Brickonomics

Figuring out trends in housing, construction and property


Where I dream that Lyons are taming a political jungle strangling housing… and wake up

Brian Green

The Lyons Housing Review was published today. After a speed read, I’m left pretty impressed with its analysis of the problems facing housing in England.

Indeed, my spirits were lifted even as I read the contents pages by phrases such as “positive planning”, “greater transparency about the land market”, “proactive land assembly”.Lyons Housing Review

This is not yet another report where planning is portrayed as some evil dead hand restricting activity, but rather as it should be – a tool to get things done.

Encouragingly too, a flick through the recommendations shows that the report strays into areas some might see as politically delicate.

For instance, it suggests: “Compulsory Purchase Order powers should be strengthened and streamlined to make it easier for public bodies to acquire land where it is not brought forward and where it is a priority for development.”

The implication here is that CPOs might be put into play more readily in future.

And we might expect also to see some resistance to the recommendation that land ownership should be more transparent.

The report recommends: “To ensure greater transparency in the land market, the Land Registry should open up land ownership information to the public in a similar manner as the property price paid data set and make it a legal requirement to register land option agreements, transactions and prices.”

In any sensible world this would be a given.

Despite its willingness to nudge the boundaries of what might be politically deliverable, there will be many people disappointed that the report does not stray further. It could perhaps have been more strident on social housing, perhaps more bullish on direct public sector investment.

What will please many is that the report, from my quick read anyway, seems keen to end the sort of shilly-shallying that leads to things that need to be done not being done.

So, if local authorities don’t get their act together and deliver a plan, it recommends: “…the Secretary of State will have the power to direct the Planning Inspectorate to intervene and ensure an acceptable plan is produced in cooperation with local residents and partners including the local authority. Similar sanctions will apply if a submitted plan is deemed to be wholly inadequate.”

In total there are 39 recommendations. Plenty appear very sound and deserve discussion and consideration.

But the overriding point I take from the report (this seems to echo what I took from the recent Barker book) is that housing needs to be more central in the overall political thinking of the nation and that policy should be more coordinated between departments and more long-term government to government.

So the report recommends a Housing Minister attending cabinet. It calls for “an independent advisory Housing Commission to bring skills and expertise from across the housing sector to inform policy, advise government and provide independent scrutiny and challenge to government in meeting its targets.” And it recommends a national Housing Observatory be set up “as a single repository for key data, forecasts and analysis on housing to assist policy making, evaluation and a consistent approach to housing market assessments.”

Importantly too, it recognises that sometimes it’s better to go with the grain and curb the desire for radical reform. Yes, it calls for a review of the New Homes Bonus, the flagship policy introduced by the incoming Coalition, but it is clear that a major disruption to the new planning regime introduced by the Coalition would be a mistake. It looks to build on what is there and improve.

The critical point here is that house building and the successful delivery of better housing for all benefits from a relatively stable legislative framework.

Certainly, for my taste at least, too much policy today is driven by “eye-catching” tactical moves aimed at relieving political pressure, scoring points against the opposition or shamelessly seeking votes. This inevitably creates a Frankenstein’s monster of a housing system.

Here’s a welcome, if optimistic, passage from the report:

“Decisions on housing should be at the heart of major strategic decision making across Government and recognised as an essential part of the infrastructure we need to support growth. That work extends beyond the life of a single Government. Sir John Armitt’s review of infrastructure planning stressed the need for longer term planning for infrastructure investment in the UK based on evidenced assessments of needs and clear plans as to how they will be fulfilled. As Sir John highlighted, such a strategy will not be delivered without strong and enduring political will that transcends the confrontational nature of UK politics and the short-term pressures of our electoral cycle.”

Back, then, to the real world.

After a very rapid read of the Lyons Housing Review untainted by what others might have written, I decided to check out the reaction. Well pre-reaction, as the coverage was penned in advance of the actual announcement.

The obvious place to start I decided was to look at the BBC’s take. I thought I’d read the opening paragraph from its story on the review and how it encapsulated the political message of the report.

“First-time buyers will be given priority when communities in England ‘take the lead’ in building new housing, Labour is promising.”

Hey, there’s a nice eye-catching policy that might win some votes.

And, yes, that pretty much parrots the key message in the Labour Party press release.

Later in the BBC piece we read:

“Mr Miliband will say: ‘There has been a systematic failure to build the homes our country needs.

‘And, for too many young families, the dream of home ownership is fading fast.’”

By way of counterpoint we read the clearly considered views of the Conservatives:

“But Conservative Housing Minister Brandon Lewis said Labour was ‘pulling the wool over people’s eyes’, adding: ‘They say they can meet their housing promises and not borrow a single penny extra to pay for it – but this just isn’t credible.’”

Now about that mad dream I had about cross-party support for a long-term policy to deliver the housing England (and indeed the rest of the UK) needs…

Questioning data, questioning the value of data, glasshouses and stones

Brian Green

Last week’s ONS construction data release caused a few ripples when it showed output dipping in August.

It also sparked some sharp criticism from Chris Williamson, chief economist at Markit – the people that bring you the PMI surveys.

The second paragraph of his commentary reads: “We question the value of the official construction data due to the scale of revisions that occur after data are first release. The signals about the health of the sector and the economy as a whole can be utterly misleading as a result.”

I’m no shrinking violet when it comes to criticising statistics. But I wondered whether the comment was fair, balance or constructive. So is it?

The ONS release suggested a drop in output of 3.9% in August compared with July and a drop of 0.3% comparing August 2014 with August 2013.

It also showed a 5.5% dip in private housing between July and August, which surprised a few people.

Output Oct 2014 1For me there was no great surprise in the figures. Mind you, I wouldn’t have been shocked if the monthly figure went up. It’s an early estimate of one month’s data on the level of construction in various sectors. It is not a snapshot indicator of sentiment.

August was a bit wetter than usual, so it may have dampened output. The industry is in a state of change so volatility is expected. This is particularly true of house builders as they restock their production pipelines. Even when the construction industry is on a reasonably even keel the data are volatile.

Looking at average of output over three months probably gives a better picture. The three months to August showed growth of 1% on the previous three months 5.3% on a year ago. So the data clearly suggest underlying growth, with a possible hint at a easing in the growth rate of late. That is all clear from the top graph, which illustrates the volatility of monthly data.

Should you always expect to be going upward when you’re climbing a mountain? I don’t, not that I climb that many mountains.

What’s more would I, if I were running a construction-related business, be reliant on updates on the level of production at a GB aggregate level to a high degree of accuracy on a monthly basis? Well probably not. A general sense of where things are going at an aggregate level from a few sources will do fine, even if they are contradictory, along with a damn good detailed understanding of my particular markets. So what’s the problem?

What about the issue of revisions? They were pretty big this time around.

Revisions are a pain. But then again not revising the past when you learn that you misrepresented it (absolutely or relatively) presents its own issues, particularly if your information customer is me – someone who likes long data series with as much consistency as you can muster.

The scale of revisions we are told was partly down to a number of technical things, such as re-referencing the indices to 2011=100 to align with the National Accounts outputs and seasonal adjustment methods in the new processing system, plus the usual adjustments made to incorporate late data.

If you imagine all the elements that feed into or are related to the National Accounts as a huge multidimensional jigsaw that has to be, as far as possible, internally consistent, revisions are inevitable. When one bit moves others have to move.

Annoying as they are, I’ve learned to accept the regular revisions. Oddly, the upside is that in some odd way they seem to give me a better understanding of the strengths and weaknesses of the series.

To my mind, ultimately, all construction data are iffy. It’s just a question of how iffy and why.

Construction is a highly complicated industry to capture with simple measures. The projects are lumpy and extremely heterogeneous. The sectors are variable and hazy. The firms are all different shapes, sizes with very variable mixes of work.

Finding a neat way to capture all that in a few simple indicators presents the surveyor and statistician with a nasty task. Trying to get an accurate gauge on the precise level at any one time is even more devilish.

That’s what the ONS seeks to do with the construction output figures. For me, at least, it is less a short-term measure of direction of change than a useful gauge of level over time.

My approach on short-term trends tends to be to use what might be described as triangulation. I look at many surveys (including the ONS construction output and orders), assess as best I can how they match and how they conflict. I question their individual weaknesses and I try to assess how they fit with the broader context.

The Guardian used to run ads suggesting that it, as a newspaper, looked beyond the meaning one might ascribe to one observation and took in the bigger picture before seeking to interpret what was actually happening.

The first clip might show a dodgy looking fellow pushing an old lady. Your immediate thought was “mugger”. The second clip (the reveal) would then show the “thug” bravely pushing the vulnerable lady away from falling bricks. Ah, not a thug, but a hero.

Context is all, beware cognitive bias, etc, etc.

As with people’s intentions, we can read data and get the meaning completely upside down.

A lesson I learned long ago was to question all data. When seeking meaning from data it’s worth bearing in mind among other things, how they were collected, the assumptions in the methodology, the survey size, the motives of the respondents, how the survey data is translated into an estimate of volume or change, the impact and treatment of occasional factors, weights and price or seasonal adjustments.

You then have to look out of the window, away from the spreadsheet at the real world.

With these thoughts in mind let’s question the construction survey produced by Mr Williamson’s firm, Markit.

To provide comparison and a bit of context I have compared the Markit/CIPS construction survey headline indicator with the monthly construction survey provided by the Bank of England Agents.

Output Oct 2014 2What we notice is that since March 2010 the construction industry has grown on the Markit measure in 47 out of 55 months. However, when there has been a slowdown recorded it has been relatively slight. The Bank of England Agents however did not measure growth until November 2010. They then recorded a slump from October 2011 through to June 2013 (21 months).

If we take the period March 2010 to March 2013 the average Markit/CIPS score is 52.6 (suggestive of sound growth) against the average for the Bank of England Agents of -0.6 (suggestive of modest decline).

I will leave those in the industry to decide which they feel provides the more representative depiction of their interpretation of the path of GB construction.

I will however draw from an unrelated dataset, employment. Between March 2010 and March 2013 100,000 jobs were lost to the industry, that’s almost 5%. Now that could happen with an expanding industry. But it would be unusual for construction, particularly as the more labour-intensive repair and maintenance work seems to have been stronger than the less labour-intensive new-build work over the period.

I’ll not go into the potential methodological issues with Markit’s measure in any detail. I can’t. I’ve asked in the past for a full rundown of the methodology. I don’t recall receiving it.

I have a couple of outside observations though, I’d need to be convinced that procurement directors are necessarily the best placed to gauge business activity within construction (some may well be) and I would instinctively be wary over the PMI sample size given the heterogeneity and the muddled regional spread of construction firms.

Interestingly, I have found the ONS transparent and open to and accepting of criticism over its construction data. The statisticians and their approaches come in for regular scrutiny at the Consultative Committee on Construction Industry Statistics, not least from me. I can see it hurts them at a personal level. But that is the price we pay when we accept our mistakes as we try to get things right.

That brings me to glasshouses. Ideally they are great for transparency. Not so good a place in which to throw stones.

Kate Barker’s new little green book highlights the need for a holistic approach to housing policy

Brian Green

You can’t blink these days without missing yet another paper, report, seminar, briefing or book on how to solve the housing crisis.

Some are bonkers, others deserve some credit and attention and a few are worth spending a bit of time on.

2014-10-01 15.57.44Kate Barker’s new book Housing: Where’s the Plan? falls clearly into the latter camp for at least three reasons. It’s short and quick to read. It covers a lot of ground, well. It doesn’t arrogantly suggest that there’s a simple solution to untangle the complex mess we’ve made of UK housing.

It’s a great run through for anyone keen to understand quickly most of the main threads that comprise UK housing’s Gordian knot.

The book clearly illustrates the trade-offs needed in developing housing policy that might work. Even more instructive is that you are left in no doubt why so many policies do more harm than good or quickly disintegrate under the weight of unintended consequences.

There are recommendations. But I find myself agreeing with the comment printed on the back cover from Martin Wolf of the Financial Times.

“Kate Barker provides both a clear analysis of the problem and sensible, albeit modest, reforms. These represent the very least that needs to be done.”

In the circumstances this is quite a timid book given the housing crisis is already disrupting economic and social life desperately in the UK and the path we’re on looks like guaranteeing worse.

Her big idea, among a series of recommendations, is the introduction of Capital Gains Tax on a homeowner’s main residence.

In principle this is a sensible suggestion, unless you are economically illiterate, stupid enough to believe the huge increase in the value of your home has something to do with your innate good judgement rather than luck, or you happen to be without a conscience and sense of fairness.

Even here my sense was that Barker was being cautious. She writes (page 62); “Even an optimist about tax reform might feel daunted by this, and yet it may well be the best reform to tackle the adverse social consequences of undersupply of housing.”

Few would doubt that Kate Barker knows her housing onions and many sometimes small, sometimes subtle and sometimes almost incidental things throughout the book highlight this.

She gives a neat summary of “good” and “bad” house price inflation (page 36). She points out that nationalised development rights and a plan-led system don’t intrinsically inhibit residential development (page 15). She recognises the value of what she described as the often undervalued “psychological” effect of additional development (page 39). She makes plain, as so often is missed, the importance of expectations among landowners (eg page 79). She doesn’t overdo planning. And she provides some useful myth-busting.

Mind you there are things that seem puzzling. It may not have been intended, but my impression was that she implies that the fall in homeownership and the sharp rise in private sector renting was prompted by the financial crisis and the recession.

I’d argue that the fall in home ownership has its genesis in the early 1990s, if not earlier. It was in no way prompted by the recession, however much it may have sped up the process. The slide in home ownership among households younger than 35 has been a feature of the UK housing scene for a quarter of a century.

What had been promoting growth in total home ownership for years is longer-living, home-owning babyboomers displacing their elders who were more inclined to rent and didn’t live as long. This disguised the underlying decay in home ownership growing among later generations.

Overall I felt the book was a bit light on intergenerational effects. This I think led to her seeming to be, on my reading at least, rather complacent on the rapidly rising level of under occupancy.

I had similar concerns on inequality.

She states (page 84): “Demand for housing space rises strongly with income in the UK: as we get richer, we want more and bigger dwellings.” The corollary is that if we get more unequal in terms of income or wealth the distribution of housing will become less equal, as the rich take more of the limited stock and the poor are left with less. How growing inequality, both between social classes and between generations, plays out within a system of constrained stock must surely be intensifying the housing crisis.

For all that Kate Barker’s book is well worth a read. Its value for me was less in the recommendations themselves than in pushing the underlying theme that housing policies needs to be longer-term in scope, more consistent across government departments and enjoy far greater cross-party support (page 79). As Barker points out if a policy is unfavourable to landowners they are happy to wait if they believe a future government will reverse it. Meanwhile, the nation has less land on which to build homes.

The need for a more long-term approach could not be more pertinent. As we head towards a General Election the housing crisis is being dragged ever more into the political scrum, where policies are delivered on the basis of being “eye-catching” rather than of long-term benefit.

It doesn’t help either that hardwired into so much political analysis is the inevitable separation of the participants – builders, developers, planners, Government, home owners, landlords, renters, those on housing benefit, immigrants  – into villains or victims.

Sure the UK housing system is grossly unfair. Sure many people are victims of this. Sure people act in their own self interest. But as a community, it is a shared problem that collectively costs the nation.

We could do with fewer quick-fix solutions supposedly designed to “mend a broken housing market”.

Housing needs constant long-term considered attention to analyse, test and implement the set of solutions that at any given time best provide good housing for all within what is an ever-changing complex system.

 

Housing: Where’s the Plan? is published by London Publishing Partnership

 

Construction jobs growth appears solid but not spectacular

Brian Green

The number of people employed in construction is up 3.3% on a year ago, according to the latest ONS Labour Market data.

This finding underlines official data showing a steady rise of the industry from recession. Output in the second quarter was up 4.5% up on a year ago.

Employment and output Aug 2014The growth in workloads is solid, but by no means a boom-time level, and like output the rise in employment stalled in the second quarter.

There are of course always reasons to question the data. One question I might ask is whether there has been a sharp increase in overseas labour coming into construction. This would most likely have been missed in the surveying.

We also have to wonder whether employment levels would have been higher if there had been a larger pool of unemployed and trained workers to call on. Unemployment has fallen sharply for those seeking work in

Employment selfemp and ue Aug 2014These are things we can’t know from a quick scan of the Labour Market data. Taking the data at face value and in a wider context, however, we see a picture of a continued improvement.

But we also see the emphasis on job creation firmly centred on the self-employed. In the second quarter level of self-employment was 6.7% up on a year ago, while the level of direct employment was up just 1%.

The industry has lost about 350,000 employees on this measure since the peak in 2008. In aggregate numbers this loss has been within those employed directly. The level of self-employment recorded over the past year suggesting it is at or above the former peak.

Construction army Aug 2014Looking to the future the concern has to be where to find new blood to fill the jobs being created. Unemployment has dropped to levels consistent with a tight jobs market. The growth in the number of employed and unemployed construction workers is slow, as we can see from the bottom graph.

There is no great “reserve army” in the UK of skills waiting to take the jobs increasingly on offer from the industry. Meanwhile the age profile of those within construction has risen, suggesting a faster rate of retirement in the future.

Within this context we can expect to see a rapid rise in foreign labour and we should not be surprised by rising costs.

Construction recovery stalls, but the forecasts remain bright

Brian Green

The latest official output data from the Office for National Statistics show growth apparently stalling in the second quarter.

This may seem at odds with trade surveys and media commentary which tend to point to construction booming. It’s not really.

Despite the zero growth recorded by ONS for output in the second quarter of this year, at the risk of doing a Michael Fish, I think we can be confident that the industry is pretty much set on an upward path. There’s nothing startling on examining the data that would suggest otherwise.

Though I’m not sure I’d call it a boom, more a rebound – finally.

You’d hope so. The gap between output at peak and today is still 10%. Forecasters expect the industry may just about have recovered the lost ground by 2016.

Construction output 2014 q2The latest ONS data release does, usefully in my view, provide a reality check. The release reminds us that recoveries can be bumpy and uneven affairs. Indeed, the data release prompted me to make this point by cheekily tweeting that if it were not for housing-related work construction would be in recession.

But even non-domestic construction is, I think, actually on the mend. It tends to take a bit more time to recover. The data supports optimism that the recovery is starting to spread into corners so far left untouched. But while work in the pipeline is pumping up, at this stage recovery in work on the ground will remain patchy.

So suggestions that things are hunky dory in construction will inevitably jar with many folk who are still struggling.

The ONS figures overall put output in the second quarter up 4.5 % on a year ago. That’s sound growth. But this is down to some sectors in some regions recovering far quicker than others. This is best characterised by the strong housing growth supporting boom-time growth rates in London.

Housing and non-housing output 2014 q2London, incidentally, is where most national policy makers and opinion formers reside. It’s understandable that their view of the national picture is shaped by what they see around them. Many will not be able to look beyond the effects of housing output being double its 2007 level in London to appreciate the effects in other regions of housing output being 30% to 40% down on 2007 while public sector is shrinking and private commercial and industrial building activity is still fairly fragile.

As to the reasons for this recovery in construction, there’s little magical, unexpected or extraordinary. By and large when there’s sustained growth in gross domestic product there tends to be growth in construction. This holds true in the UK as it does in Argentina, Botswana and China.

After a long period flatlining the UK economy has woken up and enjoyed a year and a half or so of sustained and fairly robust growth. Forecasts suggest this period of growth will remain strong for some time yet. So there is a platform that supports growth in construction.

The latest set of industry forecasts support this. Two, Experian and Construction Products Association, expect strong growth from here, expanding the industry by about 10% over two years. Growth will be particularly strong for new work. The Hewes forecast shows growth, but it is weaker and expected to evaporate in 2016.

The Hewes forecast tends to factor in more of the downside risks rather than taking a strictly central position. One of the growing risks noted by Hewes is the rising cost of construction. This, Hewes argues, will restrain the construction growth of output in volume terms – the normal measure used.

Hewes is also pessimistic on a return to growth for the commercial sector. It forecasts persistent falls for a couple of years, compared with annual rises of about 4% to 5% forecast by Experian and Construction Products Association.

But even the more pessimistic take on risk from Hewes shows the industry improving.

Forecasts summer 2014There are upside risks to these forecasts. If they are realised and release greater confidence to build, they might easily out gun those on the downside. There’s huge potential demand for construction if the confidence and finance can be found. The slump in building work will in some quarters have created a backlog of work that needs addressing. The need to address the nation’s energy supply being a major issue. Furthermore the population continues to grow adding pressure for more homes and infrastructure increases.

There are also structural changes in the economy relating to the increased use of information technology. This is changing how we use buildings and where they need to be located. The changes should result in demand for construction as the built environment is adapted to suit.

Naturally the General Election in 2015 represents a real risk. But by comparison to 2010 the risks may be stacked on the upside.

The last election was fought on the battleground of austerity. That is not good for capital spending. This time around it seems that all political parties are increasingly emphasising the benefits of investment in housing and the nation’s transport infrastructure. In the bidding war for voters there is a fair chance this may push spending on construction up rather than down the agenda.

Downside risks remain. When and how fast will interest rates rise and how will rises impact on investment and consumer spending? What might unwinding quantitative easing mean for investment? The current recovery is reliant on consumer spending, despite low earnings growth, how long before we see a more balance recovery? Will the Eurozone troubles remain contained? Will fear over capacity constraints restrain investment in construction? How will global political instability impact on economic growth? What effect might independence for Scotland have on construction? And there are plenty more.

There will always be risks, but in the round construction is in a much stronger position than it has been for some time. Work is easier to find and will become so for ever more firms in the industry. And there are plenty of reasons for optimism in the longer term.

That, however, doesn’t mean everyone is seeing improvements and everyone will. More importantly, while work may be easier to find, the industry has a tough job on its hands rebuilding its own infrastructure, particularly its skills based, as it drags itself out of the slough of long and painful depression.

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.

 
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