracts let by broad sectors. Taking this annualised measure will tend to smooth out seasonal effects and the lumpiness of contract data, but no account has been taken of inflation.

Here again we see the strength of housing relative to other sectors. But what also comes across is the volatility in the infrastructure sector.

So looking across this collection of data and the Construction Products Association forecast what do we see?

I suspect if you are not in housing you see what you expected. A lot of housing and some positive signs of growth with optimism on the rise.

If you are in housing you perhaps see an industry doing less well than you might have thought.

But we can also see that while the industry seems to be on the mend it is by no means booming. And there are definite areas that remain fragile.

Note: graphs 5 & 6 were replace after noticing a date error in the x-axis in the original 

 

Cracks are already appearing in the Government strategy on the building materials trade gap

Brian Green

The construction industry imports about 10% of its output value in building materials and seems to have done all my adult life at least.

Admittedly the figures are a bit ropey, but the pattern looks pretty clear from the top graph.

Building materials imports and exportsThis is important, because the Government’s rather suspect industrial strategy (pdf) for construction has as one of its big targets a 50% cut in the building materials trade gap by 2025.

Looking at the current data I reckon that means, according to my quick calculations anyway, exports would have to expand at about 4% a year just to hit that target if imports remain where they are now.

If imports continue to grow with construction output – as they have over the past four decades – and construction grows at, say, a modest 2% a year, then exports will have to grow at about 6% a year.

Building materials imports and exports deflatedThat’s a big ask. The second graph, which I have adjusted to take some account of inflation, illustrates just how poorly exports have performed over the past two decades.

I raise this issue of imports and exports because that big ask is likely in the short term to get a whole lot bigger.

The rapid increase in house building has generated a shock in the demand for bricks and blocks.

A number of factors were at play here in addition to simply the extra bricks and blocks needed to build more homes:

  • Production had been lowered and stock levels reduced leading up to the surge in demand as house building activity had been waning in mid to late 2012
  • There was an unscheduled shutdown at one of the aerated block plants taking out supply
  • Builders needed to expand their production pipelines, this added to demand
  • There was a bit of panic buying

Housing starts completions outputIn fact if we look at the recorded level of housing activity the upturn doesn’t so far seem that spectacular. And sales of both bricks and blocks didn’t spike that crazily, even though firms were recording best-ever quarters in the early part of 2013. Had they been prepared they would probably have been able to pumped up their stocks in the winter to have accommodated most of the upswing.

production of aerated blocks

What threw me looking through the data was how since August deliveries of aerated concrete blocks actually fell, while brick deliveries increased. This paradox was explained to me thus.

The sharp rise in demand up to August was met in part from stocks which eventually ran down. This meant firms having to limit supplies on a priority basis as they turned up production and rebuilt stocks. The net result was a fall from the stock supported level of deliveries, despite a rise in production.

production of facing bricks

But what is clear, builders looked to imports to make up for shortfalls. The graph shows how imports of bricks and blocks jumped in 2013. Most of that jump was down to a surge in the second half of the year. In the final quarter imports were more than double the level in the same period a year earlier.

Concerns over materials supply, especially the supply of bricks and blocks, have not eased. Indeed, the latest Home Builders Federation survey on production constraints shows concerns over materials availability accelerating at the end of last year.

Deliveries bricks and blocksLooking to the future, the hard question to answer now is whether the reliance on imports will become normalised. Price and choice will play their parts here, but if imports become a more permanent feature of the brick and block industry it may well lower the incentive of manufacturers to invest in the UK.

And don’t forget decisions to invest here are not just based on demand. For instance, for manufactures of these products energy costs and certainty of supply are determining factors. There are big questions over the UK’s energy policy.

Imports bricks and blocksFor me, however, the more telling curve is the one that shows exports of concrete blocks falling below those of imports.

In microcosm we see here the scale of the challenge set by the construction industrial strategy in trying to cut the building materials trade gap by 50%. It may prove tough over the next few years just to hold the trade gap steady.

 

 

Postscript

What would’ve been handy is if the Government had not allowed the industry to shrink to the level it did.

Imagine if as a nation five years ago we had directly funded 200,000 homes. We could flog them off now and not just pocket the uplift in value, but also we’d have saved a fortune on benefits, gained on taxes and kept an industry and its skills readied for when it would be needed. Like now.

On my crude count back in 2008 that would have earned or saved us as a nation a total of more than £10 billion. And guess what, we’d have 200,000 more homes.

Am I bitter? Perhaps we all should be.

 
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