Brickonomics

It’s time for Shapps to find a big bazooka

January 27th, 2012

By Brian Green

In September 2010 Grant Shapps set a “Gold Standard” against which he, as housing minister, would be judged – to see a house-building rate at least matching that achieved before the recession.

There are few targets (political hostages to fortune, perhaps) discernable from the reams of documentation and hours of speeches and statements made by this Government.

But this is one. It is important. The consensus is England needs more homes. Sorry, a lot more homes, more even than the previous administration was delivering.

The Gold Standard equates to delivering 175,500 new homes in England a year, or 48,440 in a quarter, depending on how you interpret it. Building fewer would be a failure.

From where we are, with completions running at about 106,000 over the 12 months to September last year, that looks ambitious.

Few, including me, think that target will be met. I have put together a graph showing the rate of increase in housing stock, the current levels of house completions with a forecast from the Construction Products Association (adjusted). I have overlaid this with the previous Government’s target for increasing the housing stock and the Shapps Gold Standard for building more homes.

By 2015 when the General Election is due the gap between the forecast and the Shapps Gold Standard is about 50,000. That’s to say the industry would need to be producing 40% more than is expected.

This forecast was made after the Government released Laying the Foundations: A Housing Strategy for England.

So it looks like Shapps will need to bring a big bazooka out of his locker if the Government is to avoid a spectacular miss of one of its few stated targets.

Before considering what the bazooka might look like it is worth looking at the current strategy.

Naturally, as with all things New Conservative, the document is pretty much free of targets and detailed numbers of what each policy is expected to achieve in what time frame. In truth the document is less a strategy than a collection of initiatives. Some new, some old, some borrowed…

But there are aspirations and suggestions of the impact that this administration reckons some of the measure will have.

I have tried to add up the implied impact of the various initiatives by taking at face value the claims and delving into the byzantine mathematics and logic that lies behind the impact assessments.

My simple adding up produced a figure for additional homes created each year of more than 100,000. I may be wrong. But, then again, I didn’t add in the impact of renegotiating section 106 agreements and reducing the regulatory burden.

To get a scale of the potential impact of renegotiating S106, in the financial year 2007/08 deals worth roughly £5 billion were agreed. Deals in the previous financial year came to £4 billion. Even a relatively small cut in this burden on developers could, in theory, unlock a host of stalled schemes.

Set the potential reductions in costs against current construction turnover from building new homes of less than £15 billion a year and impact seems potentially huge, leaving aside probably cost savings from reduced regulation.

So, taking the strategy at face value it would seem the Gold Standard is well within reach.

The trouble is few people actually think the strategy will have that great an impact on house building numbers. Certainly not the industry forecasters.

It will however support house building firms, because it focuses mainly on reducing the various burdens and barriers to private sector house builders and developers.

Shapps would most likely argue differently, pointing to increases in affordable housing. There is after all the n^th redefinition of “affordable”. This will (in stripped-down terms) mean rents covering ever more, if not all, the cost of financing new build.

And there is the promise of a one-for-one replacement of additional homes bought under a more enticing right-to-buy regime.

Critically, though, it will be the performance of the private sector that will determine whether Shapps gets Gold or the wooden spoon.

Certainly, there is a good argument for focusing on private sector house builders. The private sector delivers the vast majority of homes built in Britain and has, through section 106, provided a large swathe of the social and affordable housing in recent years.  Even over the past few years when social housing grew relatively strongly, the private sector delivered more than eight out of ten new homes. So a well functioning private sector is essential.

However, there is a flaw in the plan. The idea that the private sector will double its build rate in four years is beyond ambitious.

Leading up to the recession the major house builders, and other developers, geared up for growth. The industry was accelerating, only to be tripped and, but for the intervention of the previous administration and support from the banks, it would have suffered worse than it did.

As it was, in the wake of the crash, the senior executives of major house builders probably expended more energy renegotiating their finances than building homes. This is not an experience, I suspect, any would want to repeat. Who would?

Talk to most in the business and they would be very happy with annual growth of 5% to 10%. You would not expect them to hunger after growth. It is not their job, nor the responsibility to their shareholders. Their focus is prudently on rebuilding their shattered profit margins, not on growing turnover.

Even at a growth rate of 10% the Gold Standard target would be missed. And it is instructive to know that even during more prosperous times that level of growth has not been sustained. If we look back as far as the 1960s the most growth achieved in private housing completions in England over a four-year stint since was 41%.

Furthermore there is a relationship that has held since the late 1970s which suggests that for about every ten homes sold one is new. With transactions low and unlikely to rise this suggests that this relationship would need to be broken if we are to see any great growth in private sector completions as the graph shows.

The housing strategy has shifted the balance in favour of new homes, this may change the relationship. But as long as homes in the private sector are sold at prices set in the second-hand market, the likelihood is that gains will be taken by developers as greater profit more than through greater volumes.

So what is Shapps to do?

It seems to me that the private sector, even making a valiant effort, is unlikely to come to his rescue. Meanwhile the public sector is not a real option. It’s skint and the Government is fixated on deficit reduction.

There is, however, one third option. The bazooka.

The Government could encourage the Bank of England to stump up the liquidity to float the house building industry through this period of troubled times using its Asset Purchase Scheme (quantitative easing).

It has been encouraging to see this notion getting a wider airing than in posts on brickonomics or Jules Birch’s inside edge.

Yesterday, The Guardian suggested QE might fund social housing. And in the Financial Times representatives of Occupy London pushed the case linking QE to house building in a piece that perhaps surprisingly bigged up the Austrian economist Hayek, a darling of many on the right.

While the need for more truly affordable housing is not in doubt, limiting the notion to social housing might prove quite problematic and technically at odds with QE.

The critical issue is that we need to build more homes, whatever the tenure when created.

How might such a scheme work?

I have considered this before, although I’m no expert on the detail. But here is what a stylised version might look like. There will be other and better ways to tap QE for housing I am sure, but this is one suggestion.

A not-for-profit Public Interest Company (PIC) financed by bonds is established.

The PIC has a remit to develop housing, with basic criteria set for sustainability, and with its emphasis on the development of publicly-owned land. It may also need to assist in funding and delivering other aspects of community-essential infrastructure.

The bonds would be bought through the Bank of England Asset Purchase Scheme (APS) with created new money, say £50 billion.

These bonds would be indemnified by the Treasury as are other Bank of England APS interventions.

The PIC, as a financing body, would fund and deliver housing in partnership with others, contractors, developers, social housing providers etc. There would be a close relationship with the Homes and Communities Agency.

Getting the tenure mix right would be critical to success. Innovation would be needed in developing tenure models and a mix that is consistent with a sustainable community. But largely the housing tenure it would fund would be predominantly rental-based (possibly with options to buy) and shared ownership/equity. It would not be there to compete with the private sector, but to collaborate.

Very importantly, the PIC should also have a remit to develop suitable stock designed and ready for future sale off-the-shelf to institutions. This would represent an opportunity to kick-start greater institutional investment.

The rental incomes and other incomes would fund the coupon on the bond.

At a suitable point the Bank of England would sell its bonds in the PIC and metaphorically burn the money.

The PIC could then be continued, refocused or wound down, treated as a body similar to the former Commission for the New Towns.

The exact structure is not the point. What is essential is that this process takes place now while the nation, and particularly the construction industry, is in a slump.

Why?

Because in a recession the economics of such a scheme, viewed from a Treasury or national perspective, are vastly different than during a period of growth.

During a recession such an intervention can save the nation billions of pounds and contribute to reducing the deficit. It creates employment from the unemployed and stimulates other activity. It generates taxes. It injects liquidity where it is really needed. It also reduces house price inflation come the next up cycle.

And the important bi-product is more people with a decent place to live in.

On my calculations, for every home built during a recession when industry unemployment is high the Treasury is £20,000 better off. That’s £2 billion if you build 100,000 extra homes. That takes no account of the much-talked-of multiplier effect associated with building.

The potency of house building should not be underestimated.

Let’s look to history. Here’s a graph of past depressions (periods when GDP remains below the previous peak).

The graph shows we are at a critical point of departure when compared with the 1930s. At this point in the cycle of depression, our 1930s forebears were seeing an accelerating economy.

Why?

They were building more homes than ever before, driven in large part by a private housing boom, based on cheap money and cheap land. There was also a surge in public sector house building.

The private sector will not and oughtn’t to attempt to grow in such spectacular fashion. The public sector can play a role, but it is limited.

Something else is needed.

It seems that when nations look for a big bazooka these days they look to central banks. So why not look to the Bank of England and quantitative easing?

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Latest data show construction sliding into recession

January 13th, 2012

By Brian Green

Latest Office for National Statistics figures for November show construction output shrinking on an annualised basis over the past three months.

The official figures suggest that about 1.6% less work was done in November last year than in November 2010 and that output was down about 1% over the three months to November compared with the same three months in 2010.

Assuming there are no huge revisions, this seems to signal that the industry has entered a recessionary phase, as the graph of the ONS current price data seems to indicate.

If construction output in December 2011 turns out to be as strong as December 2010, then we should see a rise of a bit more than 2% for the year, but a fall in the final quarter of almost 3%.

Given that December 2010 was the coldest in 100 years with snow falling in most areas and that December last year was very mild, there must be some hope of a better performance for construction. We’ll see.

The industry forecasters, I might add, are expecting a lesser rise in 2011 than 2%, suggesting a sharper fall in the final quarter.

Leaving to one side weather effects, what the figures do reveal on closer inspection is that, excluding infrastructure, the sectors the industry is looking to for growth are stagnating.

Growth in private housing and commercial construction has pretty much stalled since last summer. Meanwhile, the falls in the public sector appear to be accelerating.

Certainly the first few months of this year will be telling for the industry.

The big question I suspect that will be circulating in industry boardrooms increasingly in the coming months is whether the Government recognises the importance of construction and is willing to respond quickly and decisively enough to cushion what might be a very nasty blow.

Big projects make big headlines, but they don’t make a big impact very quickly.

PS: one point of interest for those who follow the statistics in more detail, the latest revisions were far more balanced this month than in previous months following the recent adjustments made to the imputation method. Hopefully this will continue and it should help with analysis.

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2012 will be a stinker for construction say forecasters

January 12th, 2012

By Brian Green

Construction industry forecasters are now expecting a drop in output next year of at least 5%.

To put that fall in context, there have only been six worse years recorded since the data series began in 1955. And some might see the latest forecasts as potentially optimistic as they assume the Eurozone manages to muddle through its deepening crisis.

Interestingly the forecasts from the Construction Products Association and Experian are closer than they have been for some while, as the graph shows.

Both forecasts point to a sharp drop in output this year (5.2% and 5.6% respectively), the decline in output bottoming out in 2013 and a reasonable level of growth in 2014.

There are differences of emphasis. Experian tends to be more bullish than the Construction Products Association about the private sector, notably new housing, infrastructure and commercial building and more bearish about publicly-funded work.

It also tends to be more bullish about new work and less about repair and maintenance than the Construction Products Association.

But both sets of forecasts end up with a similar overall picture.

The first point to note is behind the forecasters’ decision to increase the projected drop in output in 2012 to more than 5% from around 3.5% is the better than expected performance of construction last year.

The public sector held up better than forecasters had expected and instead of seeing a decline in overall construction work last year, the data points to growth. The painful corollary of this “good news” is that the industry will fall in 2012 from a higher base.

On top of this the forecasters are generally less optimistic than they were a few months ago about the strength of the economy and, consequently, the recovery of private sector construction.

Put these two factors together and we get quite a big mark down in the forecast growth for 2012 and the prospect of 2012 being a very uncomfortable year indeed.

However, these are central forecasts – more a mode than mean. They point to what the forecasters think is the most likely outcome from a host of possible outcomes.

What is important to note when interpreting these forecasts is that the major risks are very weighted on the down side.

That is to say that there is a lot more chance of the reality for construction being a lot worse than forecast compared with the chance of things being very much better.

By far the biggest risk – in some eyes an inevitability – is a very untidy resolution to the Eurozone crisis. Should we see sovereign debt defaults then it would most likely kick the UK economy into a nasty nosedive.

The knock-on effect on construction would be extreme, on the assumption that the Government didn’t reverse its position on constraining public sector spending.

There are of course other potential big risks. We are seeing increasing amounts of speculation over the state of the Chinese economy, particularly in the light of its stubborn inflation.

But against this we have seen slightly better figures from the US.

The point to note, however, is that with the prospects of recovery in construction resting solely on the private sector any market turmoil or uncertainty will slow growth.

To put the whole thing in a longer historical context, I have put together a graph for the data stretching back to 1955.

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So what should we expect the housing market to do in 2012?

January 6th, 2012

By Brian Green

The various data suggesting how house prices shifted over 2011 are mostly in and the vast array of pundits have made their predictions for the market in 2012.

So here’s a round up of the prospects for the housing market in the year ahead and a suggestion of what it might all mean for house building.

If we look at all the indicators, the picture painted for 2011 was of house prices flatlining. Some indicators were up a little, some down a little. That fits pretty well with the consensus drawn from the pundits a year ago. 

The graph shows how the various indicies suggests that the annual price rise has eased and is now flat or possibly on a path of gentle decline. Taking inflation into account what we saw in 2011 was a real-terms fall in prices.

The best bet for this year, looking at the array of forecasts, seems to be to expect much the same again – some forecasters expect a slight rise, some a flat market and others a fall.

The big difference this year is that any qualifying notes associated with forecasts are much more likely to carry hefty warnings of a big downside risk if the eurozone collapses.

One factor we have to take into account in these figures is that they are so heavily influenced by the London market and in many ways that operates almost as if it were a separate country. The capital’s housing market has been strongly supported in recent years by an influx of international investment.

The general view is that the disparity between London and the rest of the UK may not be as stark this year as last, but prices in the capital and the south are expected to be far more resiliant than elsewhere.  

Here is a selected list of recent forecasts listed from the more bullish to more bearish, with their last year punts for 2011 in brackets. These just give a flavour and I have not put down the index against which each is measured.

Below that I have summarised the key factors that the forecasters have tended to point to. The judgement on where prices will end up roughly rests on how strong they feel each of these factors is in relation to the others.

• Cluttons: 3% rise (Broadly flat)
• CEBR: 1.6% rise (1% rise)
• OBR 0.2% rise (3% fall)
• Jones Lang LaSalle: Flat (1% fall)
• PS&A Future HPI: Flat (8% fall)
• Median of independent forecasters 1.7% fall (2% fall)
• Savills: 2% fall (3% fall)
• Rightmove: 2% rise (5% fall)
• RICS: 3% fall (2% fall)
• Hometrack: 3% fall (2% fall)
• Oxford Economics: 3% fall (3% fall)
• Capital Economics: 5% fall (10% fall)

The main factors put forward for holding up prices appear to be:

• Ultra-low interest rates
• Rising rents
• Shortage of housing supply in the market caused by:
  • Bank forbearance restricting distressed sales
  • Low new-build rates
  • Sellers able to rent out and hold onto housing rather than sell below aspiration

The main factors expected to press down on prices appear to be:

• Economic uncertainty
• Tightening lending criteria
• Unemployment
• Squeezed household finances

But for house building price is just one factor that influences the market and whether homes are built or not built.

Probably of more interest are expectations for the number of housing transactions. Here looking at forecasts from the Office for Budget Responsibility, the Council of Mortgage Lenders, Savills and Jones Lang LaSalle, the suggestion on balance is that we should expect a slight drop in house sales this year compared with 2011.

The worry for the industry here is that the number of new private homes built has for many years (since the late 1970s at least) tracked very closely with the total number of housing transactions. The graph (using DCLG house building figures and HMRC transactions data put together by the Council of Mortgage Lenders) illustrates just how closely new private house completions track the total sales in the market in England and Wales.

So, while the Government has introduced a number of schemes to boost house building, the wider market conditions seem to be telling us that the growth in private house sales will be constrained.

Add into the mix downward pressure on the social sector and the picture for house completions looks pretty weak this year. Indeed, the Construction Products Association reckons that house completions this year will be about 5% down on 2011.

So for those looking for where the action is in the UK house building sector, it will probably be in much the same places as last year. The emphasis will remain on southern England and the more affluent areas, where folk with existing housing equity are keen to live.

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There may be less work in 2012, but that doesn’t mean less opportunity for smart construction firms

December 20th, 2011

By Brian Green

Expect 2012 to start with industry forecasters shading down their estimates for construction growth.

But while workload is likely to decrease in 2012, that does not mean that the opportunities for smart thinking and resourceful construction firms need also shrink.

I would argue that the very decline in the economy and the stresses caused open up scope for entrepreneurial thinkers with ideas for improving the built environment.

Before getting too gloomy over the prospects of a worse than expected 2012 in construction, it’s worth seeing why forecaster might downgrade growth.

Ironically part of the reason is that the official construction output figures so far for 2011 were stronger than expected. So the base is higher.

Broadly speaking the output data suggest that it’s taking longer for the public sector cuts to filter through than first thought. And the infrastructure sector has been holding up quite well.

Sadly construction firms don’t employ people or buy building materials on past good fortune, so any drop even from a higher base will be real.

But not all of the downgrade, I suspect, will be down to base effects.

Increasing uncertainty in the broader economy will take its toll, with prospective building projects being cancelled, shelved or not even considered.

I sense we shall see the forecasters downgrading their expectations for the commercial sector.

Now this is a bother.

Much hope has been pinned on a bounce back in the giant commercial property sector. Next year was not really expected to see a full-blown upswing in construction of shops and offices, but there were expectation that plans would be making their way through the system heralding a brighter 2013.

These hopes have waned.

The latest survey into commercial development activity results from property consultant Savills points to worsening prospects. It shows activity declining for the fifth consecutive month in November.

It found commercial developers less confident about the future than at any time since February 2009.

To add further gloom the British Property Federation recently put out a release revealing its concerns over the debt refinancing challenge facing the property industry as the Eurozone crisis puts the squeeze on available funds.

Prospects in retail look exceptionally bleak, outside the investment in new stores being made by the mega-retailers. And the recently released Portas Review into the state of Britain’s high streets highlighted the plight of the retail sector.

A stark and real example was provided recently by Sir Philip Green, who runs the Topshop to BHS business Arcadia. He announced that more than half of the 450 shops he has coming up for lease renewals over the next three years will be closed.

He might open a few new stores, but the implication is that Arcadia’s retail strategy is looking increasingly at internet sales.

Internet sales now represent more than 10% of all shopping and the volume is growing rapidly, eating into the struggling in-store marketplace.

But it is not just shops that are lying empty. In secondary locations there are increasing numbers of offices vacant.

Mat Oakley, Savills director of commercial research, says that vacancy rates are not as scary as in the 1990s downturn, but the pattern of vacancies is uneven. Many towns and cities just have too much of the wrong kind of offices, with vacancy rates in some are at or above an uncomfortable 20%.

Add to this the huge number of empty homes on the nation’s asset register and it is clear that a whole swathe of the UK built environment is not fit, ready and available for purpose.

The issue of vacant buildings is not just the waste of an opportunity. Buildings standing empty have a negative impact on both business and residential districts. They signal decay. That is unattractive. And they dilute the potential vibrancy of the urban centre, which impacts on the businesses and community that remain.

So we should expect to see hard-pressed councils in league with local business folk and their communities working hard to bring life back into fading urban centres.

And the very depths of this economic slump will mean that everyone will be more receptive to fresh and radical thinking. There is no room for complacency.

So as retailers retreat from the high street, as more offices become vacant within Britain’s towns and cities, as more homes lie empty and as public buildings are vacated as the cuts bite a major opportunity for construction is opening.

The built environment is not consumed as such. It has purpose. So the question for construction firms eager and willing to find a new source of work is how to repurpose redundant buildings and infrastructure to meet the needs and aspirations of tomorrow.

Encouragingly there appears to be a growing political will to address the problems of decay on the high street and this will no doubt extend to embrace more widely the need to repurpose the built environment.

Yes, it is an unfortunate trend that seems to be leading to TV “gurus” such as Mary Portas being engaged to undertake Governmental reviews. There is significant danger this will lead to considered thought, research and dispassionate analysis being replaced by cliché, prejudice and sound bites.

But there’s an upside. Important but unsexy topics do get broader media coverage. And, despite any reservations over the output, the topic covered by the Portas Review is extremely important for the construction industry.

It should be studied hard because within it (for all its faults and there are many) and within the more serious research that accompanies Portas’s 28-recommendations I suspect there are germs of opportunities. Furthermore the Government appears to be taking the issue seriously with the appointment of a minister to oversee progress. Grant Shapps has that task.

The solutions, however, will not come simply from those with smart building skills. The answers more likely will develop from bringing together local businesses, active members of the community, local government officials and politicians together to create a shared vision that matches what is desired with what is possible.

Then the important bit will be to develop smart and innovative ways to fund that vision.

This isn’t anything new. But it is often in crisis that radical solutions come to the fore.

The scale of redundancy in Britain’s built environment may not be that huge proportionately, but it is likely to grow and as a sum it potentially represents £100s billions of lost value.

Here’s a quick sum to get the scale. The nation’s buildings and infrastructure sit on the national accounts as assets worth about £6 trillion. If we consider that more than 5% of that is standing idle that’s about £300 billion of potential.

Looked at as opportunities for work here’s another set of numbers. The British Retail Consortium estimates that 11% of the nations almost 290,000 shops lying empty. That’s 30,000 shops.

Despite, or perhaps because, councils will be under increasing financial stress they will be eager to revitalise their business infrastructure. They will be up for listening to ideas.

Here construction firms, particularly those with local knowledge who can tap into councils, local businesses and communities, have the potential to play a huge role in prompting debate and working up plans that may be radical but are doable technically and financially.

The need to repurpose buildings as a precursor to economic revival is now rising up the political agenda. What the buildings become is not the point, so long as they gain a purpose and breathe life back into exhausted urban centres.

This represents an opportunity for construction firms with vision to prompt and foster work that might not otherwise take place.

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Finally the plight of first-time house movers hits the national headlines

December 18th, 2011

By Brian Green

Hallelujah! The plight of trapped first-time house movers has finally got into the national headlines.

Recent research undertaken by Lloyds Banking Group exposes the problem of increasing numbers of financially-constrained first-time homeowners trapped and unable to make the second step up the ladder.

The banking group reckons that affordability among second steppers, as the bank calls them, to make a house move is at its lowest level for 25 years. And the research threw out numbers for how bad it is in each region.

Intriguingly, the research suggests that it’s tougher in terms of affordability for second-steppers than for first-time buyers.

Given the amount of attention lavished by politicians, estate agents and a bevy of experts on the plight of first-time buyers, the Lloyds findings might sound like rather shocking news.

Might it be that the big problem with the housing market isn’t first-time buyers then?

Well, no, and it hasn’t been the “big problem” for a few years in my view. First-time buyers are yesterday’s big problem, or should I say one that goes back a decade or so.

There has been for many years a “hidden” and growing problem with trapped first-time homeowners, or second-steppers if you prefer.

So I welcome this research and highlighting the plight of the trapped second-stepper.

But I found the interpretation of the research to be unsettling and, to be honest, irritating.

Before examining that interpretation, it’s worth saying that you did not need to do any particularly detailed consumer research to know that there was a potentially huge problem in this sector of the housing market.

Sat on a couch armed with a moderately functioning brain, a few bits of paper and a pencil, some modestly robust assumptions, a few widely available stats, a reasonable aptitude for maths and, most importantly, an inclination you could, at any point over the past few years, have done sums that would have revealed the lot of first-time homeowners as a potentially very scary problem.

Indeed, two years ago, having become increasingly concerned about the potential effects on the housing market of sustained low interest rates and low inflation, I did some sums. I cheated though and used Excel rather than pencil and paper and sat at my desk rather than on the couch.

Anyway, it had become tricky to avoid noticing in the housing data that something was amiss. For instance, the figure for the median earnings of house movers was rising far faster than the UK median earnings.

Either rising earnings were encouraging richer people to move more frequently, or home-moving was increasingly confined to the better off. On the grounds that transactions were falling, the latter seemed the more plausible.

I had been arguing for some while that the stagnant housing market was “more a problem of first-time movers than first-time buyers”. So I decided to do a stylised example of the experience of a notional first-time homeowner (second-stepper).

The sums (based on what I think were reasonably robust assumptions given what I was trying to do) suggested that the average time it would take for a first-time buyer to be in a comfortable position to trade up had doubled from four years in the 1980s to eight years in the 2000s.

Naturally this was stylised, but it illustrated a simple point. When wage inflation is relatively high and interest rates are also high the cost of buying a home is front-end loaded and the price of homes are, broadly speaking, lower.

In these circumstances house prices in nominal terms can comfortably rise at the pace of earnings or slightly faster and in doing so first-time buyers quickly build the equity needed to fund their next move. This was the basis for the housing gold rush in the 1980s.

But this effect is significantly less pronounced in an economy with low wage inflation and low interest rates. It takes longer to build equity and the house price to earnings ratio expands increasing the equity needed to trade up.

So to be told that there is a problem with second-steppers should hardly be a surprise to anyone with a basic grasp of how the market works, given that the economy has exhibited the traits of relatively low wage inflation and low interest rates for a sustained period.

What is more, the implications of a lengthening in the time between buying a first home and buying a second home were and remain clear – fewer transactions.

This problem will only be exaggerated by the downward pressure on real wages.

But to accept this analysis means to take on board some uncomfortable policy problems.

One of these is to accept that house prices are just way too high. This in fairness Grant Shapps, the housing minister, has broadly accepted. And well done to him for that. But his “solution” is the gradual whittling away of real house prices by wage inflation. That’s hardly a full-frontal attack.

Another prickly policy problem is that to accept the notion that a large number of second-steppers are trapped kind of implies that to encourage yet more first-time buyers onto the housing ladder with market distorting programmes simply compounds the issue and so might well be, well, what’s the word…stupid.

But more difficult for the industry at large, I suspect, is that this research, for what it is worth, delivers a kick to the cosy, widely-accepted and unchallenged assumption that if we can just get first-time buyers buying again all will be well.

So it’s good that a spotlight has been turned on this troublesome and hugely challenging problem in the housing market.

So, well done for that Lloyds.

However, what is extremely disturbing, to me at least, is that the conclusions being drawn by Lloyds from this research are not well founded.

Certainly, there appears to be too many lazy assertions in the document Second Steppers: The challenges facing those moving up the ladder. This is pretty worrying given that Lloyds has more financial interest in housing than almost any other bank on the planet.

I was genuinely shocked to read: “Crucially, for every Second Stepper that can’t move on, there’s a First Time Buyer not getting on the ladder.”

That’s just rubbish. It appears to have been written by a marketing person or team of them with shamefully little understanding of the housing market.

More worrying is the implication in that statement that first-time buyers are being in some way thwarted in their attempts to buy because of second steppers inability to move. What about new homes, built and designed for first-time buyers?

If there were a backlog of frustrated first-time buyers gagging to get on the housing ladder, don’t you think house builders would be gearing up to supply them with brand new purpose-built homes rather than banging on the doors of ministers convincing them to devise a mortgage guarantee scheme.

Just for those who keep forgetting. The collapse in first-time buyers began in 2003. At the time average mortgage rates were falling and the terms for getting them were, well, how can I put this without getting sued? Let’s settle on pretty slack.

If you want to understand why the market for first-time buyers was kyboshed I don’t think you need look much beyond the near doubling of house prices within five years.

But to end on a positive note, let us hope more work is done on the plight of first-time movers and more attention is paid to this fundamental flaw in the housing market.

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Why the lag in construction output data may be more important than the ONS seems to suggest

December 16th, 2011

By Brian Green

The Office for National Statistics today released analysis that says the lag between recorded and actual construction output is 0.24 weeks.

If the lag really is less than two days, the ONS would appear to be sensible to do what it has done, the pragmatic thing, ignore it.

But is the analysis really convincing?

Well not for me, having read it this morning, and I am not alone in my concerns.

I don’t know if there is or is not a lag. I suspect there is and I suspect it is variable between companies and over time and so is hard to predict or adjust for.

I also suspect that in some circumstances it may have a far more profound impact than the 0.24 weeks figure suggests.

More importantly I believe that reducing the lag to a weighted average time is inappropriate as I will argue later.

In the broad scheme of things a lag in the data isn’t a matter of life or death. But if you are aware of the possibility or probability of a lag it does help in better understanding what is actually happening on the ground.

It’s nice to know that January’s output figure tells you about what is going on in January rather than what is going on mostly in January but also to some extent what happened in December.

Anyway, for the record here are my understanding of and concerns with the ONS analysis.

ONS contacted 395 companies by phone and elicited responses from 187, a shade fewer than half.

I haven’t seen the actual questions asked and I don’t know whether these are exactly the same as those shown in the analysis. Also I haven’t seen any details of the surveyors’ script concerning any prompts used or stylised answers to deal with queries by the respondents.

So I can’t know if any important issues were missed or whether the survey might have, in itself, led to misinterpretation.

I don’t know how the 395 companies were selected. I hope and suspect they were selected randomly, although I didn’t see the word used in the report.

But one immediate concern I do have is that those of the near 400 who responded are potentially (human nature being what it is) the more conscientious among the construction fraternity. So I think to myself, is there bias here?

These are just the worries of a fevered brain, so on to what the survey found.

The findings showed that a narrow majority of firms filling in the survey tended to use invoices raised to measure the work done in a given month. This is very much what was expected.

A couple of firms used orders (very worrying, but fortunately a small proportion), about 30% said they worked out what work was actually done in the reference month and 16% said they put down a figure for turnover on the basis of invoices paid.

What the survey did find was that about a quarter of the sample said that the work they put down for the reference month was not actually all done in that month.

So the survey appears to have found that there is a lag with the data provided by a fair proportion of respondents.

To assess how much of a lag there might be these firms were then asked to come up with a figure for how much lag there was in weeks between when the work was done and the period it was recorded in.

What we end up with is a picture that shows about 10% of the overall sample reckon there is a lag of about one to two weeks, 9% or so reckon their data lags by about three to four weeks and a further 4% or so reckon they are putting in the details for work done six or more weeks before the reference month.

Broadly speaking the percentages here are a bit ropey as when we start to get to this level within the sample the range of possible error is pretty large. But what we see is that there is quite a bit of lag in the reporting system, with the analysis suggesting a lag in almost a quarter of the firms responding to the construction output survey. And the lags are pretty varied.

The analysis seems to suggest that more than 20% of firms report output two or more weeks late in relation to the reference period.

In fairness these are weighted towards the smaller firms, so it is possible that we are not talking here about a quarter of the total output recorded being recorded outside the reference period.

Before I explain why it is (at least in my view) inappropriate to use the measure of an “average” lag (the 0.24 weeks figure) as a test of whether a lag has significant impact on the figures or not, there is a potential snag or two in the survey that is nagging in the back of my brain.

Let’s look at how things happen on the ground, at least as I understand things.

Work is not always measured in precise calendar months. While payment to exact calendar months may prevail (they may not, I don’t know), the payment dates for a job may start on any given day in a month.

So January’s payment might be up to the 20^th say with the February payment starting on January 21^st.

Now the survey found 98 out of the 187 respondents said they used invoices raised as a measure of work done. That’s more than half.

Do any of these firms really unpick these invoices and allocate accurately that which is attributable to each reference month?

I’d hate to tell you what I am told by those on the ground about the accuracy with which they apply themselves to this task, but it’s not encouraging.

I suspect that if the invoice says “January” then it is in the January pot for the ONS survey. That means anything dated January 1 to January 31.

I merely speculate here, but this all smells of a lag potentially bigger and more widespread than the one suggested by the analysis.

One other point that struck me concerns those firms that used invoices paid to calculate work done. Quite rightly ONS points out that they tend to be smaller firms. But there is an assertion that payment is made in the same period as the work is done because the projects are of very short duration.

This I have to query. Late payment is, as far as I have been led to believe, still a major issue.

This again points to the possibility of a bigger lag.

How well these issues were picked up in the survey I don’t know, but I harbour suspicions that the amount of lag may well be larger than the survey results suggest.

But I hasten to add I am just speculating here.

Now to my concerns over the distillation of this data into an “average” lag and why this is not in my view a smart way to look at the problem.

What the ONS did was to provide a weighted average lag from the figures. It comes out at 0.24 weeks, or about a day and a third.

There doesn’t appear from that to be a problem then.

But to me this is a very odd way to look at the impact of a lag, particularly as the lag is clearly not consistent across all those who fill in the forms sent out.

To illustrate this point I have put together a stylised example of how a lag in a proportion of the data might impact on the final figures and how this might hinder interpretation.

(Please scream at me if I have made any errors, I have had to knock this out a bit quickly and have not had someone to check the numbers for me, so apologies in advance if they are needed.)

I have chosen to use figures for 25% of the sample being lagged by one month. I have assumed in a normal year all monthly figures are 100. But in a weather-impacted year the figure for December falls 20% below normal. 

Here are the figures:

	October	November	December	January	February
Actual in normal year	100	100	100	100	100
Properly allocated		100 x 75	100 x 75	100 x 75	100 x 75
25% lagged by a month		100 x 25	100 x 25	100 x 25	100 x 25
Recorded in normal year		100	100	100	100
Actual in weather impacted year	100	100	80	100	100
Properly allocated		100 x 75	80 x 75	100 x 75	100 x 75
25% lagged by a month		100 x 25	100 x 25	80 x 25	100 x 25
Recorded in weather impacted year	100	100	85	95	100
Error %	0.00	0.00	6.25	-5.00	0.00
Actual growth rates %	0.00	0.00	-20.00	25.00	0.00
Recorded growth rates %	0.00	0.00	-15.00	11.76	5.26

Here are the accompanying graphs:

What we see is that there is a significant error in the December and January figures (+6.25% and -5% respectively). This could easily mislead interpretation.

Both the level and growth rates are noticeably impacted as the graphs illustrate. Furthermore, because this effect happens across years, the output figure for the weather-affected year is up about half a percent and the following year is down roughly half a percent. The net effect is that the growth rate from year one to year two is shifted from 1.7% to 0.8%.

Furthermore it is important to recognise that even if the significant part of the lagged data were lagged by, say, two weeks and not a whole month, if an unusual event happens in the final two weeks of the month, the impact will be felt in the next month’s recorded data.

In my view to reduce the lag to a weighted average is to underplay the potential impact in critical cases.

Just for fun I took the existing current price data and then adjusted it on the assumption that the recorded figure consisted of 70% of the actual figure for the month and 30% of the previous month’s actual figure (so, Feb^R = 0.7 x Feb^A + 0.3 x Jan^A).

This would be to assume that there is a one month lag in 30% of reported volume.

The graph is quite interesting as it show output in December 2010 a shade lower than in January 2011. And if there is anything in this, it is possible that the Royal Wedding also had a bigger impact than the official figures show.

Now I am not painting this as a more accurate picture of what is going on, just illustrating how sensitive the figures can be to lags.

But to summarise, firstly, I fear the lag could possibly be greater than the analysis suggests. Secondly, I think that even if it is not, the impact on the output data is potentially far greater than the average weighted lag would suggest.

When construction output is hit hard by big events, such as blizzards, the fact that only 20% or 30% of this effect is being carried forward does not stop the data series being greatly impacted.

To be clear, I am not suggesting that the ONS needs to radically alter its processes or reschedule its time frames or need look at correctives to adjust for the impact of any lags there may be. In normal circumstances the impact may not be that relevant.

But the potential distortion of variable lags within the data should not, in my opinion, be ignored.

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Glimpses of improvement in housing market, but economic woes continue to dog prospects

December 13th, 2011

By Brian Green

There were positive glimpses within the latest batch of housing statistics. But on balance these seem too weak to deliver a recovery sufficient to propel house building numbers given the drag caused by an enfeebled and uncertain economy.

The Home Builders Federation survey showed October to be very significantly better than a year ago for both site visits and net reservations, although both were lower than in September.

The Council for Mortgage Lenders estimate for gross mortgage lending in October was 13% higher than a year ago. But it must be remembered that mortgage lending in the autumn of last year was pretty soft.

Meanwhile the latest housing market survey from the surveyors’ body RICS suggests that November saw more buyers coming into the market.

But for all that that is a positive sign, there is little in the RICS figures to suggest a particular upward turning point in the housing market.

The vast array of house price indicators, on balance, suggests the UK average house price may be rising very slightly. But in real terms prices remain in decline. The general flatness in UK house prices is evident from the graph showing a selection of those indicators.

What the graph does not show is that UK average prices are being buoyed by the more active London market. Much of the country is seeing price falls, a pattern very evident in the RICS survey.

All this accumulated data seems to have propped up sentiment in the City over the direction of house prices.

The latest figures for future prices of housing, as expressed in the Future HPI put together by Peter Sceats & Associates suggests the City traders expects a shallower slump in house prices than it was even a month ago.

But it should be remembered that, in part, this may actually be a reflection of the weakness of the broader economy and the increasing likelihood that interest rates may stay lower for longer helping to sustain prices.

Traders now are pricing in a slump in house prices of about 3% compared with December 2010 prices. Last month the future price suggested the slump may exceed 5%.

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Latest output figures suggest construction is sliding into recession

December 9th, 2011

By Brian Green

Today’s construction output figures are a bit of a mixed bag suggesting things are getting worse, but that they were not as bad as we thought they were.

The headline figure is that output over the three months to October was down by 1.1% compared with a year ago.

And, as is clear from the graph, on the basis of the latest figures the industry does appear to be subsiding into recession.

The graph shows the monthly progression of the past 12 months worth of construction measured in constant 2005 prices. The data before 2010 is estimated from the quarter figures produced.

The main contributors to the recent fall were in the public sector, where new housing, housing repair and maintenance and non-residential new build were all down and the pace of collapse appears to be accelerating.

Countering this fall in public building works was a continued strong performance from infrastructure, where 11.5% more work was done in the three months to October compared with the work done in the same period a year ago.

But the interesting back story to these figures from a statistical point of view centres on the revisions.

Last month there was a pretty substantial upward revision in the figures resulting in part from a tweaking of the process for dealing with late survey results. Adjustments to how the statisticians estimate for missing data are to be expected with a new series such as this.

The adjustments were made, quite properly, to make future revisions more balanced. That is to say some up and some down.

What is perhaps a bit surprising is that the latest data was once again revised upward quite a bit.

The effect has been to produce a picture of a much more buoyant construction sector for the second and third quarter of this year. Growth estimated last month at 2.6% for the second quarter is now thought to be 3.1% and the ONS now estimates that there was 0.3% growth in activity in the third quarter instead of the previously estimated decline of 0.2%.

On the basis of the latest set of revisions, it seems reasonable to assume that future revisions may well tend to be more upward than downward, so the October figure may not prove as dull as it initially seems.

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No Christmas cheer from the ONS new orders figures

December 2nd, 2011

By Brian Green

The latest construction new orders figures give no comfort to those fearing a nasty second bout of recession in construction.

The numbers bounced up a little in the third quarter but remain on a downward path if looked at on an annualised basis, as can be seen from the graph (more graphs below).

The bounce back was, in the main, due to expected improvement in sectors such as infrastructure and commercial which had experienced a pretty grim second quarter for new orders.

The Office for National Statistics data on new orders does rather throw into question the continued positive results coming from the Markit/CIPS construction purchasing managers’ index.

This seems to show construction growing and more puzzling it shows an optimism growing over further expansion.

Read more >

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