Brickonomics

Figuring out trends in housing, construction and property


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

Brian Green

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

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

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

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

2014 Apr 15 graph 2

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

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

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

2014 Apr 15 graph 3

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

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

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

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

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

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

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

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

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

2014 Apr 15graph 4

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

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

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

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

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

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

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

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

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

 

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

Brian Green

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

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

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

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

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

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

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

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

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

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

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

production of aerated blocks

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

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

production of facing bricks

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

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

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

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

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

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

 

 

Postscript

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

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

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

Am I bitter? Perhaps we all should be.

The implications of falling homeownership on private house building

Brian Green

Whatever view you take of homeownership it has a powerful influence on how the economy functions and on the type and number of homes that get built.

Rapidly growing homeownership in the 1930s and again in the 1950s and 60s corresponded with big surges in private sector house building, particularly in England.

(I apologise, but this piece will be mainly based on English data, although not exclusively)

But I’m increasingly convinced that it’s not just the level of homeownership or its rate of growth that influences the number of private homes built, but how often private homes (new and existing) are traded.

The top graph shows the level of residential transactions and how it compares with the numbers of homes completed in the private sector in England and Wales over the past 50 years.

HO 5From about the mid to late 1970s what to me is an extraordinary close link has formed between how many homes are traded (residential transactions) and how many private new homes are sold (private housing completions).

As you can see the link is fairly stable at a level that suggests approximately (on these figures) that for each 10 homes traded one is a private new home.

If we test for a lag in the series we can also see that it suggests builders are following the wider market rather than the other way around.

I’ll not speculate at this point on why a relationship formed in the 1970s, but the data suggest one did form. I could provide possible explanations for this including the role that the residual land value model might play. But that is, perhaps, for another time.

For now the key point is that there appears to have been for almost 40 years a strong link between how many second-hand homes are bought and sold and how many new homes are bought and sold.

This is, in my view, critically important in helping to understand the current levels of house building.

So from this we can reasonably expect there to be a link between how often people move and how many new homes are built. This link will be a bit less direct as, for instance, sales of homes to investors and second-home owners will cloud the picture.

But given the majority of homes are sold to moving owner occupiers and first-time buyers, a link should be evident. And we see  in the second graph that the link does hold.

HO 6It shows how the number of moves into and between owner-occupied housing is closely linked to how many private homes are built. The link between new home sales and those within the wider market, mainly second-hand homes, appears intimate.

This link strongly suggests that if the number of people in owner-occupied homes falls, or the number of moves made into or between owner occupation falls, then we should expect (all other things equal) a fall in private sector house building, unless, of course, this link is spurious or coincidental or house builders build in large numbers for other buyers than owner occupiers.

Let’s assume the link is real and it is important.

If it is, in my view, it becomes really important.

The data show that the numbers of young people buying into the housing market is decreasing pretty rapidly. This we have known for many years. I covered this in the previous blog in some depth.

This means fewer transactions each year from this group. In turn, assuming our connection holds between overall sales and sales of new homes, house builders will struggle to sell as many homes to this group.

I think we all get that. The effect of fewer first-time buyers has been a problem facing house builders for some while. Fortunately the gap this left in their market proved less painful for developers as a surge in demand from investors and buy-to-let landlords neatly replaced the lost demand from first-time buyers through most of the early 2000s.

Let’s put to one side second-home owners and investors, that’s a whole other discussion. Let’s continue with what might be regarded as the “traditional” owner-occupier market – first-time buyers and existing homeowners.

As we can see from the graph below the lion’s share of newly-installed homeowners owned their previous home. And it’s here with existing homeowners where, in my view, a potentially bigger concern emerges for house builders than the problems caused by shortages of first-time buyers.

HO 7The graph shows the enduring importance of existing owner-occupiers to feed the housing market. The level has been fairly constant over the past three decades, with on average close on 60% of homes bought by previous owners.

The most evident shift discernible from the graph is that rather than new households forming in newly-purchased homes they are forming in rented homes and then, perhaps, moving into homeownership. We have also seen, certainly more in recent years, moves by existing owner occupiers into private rented between home purchases.

In my previous blog I illustrated the decline in homeownership among younger households with a split below and above 45 years old. This age split was deliberate, because this age represents, very crudely, a watershed in the likelihood of a household moving.

Younger households are much more likely to move, even taking into account the differing mix of tenures. So, even with a stable level of homeownership, a shift in the mix from younger to older households will, all other things equal, lead to a reduction in moves into or between owner occupation.

The fourth graph comes from data provided for the Housing Market Intelligence report 2012. It’s from a paper on house movers that I co-wrote with huge input from Dr Birgitta Rabe, a Research Fellow at the Institute for Social and Economic Research, University of Essex.

HO 8This graph shows just how much age influences the likelihood of people moving home. Certainly younger people rent more and renters move more. But around the age of 45 there seems to be a significant drop in people’s propensity to move. This drop is far larger than can be accounted for by the rise in the level of homeownership.

Interestingly, the Understanding Society data also show that while a sizeable proportion of the 45-54 year old age group may want to move, the proportion that actually do on an annual basis is far lower than for younger age groups.

The findings from the Understanding Society survey is pretty consistent with the findings from the English Housing Survey and its predecessor the Survey of English Housing.

Over the past decade or more the figures have been pretty stable. The English Housing Survey has found the proportion of movers in the band 45+ has been below 5% while those in the 35-44 band have been more than twice as mobile.

This should be no surprise. Many within the 40+ age group will have children of critical ages in their schooling and would tend to seek stability in where they live. They are likely also to be at a more stable period in their employment, than in the earlier years of their career.

Importantly too, the Understanding Society data analysed for the Housing Market Intelligence paper also suggests that outright owners are half as likely to move as those buying with a mortgage. The English Housing Survey suggests that outright owners are even less likely to move, a third as likely to move as those buying with a mortgage.

Now this is pretty obvious in one sense. Older people tend to move less often and outright owners tend to be older.

However, the key point is that what we see within the overall mix of homeowners is the number of younger (pre-45 year old), relatively-mobile, home-owning households plunging. Meanwhile there are growing numbers of less mobile outright owners and fewer more mobile households with a mortgage. The number of homeowners buying with a mortgage has fallen by about 1.3 million over the past 10 years.

Put all this together and we can see a major traditional market for house builders shrinking as fewer moves are made by existing homeowners. Add to this the flagging market for first-time buyers and the prospects look bleak.

To be fair, this is only freakishly scary if we accept that the health of demand in the private house building sector relies very heavily on mobility among existing homeowners and first-time buyers. It might just be a coincidence that a link has existed for the more than 30 years tying the number of private homes built to the number of moves made into or between homeownership.

Personally I wouldn’t bet on that.

Looking at the data and the trends, if we want to find a cure for the plight of low levels of house building, it strikes me that we should be releasing ourselves from a fixation on planning restrictions.

Yes, planning plays a part in frustrating house building. But the above evidence suggests that demographics and the distribution of homeownership seem to be a far more immediate and potentially potent threat to the demand, and hence the delivery, of new private sector homes.

Let’s not forget the private sector provides the vast majority of the new homes built in England.

I believe house builders already sense the shifting sands, maybe not as I have expressed things. They may even disagree with this analysis. But even without research they will know intuitively from their observations of their market that buyers in the “traditional” market are waning. Meanwhile, they will be noting new opportunities.

From what I can see in the data, I suspect we will see the private sector as a whole relying less on the “traditional” market, one populated by owner-occupying first-time buyers, mid-life movers and empty-nesters. This does not mean, however, that private house builders will be starved of a market.

One look at where there’s money will gives some clues as to the opportunities they may seek to pursue.

There is for instance £400 billion of available housing equity in the hands of pensioners keen to move, identified by Demos in a report (pdf) funded by the Home Builders Federation. That suggests one huge market.

Indeed, with so much housing wealth and an ever growing proportion now in the hands of the those above pension age, how this age group behaves may well have a determining influence on how the housing market overall behaves in the future. How much of their wealth will be consumed to keep them in old age? How much will they pass on and to whom? Will they stay or will they go from their existing houses? If so what choices will they make? There are many unknowns here.

Meanwhile we don’t need to look very far to see other growing opportunities. We’ve heard growing noises related to the private rental market for many years. And I suspect we will see many new models emerge as the demographic shifts we are seeing fundamentally change the housing market.

For me the big question is not so much how will private house builders respond to falling homeownership. They will adapt. It is, how will policy and the politician react to these shifting sands?

 

I have concentrated here on the impact of falling homeownership mainly on private house building. There will be many other elements of the complex housing system that will feel big impacts from a transition from homeownership to rental housing, some positive, some negative and some temporarily disruptive. 10 to 15 years ago the idea of declining homeownership would have been well outside mainstream thinking. So the amount of research into the probably effects is limited. But people are now looking at the implications with increasing interest.

 

On fears that homeownership is trapped in a doom loop

Brian Green

The decline in homeownership over the past few years is starting to worry a lot more people a lot more for lots of reasons.

The English Housing Survey shows homeownership among households down to 65% from 71%. The DCLG stock figures show a lower level of ownership, falling from a shade about 70% to below 64% almost two years ago.

HO 1Whatever the precise figures, the subject is filling ever more headlines and pages in think-tank reports. The latest English Housing Survey has sparked a near panic of words on falling owner occupation.

“Is this the end of our property owning democracy? Will Generation Rent give way to Nation Rent?” Asks one recently-produced report by Million Homes, Million Lives 2014.

In truth for those who track the figures the decay of homeownership has been evident for many years. The slide in homeownership in England started in the early years of the new millennium, although the seeds of the decline were planted well before.

Here’s a blog from Jules Birch from a year ago that highlights work in Steve Wilcox’s UK Housing Review. And here (pdf) Andrew Haywood in 2011 looks at the implications of declining homeownership.

The growing problem was, however, hardly noticed in the mainstream at first, but since the recession the pace of decline has accelerated and so have the words written.

The decline is most obvious among younger people, which has played greatly into the intergenerational unfairness argument, around which much of the debate has taken place.

In reality intergenerational fairness is a complex subject akin to weighing the relative values of apples, bananas and fruit cakes to a yeti.

The baby boomers didn’t have the Internet, mobile phones, ipads, soft-play areas and such wide access to university in its youth. But they did get to play in the streets, climb lots of trees, spend endless hours unaccompanied by adults and, for those who did get to university, there were what now look like very generous grants.

On homeownership, though, the data are clear. Younger adults today have been well and truly stuffed. That’s unfair and almost any analysis of the data will show this unfairness is set to deepen.

In reality the implications are much wider. In time, without a swift turn in the tide, this trend will cease to be an intergenerational issue. It will reshape society and the housing sector as a whole.

In the meantime, the continued shift in the intergenerational distribution of owner occupation (and wealth) in favour of the elderly and richest among the young looks set to constrain the demand for homes, restrict house building and eventually influence the type of homes built.

This blog is a precursor to one I plan to write later that will explore the implications for house building.

For now I want to set the scene and examine the data on the distribution of homeowners over time and its implications for homeownership levels.

The top graph shows how homeownership has declined since in recent years in absolute numbers and more so as a proportion of all housing in England.

HO 2But the aggregate level of homeownership masks some very worrying trends. Let’s look (second graph) at the number of homeowners above and below their 45th birthday. Here we see a growing number of older households and a diminishing number of younger households in owner occupation.

(The importance of splitting the population at 45 years old I hope will be apparent in the blog I intend to write about the effects on house building)

The third graph shows similar data for under 45-year-old homeowners but plotted against all those in the age band 20 to 44.

HO 3There are relatively few homeowners younger than 20, so this gives a reasonable clue to the penetration of homeownership within this age band over time. As we see, the penetration of homeownership among the under 45s is lower now than in the 1970s. This should particular figures, however, be taken simply as indicative, as the constitution of households today will differ from those in the 1970s.

The data behind this graph shows that from a peak somewhere in the early 1990s (probably 1991), the number of homeowners (household reference persons) under the age of 45 has fallen by about 1.7 million while the number in the age band has risen about 350,000.

The fourth graph shows similar data for the years 1981, 1991, 2001 and 2011 expressed differently to illustrate the proportion of all homes for each age band of household reference person (head of household) in owner occupation.

HO 4It shows how in the 1980s (the difference between the red and blue lines) there was an expansion in homeownership across all age bands. This expansion was in part a continuation of the across-the-board expansion of home ownership that took off in the 1950s and lasted through the 1960s. Over  that period homeownership rose by an average of more than 200,000 a year. The 1980s expansion was of a similar proportion, but the numbers were pumped up by generous discounts offered to sitting tenants to buy their council housing. This inevitably swelled the ranks of older homeowners.

The wave of homeownership expansion, however, was checked in the 1990s (the difference between the blue and green lines), certainly for younger adults. And that downward trend in younger homeowners has accelerated through to today.

The reasons for this trend have been widely discussed and certainly within the academic sphere the 2012 paper Homeownership for Future Generations in the UK, by Geoffrey Meen of Reading University, provides very interesting thoughts on intergenerational inequality and the relative power in the housing market of “insiders” (existing owners) and “outsiders” (newly forming households).

In another earlier paper by Geoffrey Meen, with Mark Andrew also of Reading University, written in 2003 for Real Estate Economics (Housing Transactions and the Changing Decisions of Young Households in Britain: The Microeconomic Evidence) the authors sought to examine the falling level of housing transactions. They pointed to the falling income share of the youngest age groups as a factor.

We can speculate over plenty of other potential contributory factors, such as lower inflation, looser credit, rising income inequality, student debt, extended schooling, young adults increasingly concentrated in cities where renting is more common, increasing youth consumerism, later motherhood.

Indeed there’s a growing library of more populist writing on how the younger generation has been robbed of its hopes of homeownership, presenting a range of explanations.

But in reality the housing market is a complex system. A huge range of factors influence it to varying degrees in various combinations at different times. These factors can sometimes in combination lead to conflicting or paradoxical effects. So I have no intention here to present sweeping answers for the underlying causes of this “demographic time bomb”. My concern in this piece is with the weight of the numbers and the implications of the trends we see.

Whatever the causes, the fourth graph shows – taking 1981 as a datum –homeownership among pensioners continued to rise in the period 2001 to 2011. But for all groups, other than those of pensionable age, it fell and appears set to fall further.

The graph shows that progressively up the age bands we have seen the proportions of homeowners rise and then fall. It is as if a crest of a wave of expanded homeownership is passing through the system, leaving a trough of reduced homeownership in its wake. That crest appears to have reached those of pensionable age.

But, whether we will see over the next decade a fall in homeownership among pensioners is much harder to gauge. The options for older folk are relatively confused. We have no precedent. So any calibration of their collective choices at an aggregate level is far from predictable.

Many factors come into play regarding how people plan for their lifestyle and housing in their later years, such as wealth, pension, the location of close family, health and the provision available from the state.

These will all influence whether pensioners choose to stay put in homeownership (stay in the family home or buy a “more suitable property”), live with a family member or a new partner, rent, or move into sheltered social housing or private owner-occupied retirement housing.

Depending on what choices are available to and made by pensioners we could see a range of outcomes within this group in regards to homeownership over the next decade from a slight increase to a moderate decline.

There is naturally the possibility that it becomes the done thing to cash in your housing chips to secure a comfortable future in some form of rented housing. This might cause a sharp decline in homeownership.

Leaving to one side the uncertainly associated with those in or entering pensionable age, we can expect the pattern of falling homeownership to continue among those of working age. Furthermore, the data suggest (looking at the growing gap between the green and black lines as we track back) that the fall may well accelerate.

For those looking for solace there is much talk of ageing first-time buyers. So perhaps people are just entering homeownership later.

Well here you have to look at the definitions. People like me have been, on one definition, “first-time buyers” more than once. In my case three times.

The average age of “real” first-time buyers in England was the same in 2007 as it was in 1993, according to the housing survey data. And the proportion of first-time buyers 45 years old or more was pretty steady at around 10% in the years 2001 to 2009.

So the idea that homeownership levels will be propped up by older buyers seems unduly optimistic.

For those who believe a high level of homeownership is important in the socio-economic fabric of the nation, the trends are clearly of considerable concern. Not all agree with this view. One can take a view on whether a high level of homeownership is a good or bad thing.

But whatever view one takes it does not alter the fact that, as the house building industry currently functions, the level of homeownership and the transition into or out of homeownership appears to have a powerful influence on how many new private sector homes get built in England.

As I hope to show in a later blog, falling homeownership is not simply about frustrated aspiration, undesirable as that may be. It is, as things stand, a threat to the delivery of new homes. This in turn can but feed into what is looking increasingly like a doom loop for homeownership.

Painful lessons in the need for common sense and curiosity when dealing with statistics

Brian Green

Last summer Jo Smit of Building for Change asked me to look at a document produced by the Office of National Statistics. It seemed to show energy consumption dropping 25% between 2005 and 2011.

The document and some press coverage seemed happy to put this huge drop largely down to energy efficiency.

As a big supporter of energy efficiency Jo would naturally be delighted by such findings, if they were true. But being smart and questioning she realised that it would be a near fantasy to think that within six years energy efficiency could reduce household usage by this amount.

I agreed it seemed silly. We decided to look into it as the basis of an article for the Retrofit Briefing newsletter.

In the finished article, I admit my first point was pedantic. But it matters to me how people see decimal places.

Why did the statistician put a figure of 24.7% on the finding rather than 25%? Could he possibly be so certain of the figure to warrant that degree of accuracy? Did that decimal point really add meaning?

Hell no.

But among a catalogue of concerns one finding in particular caught my attention. The study suggested, even after weather correction, that there was an extraordinarily weird spread of household energy consumption between regions.

Why would households in the East Midlands of all place use on average 70% more energy than those in the South West and a third more than in the West Midlands? (The top graph is taken from the original report)

ONS energy 1Indeed even more extraordinary was the finding that all of the top 10 regions for household energy consumption were in the East Midlands.

Such findings, if accurate, should have been the headline of the story.

They could point to a fantastic series of energy efficiency policy measures. Encourage people in the East Midlands behave differently. Don’t build homes like they do in the East Midlands. Don’t have an energy pricing policy like they do in the East Midlands.

But no, little was made of these oddities.

This potential PR miss was in happy hindsight very fortunate for ONS. We now know there was a methodological error and the work was updated in February 2014.

Of course there was a methodological error.

Had it not occurred to check a few basics here? Didn’t the statistics clang the alarm bell?

For example, I had a quick peek at the average SAP ratings for the supposedly top 10 most-energy-gobbling boroughs in the research. They were pretty average, so it didn’t appear to be housing stock issue.

Were we looking at high-rolling, sauna-loving, window-opening, sun-bed fetishists in Rutland having high-energy parties on a regular basis?

ONS energy 2Well actually, no. (The bottom graph shows the corrected outputs posted here)

It turns out the most lavish users were in South Bucks and a list of other very wealthy boroughs.

Ah, now that makes a bit more sense.

There are in my view other problems with the research which I’ll not bore you with, such as the choice of datum points on a timeline.

The lesson I would draw here is that not having a nose for obviously weird findings and not questioning outliers can be dangerous. It should be instinctive, along with not implying accuracy that isn’t there.

My aim is not to crow, nor to pillory the researcher. Hell’s teeth we all make mistakes (Professors Reinhart and Rogoff and their excel cock up come to mind) and there are plenty I would prefer to forget.

What bothers me now and bothered me then was why no one else looking at the study appears to have been curious enough to question such bizarre findings.

For the record the overall decrease in average household energy consumption in England and Wales was revised down to 22.3%. And I am still suspicious.

It seems, at first glance, to be at significant variance with the 17% drop in average energy used per household between 2002 and 2012 quoted in the recent ONS report on household energy spending in the UK.

And as for the explanations for the drop provided in the earlier study, the less said the better.

This was not the finest hour for the ONS, which in many ways I hold in high regard.

Taking the housing debate in an uncomfortable direction – that’s nearly always a good thing

Brian Green

What two issues in the housing debate do you think deserve more attention than they get?

My pick would be growing inequality and poor distribution of owner-occupied housing.

There are good reasons why these two linked topics are lower down the problems-to-be-solved list than they should be. The precise effects of increasing inequality and increasingly inefficient distribution of living space are hard to nail. Worst still most of the obvious solutions to them fall into the complex, potentially uncomfortable or politically explosive categories.

So they don’t get much airtime. Good research into them tends to be scant and poorly funded. And as a focus for policy they fail to break through the cosy consensuses that have formed around the well-rehearsed arguments that all housing’s problems would be solved if we had a better planning regime, or less regulation, or more institutional funding, or (not just from the left these days) more state-funded housing.

It is hugely frustrating. Personally I suspect – and I take this view from the numbers – that growing inequality and an ever inefficient distribution of housing are in fact major problems not just in their effects on housing people, but also in thwarting the house building and regeneration needed to better house Britons. If so they should be far higher up the housing agenda.

For me this makes the release of Danny Dorling’s latest book, All that is Solid: The Great Housing Disaster, very important.

The twin themes of growing inequality and poor distribution of housing are central to the book. And, as a professor in geography at Oxford University, it is to be hoped that Dorling can promote a wider exploration of these issues and push them up the agenda.

The problems we face with housing in the UK are grave and we need to be exploring all possible causes with open minds.

Certainly the book has prompted interest. It has received many column inches and plenty of TV and radio airtime.

That’s fantastic.

However, perhaps I expected too much, perhaps I tried too hard to combat confirmation bias, perhaps I missed something. But I was disappointed.

I’ll not go into his argument. Jules Birch in his Inside Edge blog provides a good summary as well as very worthwhile comments. I will instead focus on my reservations, the first of which I think has been noted quite widely.

It’s hard not to suspect the book was rushed. There are silly factual errors, it’s overly repetitive, the chapter headings seem a bit arbitrary and, I thought, there was a heavy reliance on the Guardian and Independent as sources, which seemed a bit weak.

However, he does pretty much nail the inefficient distribution issue at an aggregate level. That’s good because it’s very much overlooked even by many who should know better.

But nailing inefficiencies in housing distribution isn’t that tricky. The data are there and, perhaps ironically given Dorling’s political positioning, the numbers on at least one aspect of under-occupancy are catching the attention of investors and private sector house builders.

The Home Builders Federation recently commissioned Demos to produce a report on the under-occupation of homes owned by the elderly. They see it as an important issue. They also see that it represents a massive market opportunity – £400 billion of tied-up equity among over 60s interested in downsizing. Similar work has been done by Neal Hudson at Savills, highlights of which were published in the Housing Market Intelligence 2013 report. (Here’s a round up of some of the thinking)

As for nailing the link between our current housing crisis and greater inequality, maybe I missed something, but Dorling doesn’t seem to do it. It is asserted rather than proved in my view.

In the broadest sense it’s obvious that greater inequality will have some effect on housing.

While it may sit outside the world view of various TV housing commentators, it is axiomatic that those that are “too poor” can’t buy a home and if more people become “too poor” fewer people can buy homes. (Can I just qualify that? Unless, of course, you create something like a sub-prime mortgage)

But what are the actual effects and what are the processes?

Providing convincing evidence and producing a model that illustrates how changes in inequality act within what is a highly complex system is extremely hard. I know. I’ve spent too many hours bothering the numbers.

Perhaps this is partly why I was disappointed. I hoped for more to help satisfy my curiosity on the effects of inequality.

But this aside, what concerned me mostly was that Dorling appears to be addressing an audience that I suspect is already conditioned to accept his view.

It would have pleased me more if he had pushed harder to engage an audience of Daily Mail and Daily Telegraph readers as much as those with a preference for the Guardian or the Daily Mirror.

Naturally the 10-point plan he presents may make a fair slice of the wealthier and more propertied classes choke over their breakfasts. But all proposed solutions should be up for discussion, without favour. And while I might quibble over some, I’m certainly in the land-value-tax camp along with the late Sir Winston Churchill and the Institute of Fiscal Studies.

The sad truth is, though, if increasing inequality is the underlying problem, even these measure, indigestible as they may seem to some, would be just 10 sticking plasters trying to hold together ever-widening gashes in the flesh of Britain’s housing system.

If, as he suggests in his book, inequality and the resultant poor distribution of living space are damaging the housing and social fabric of Britain, ultimately they disadvantage most if not all of us.

So the mission must be to increase awareness and broaden the consensus that something must be done. That, in my view, means making a convincing argument that will be heard across the political and social spectrum.

But for all my complaints, which I am sure are borne as much as anything from frustration, I hope that a wide audience does read this book.

Whatever one’s political leanings we need to do more to solve the housing crisis. Ignoring potential problems, however unpalatable they may seem to some, will not result in a lasting solution, unless we are very lucky.

Is 2014 the year when house building takes off?

Brian Green

There are some interesting readings to be taken from the latest house building statistics for England.

Starts eased slightly in the fourth quarter, but are still consistent with growth and last year saw 23% more than in 2012 and 10% more than in 2011.

Completions look to be perking up, despite remaining at a sadly low level. That said across the year they were 5% down on a year ago and 3% down on 2011.

We’ll look into these in a bit more detail later.

HousebuildingBut for now given a quick look the statistics support the widely held view that the number of homes being built is on the rise.

It’s always a comfort when stats do that.

What is not a comfort is misuse of statistics by politicians, intentionally or otherwise.

Try as I may I can’t make these latest stats fit with the statement made by the communities secretary Eric Pickles:

“Last year we built the most homes since 2007, and even the appalling weather conditions this winter have not stopped our hardy builders from getting the job done.”

Were I living on the Somerset Levels – not a hotspot for house building – I might take a different view of this statement. I might wonder why, if the weather was so appalling in the final quarter of last year to deserve comment, the Government has only so recently taken notice.

But I don’t. My concern is more with normal use of language and statistics.

Homes built are those completed, unless my grammar and understanding of the past tense have completely failed me. More to the point, that is what any normal person would think Mr Pickles means.

If it is, he’s wrong, assuming the statistics he’s talking about are right.

If he misunderstands the difference between housing starts and housing completions he should be politely informed.

The statistics say 109,480 homes were built in England in 2013. 115,350 were built in 2012. That is a fall in the number of homes built.

For our amusement, what happens if we reverse his political spin?

In no full calendar year under the previous Government were housing completions in England lower than in 2013.

Furthermore, excluding 2010, in no calendar year since 1946 have fewer homes been built in England as were built in 2013 (live tables 244). In 2010 when 107,000 were built the significant fall occurred after the Coalition took power (live tables 222).

Oddly, there are positives in the statistics without resorting to abusing of them.

So what do they appear to be telling us?

Private HousebuildingFirstly, the surge in starts is encouraging. Private housing starts we up 23%, but let’s not forget they rose 29% in 2010.

It is well worth noting that the headline figure for starts can suggest faster underlying growth because can be is influenced by builders playing catch up and trying to restock their flow of work in progress.

So a slight slowdown in starts in the final quarter isn’t a surprise and should not be read as a slowdown in the market or the level of construction.

Perhaps less spectacular but more comforting is that 6% more homes were completed in the second half than the first half of 2013. This kind of growth rate, admittedly from a low base, is welcome.

Given the growth in starts next year we hopefully will see the annual output of the private sector topping completions of 100,000 in England this year, for the first time since the autumn of 2009. That is certainly consistent with what some of the forecasters are suggesting.

The 100,000 by the way is two thirds the peak level. So there’s a long way to go to restore the level of delivery of homes in England.

But purely from a numbers point of view there is a positive story in the figures, albeit a story that says (looking at the graphs) we are starting to see positive signs of growth in house building numbers after four years of flatlining.

It definitely looks like housing completions should really take off this year. But the ground to be made up remains huge.

We should also remember that with policy levers as powerful as the first phase of Help to Buy, you really would expect some market response. This leaves us again wondering about long-term sustainability.

For now though, things are looking very promising indeed for house builders and the construction firms they employ.

 

 

Women lead the charge as construction employment rises

Brian Green

Employment in construction grew in the final months of last year 2.6% relative to the same period a year earlier, according to the latest ONS data, providing further evidence of an expanding industry.

The figures suggest there were about 56,000 more people working in construction at the end of last year than at the end of the year before.

Employment

As we can see from the top graph there is a slight rise in employment that corresponds to a rise in work done.

But below this overall figure lies a few interesting nuggets.

For instance the growth over this period came more from women (31,000) than from men (24,000), despite the fact that about women account for less than 14% of those employed.

You don’t want to read too much into this, but it does suggest some of the roles in construction where women tend to be more prevalent may be being restored – we might for instance look to sales, marketing or administrative functions.

Certainly roles such as these would have taken a beating as the recession bit and it’s worth noting that proportionately women took a much bigger hit than men in terms of job losses through the recession.

It’s only supposition, the data do not allow us to see exactly what roles are being created, but if firms are rebuilding their administrative and marketing teams, this is a healthy sign. It indicates that firms are more confident in the future and are rebuilding the infrastructure of their businesses with a view to growth.

The fact that the increase in the number of women came from growth in employee jobs not self-employed roles lends some support to the supposition that the increase in employment of women is within white collar rather than blue collar jobs. It was direct employment where the cuts were deepest for women.

The number of women in construction is still more than 20% down from peak against a bit more than 13% for men, so I wouldn’t read the faster increase in growth of women in the industry as a sign of times changing. Not yet at least.

Another nugget is that the data showing a continued rise of self-employment. Self-employment rose 5.8% compared with 0.7% for direct employees. There are now more self-employed in construction than at the peak. And as the second graph shows the gap between the number of self-employed and directly-employed is shrinking. More than 45% of men in the industry are self-employed.

A third nugget is that the overall “army” of construction workers which include those that are unemployed has risen for the first time since the recession. This can be seen in the third graph. What is encouraging is that the growth came despite a fall in unemployment. The number of unemployed former construction folk is down to the lowest level since mid 2008.

While this is good news for the people concerned, it is unsettling for the industry as a whole in that it highlights again the desperate need to train.

Meanwhile for those who are looking at the top graph and seeing increased productivity, it is worth noting that the figures at this level might be misleading. Each sub-sector of construction has a different labour usage, so changes in workload mix impact on the demand for labour as well as growth.

It’s worth noting that one sector that came out of the recession larger rather than smaller was infrastructure, which tends to employ far fewer people for a given amount of output.

Looked at overall, the figures are positive, encouraging even, but far from spectacular.

 

 

How less work led to more growth – lessons in statistics from the latest construction data

Brian Green

Here’s a prime example of why it’s important to use a range of measures and timeframes rather than one single stat when using statistics as a tool to examine or describe whatever you’re interested in.

The headline figures from the latest construction statistics say that construction grew in the final quarter of 2013 by 0.2%. This compares with the earlier estimated 0.3% fall released when the first estimate of GDP was published late last month.

Looking simply at this changed figure the immediate interpretation is “Brilliant the industry is doing better than we thought!!!”

Well actually, here’s the thing. It isn’t.

It was less work than expected that made construction grow more than expected in the final quarter.

Trust me this isn’t some conjuring trick and it’s not too hard to follow.

Using the data from the GDP figures last month I produced a graph (the top one of the two below, the second uses the latest construction output data from the ONS) making an estimate for the missing December figure for construction output. I estimated £9,577 million (using data from Table 2a: Chained volume measure of construction output in Great Britain: 2010 prices, seasonally adjusted).

Construction outputWith the graph to illustrate my case, I wrote a blog saying construction was still growing despite the estimated fall in the final quarter. My first point was that the figures would be revised and I provided a soft hint that it would likely be up – although making plain that it could have been down.

I’m not a clairvoyant. Revisions happen all the time and you can get a hint of how things might change. Though sometimes (well quite often really) you’ll be wrong.

What’s fascinating (and it amused me) is that the newly published table 2a shows a figure of £9,576 million for December. If I’d put a spread bet on my initial guesstimate of £9,577 million what would I be raking in now?

The point is that with the same figure for December we have ended up with two different stories: one of decline taking the data at the time of the GDP estimate; one of growth from the latest construction output data.

The irony here, as I said earlier, is that the upward revision for 2013 Q4 from a fall to growth comes as a result of less work having been done than we thought (about £550 million) in earlier months.

So we get what may seem paradoxical, less actual work than previously estimated leading to the headline number of stronger growth in the final quarter.

This is why we need to look beyond the simple headline measure and take a longer view of the statistics when interpreting the numbers.

Look at the two graphs. How much real difference is there? Little. But the narratives that might be created from making poor selections from the data that feed these two graphs could be radically different – one saying growth the other saying decline.

This would not be the fault of the statistics. It would simply be poor narration.

What brick and block shortage? What house-building boom?

Brian Green

House building is enjoying its fastest growth for a decade or more and this is leading to shortages in the supply chain that threaten growth. That at least has become a widely accepted narrative that in many ways is characterising the current state of the construction industry.

But is this really the case?

The latest release by the business department BIS of the Monthly Bulletin of Building Materials and Components prompted me to scrutinise the data and various comments and question whether those two interlinked notions accurately reflect what’s really happening.

Certainly, you can find plenty of survey evidence and comment that seems to support the narrative.

Turn to the Markit/CIPS survey of construction firms and the message is clear.

In its last release of the UK Construction PMI David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said: “Housing activity growth was the highest in a decade and remains the fastest improving area of construction.”

Meanwhile Tim Moore, Senior Economist at Markit and author of the Markit/CIPS Construction PMI, said: “While input cost inflation eased in January, there were again signs that some suppliers are struggling to adjust to greater demand for construction materials.

“Vendor lead-times were lengthening even before the surge in construction output began last year, and now firms are reporting that cutbacks to capacity have caused supply bottlenecks as demand picks up across the sector.”

This seems to support the view of a boom in house building creating shortages in the supply chain. And we also find more support for this narrative in the latest RICS construction survey.

Within the 60 or so comments from surveyors recorded in the survey the word “shortage” pops up 10 times relating to both bricks and blocks and labour.

The release of this survey by the RICS and recent surveys from Markit/CIPS has fed into national news and trade press stories “revealing” that shortages of bricks, blocks and bricklayers are restraining growth in construction.

But my reading of the commentary written by the RICS economists suggests they are rather more circumspect on the subject of shortages than the media coverage might imply.

There’s good reason why the RICS economists would take a more circumspect view. They know full well that with surveys such as theirs or the Markit/CIPS there’s likely to be a range of statistical and cognitive biases at play.

That doesn’t mean the surveys are useless, far from it. They provide very useful indicators of change. But sound interpretation of the findings requires taking account of the broader context.

For instance, that 10 surveyors out of 60 or so mention shortages is important. But so is the fact that until recently they would have experienced extreme slack in the supply chain where the idea of shortages would have seemed ludicrous. This would be their reference point for filling in the survey.

It’s important to consider the base used as a benchmark for the responses and there’s a host of other factors that need to be considered if we are not to misinterpret the data from these kind of surveys.

Let’s look at other data sources that seek to measure actual amounts rather than observations made by respondents of perceived or even measured change.

DCLG starts etcThe first graph shows housing starts, completions and construction output up to September last year (note the starts and completions are for England only because data for other countries lags).

Sure there’s been a lift in housing output and starts have surged quite a bit. But looked at in the round there was equally fast if not faster growth in 2010. More importantly we see that the current level is still way off that seen before the recession.

The official data for starts and completions, however, don’t show what happened in the final months of 2013.

The output data, up to November, hint that the rate of growth was easing as the year headed to a close.

NHBC startsAnd we can get a suggestion of the direction of official housing starts from the NHBC starts figures. The graph shows monthly starts from 2009 to 2010 against 2012 to 2013. It’s clear that growth overall from 2009 to 2010 was greater than from 2012 to 2013.

But as the graph also shows the surge in starts in the mid-year period of 2013 was more pronounced than in 2010. That surge faded faster than in 2010. This is important to note.

From this limited review of the data it seems the measures of actual outputs don’t, in a straightforwardly way, support the claim of “the fastest growth for a decade”.

This doesn’t mean that in the round house builders are not doing far better than in 2010. Of course they are. And as far as we can see there’s a much brighter future. But in strict terms output seems to have been growing faster in 2010 than now.

Let’s now turn to the shortages of bricks and blocks.

bricks blocksTo keep the series fairly clean and try to avoid distortions caused by aggregation I picked facing bricks and aerated blocks. The two graphs show the production (green), the deliveries (red) and the balance (black).

Yes there was a hard suck on the supply chain in the middle of 2013, but the imbalance of demand over supply for both facing bricks and aerated blocks wasn’t that special.

What’s more I’m told that overall production of aerated blocks was affected by an unplanned shutdown of one of the plants which restrained the normal early spring surge in production.

Looking at this data and room manufactures seem to have to flex production, there is no clear sign that capacity will constrain growth. Not yet anyway.

We can take a different look at the data and the context within which the industry is operating and develop a very different narrative.

Yes house building is on the up, although still a long way from pre-recession levels. But the massive surge in activity we saw in the mid-year of 2013 was heightened by a number of factors and is an exaggeration of the underlying growth rate.

So starts in the final quarter of 2012 were lower than in 2011, which illustrates the cautious mood in the market at the time. 2013 started modestly if not slowly for house builders, with the weather also hampering progress.

Prompted by easier credit, house builders reset their aspirations and wound up production, also in part to catch up from the slow start.

But crucially, not only did they raise activity to meet demand, they also had to restock their production pipeline to be able meet a much higher level of future production.

This inevitably created a surge in activity well above the growth in demand. This seems to have caught the suppliers, and most others, by surprise.

Meanwhile it seems manufacturers had, I am told, let their stocks dwindle. The data supports this view. Given the record of demand in recent years that seems a sensible policy. It seems they had relatively low expectations for 2013 and geared up accordingly. So when the surge hit they were not as prepared as they might have been.

In the case of aerated blocks, the loss of a plant made things worse.

Given this situation it is not surprising that there were shortages. Particularly as there will inevitably have been a degree of panic buying.

But it’s important to assess how this will have been perceived. Buyers will have adjusted their behaviour to fit a very slack supply chain. So it will have been a shock to find they couldn’t get what they wanted when they wanted it.

Hence the reaction and fears over shortages.

But the data, such as it is, doesn’t seem to support the notion of real shortages, other than those associated with a blip in demand. Yes imports have gone up, but they are still well below the level seen before the recession. Indeed they seem to be proportionate to the number of homes being built.

And by the end of the year we see production was outstripping deliveries.

It’s worth noting what the manufacturers themselves say. This is a comment from Noble Francis, economics director at the Construction Products Association, on the latest trade survey: “Importantly, manufacturers reported that, overall, capacity is not a significant issue and is unlikely to be during 2014 despite an expected rise in demand.”

The danger of overstating the problems of constraints in the supply chain is that we lower our sights. We need to build many more homes than we are.

Here’s a different take. Now I could well be totally wide of the mark, but…

We need to see house building continuing to expand at the rate it did in 2013, if not faster. I fear that its growth rate will ease as demand from the traditional private sector homeowner, which represents the bulk of new homes delivered, reaches a plateau.

This is the point at which the Government should consider how homes can be built outside and beyond the traditional private sector model in large numbers. It’s worth noting that output from the private sector in the UK has averaged less than 170,000 homes a year over the past 50 years.

If house building expands I do not see that the materials supply industry would not respond. Yes, imports may rise in the short term – that is the nature of things. But the supply will be there. And if there is a reasonable certainty over demand we may even see serious delivery through off-site manufacture.

The real focus for policy makers on constraints, opportunities, potential failures, crises, boon, however you want to see it, should lie elsewhere.

The attention of the construction narrative must shift firmly towards its people.

If the Government is serious about delivering more homes. If the Government is serious about moderating immigration. If the Government is serious about giving opportunities to our youth. Well if it is serious at all. It must embark on training a new generation of skilled construction workers.

More on that later…

 
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