Figuring out trends in housing, construction and property

Best estimate? Really? Evaluating the Help-to-Buy Equity Loan Scheme evaluation

Brian Green

The Government this week released a report evaluating the Help-to-Buy Equity Loan Scheme. It said that the best estimate showed 43% of the new homes funded by the H2B Equity Loan Scheme were additional and this additional boost amounts to 14% of total new-build output.

That surprised a lot of people.

So I thought I’d better have a look at how this “best estimate” was generated.

I’ll say now it left me with a few questions and not a little concern.

So how did the researchers come get to 43%? The brief answer is that they quizzed people who bought homes through the H2B scheme and derived the figures from the answers.

The report’s objective seemed to be estimating the level of additionality produced by the policy intervention.

Interestingly, at the outset, they make the sensible point: “There are inherent challenges in making an assessment of additionality, the introduction of the policy in April 2013 means it is not possible to establish any meaningful counterfactual and disentangling the effects of the policy from other related policy initiatives add further complication.”

Then they go on to seek a best estimate. I’ll not try to unravel the whole process. I’ll just look at a little bit, but an important bit.

They selected three questions taken from their questionnaire to derive the 43% figure. These were:

Q18a – I would have been able to buy a property I wanted anyway without this assistance.

Q19a – do you think you would have been able to buy this same property without the assistance of the Help to Buy Equity Loan scheme or not?

Q19b – and do you think you would have been able to buy a similar property that was NOT new build and being sold by its owner. By similar I mean in terms of type, size and location?

For question 18a the interviewees could answer: Strongly agree; Tend to agree; Neither agree nor disagree; Tend to disagree; Strongly disagree; or Don’t know.

For question 19a and 19b the interviewees could answer: Yes – Definitely; Yes – Probably; No – Probably not; No – Definitely not; or Don’t know.

For “additionality” the respondents had to not agree with Q18a and not answer yes to Q19a or Q19b.

At first sight that might seem ok, if you trust the answers given.

That is until you look at the footnotes. You notice that the “disagree” portion from Q18a appears to include everyone who said “neither agree nor disagree”, “tend to disagree”, “strongly disagree” and “don’t know”. And the “no” portion for Q19a and Q19b includes “don’t know” responses. Unless, of course, I’m misreading the footnotes.

Without the fine data it’s hard to know exactly how the number giving negative responses to all three questions (215 out of the total 501 sample) would have shrunk if we took out the “don’t know “or “neither agree nor disagree” responses.

The two points to note here are: firstly; that the more negatives there are the bigger the additionality; and, secondly, surely you should exclude “don’t know” and “neither agree nor disagree” responses in these results?

I’m puzzled as to why they would be included. But what unsettles me more is the lack of critical examination of the likely behaviour of the respondents. How would you expect people to respond to these questions?

Firstly, all those interviewed were aware that they were taking part in a survey about the H2B Equity Loan Scheme and, having benefited from it, we might reasonably assume they view it favourably and will, in a sense, feel indebted to it. This will surely shade their responses.

Cognitive bias will be at play, if only because we are asking people to compare what actually happened with a counterfactual that is for many, if not all, unknowable or unexamined.

Think how many times people have said to you: “I couldn’t have done it without your help.” Think how many time you have known full well they would have found an alternative way, if push came to shove.

For the respondents H2B was part of what got them the home they wanted. It is hard to know whether they would or could have taken a different route and bought the home they ended up with (for example, the “Bank of Mum and Dad”) or bought a smaller place or bought somewhere else, if the scheme wasn’t available. They did not need to look elsewhere for alternatives, as those before H2B might have done, so the likelihood is that alternative options were not examined, explored or experienced.

In these circumstances what does “I tend to disagree” or “probably no”, let alone “neither agree nor disagree” really mean?

Personally, I’d be uncomfortable about taking any response less categorical than “strongly disagree” or “definitely no” as a sufficiently strong negative response to the question of whether they would have bought a new home without H2B. And I’m purposely avoiding getting into speculation about what incentives house builders would have provided in the absence of H2B. There would have been other incentives.

So, if we were to take out the “probably no”, “tend to disagree”, “neither agree nor disagree” and “don’t know” responses, what would be left? Far less than 215 out of 501 (43%) I wager.

I sense you could be getting bored here. So I’ll cut it short. I could go on. For instance, I might suggest the use of Land Registry data for factoring the proportion of new-build homes bought with H2B is questionable and makes the additionality provided by H2B look more impressive than if we used potentially more realistic alternative data.

I’m not suggesting that the researchers deliberately set out to stretch the numbers and there may be something in the analysis that I’m missing, but I feel far from comfortable with the best estimate provided.

So when you hear in future the 43% of homes bought with H2B Equity Loan Scheme were additional and that this boosted new-home output by 14%, it may be worth being a little sceptical. Well, a lot sceptical.

Trying to make sense of how construction performed in 2015. It’s not that easy

Brian Green

Interpreting the construction output figures has become a herculean task for analysts of late.

It’s tough to interpret any construction data at the best of times. Construction work is lumpy, heterogeneous, blurred in definition and geographically dispersed.

But making sense of the Office for National Statistics year-end construction output figures has left me stumped.

It’s no secret that the output series has proved a headache for the ONS. The series has been stripped of its National Statistics status and the interim review of the UK statistics by Professor Sir Charles Bean (pdf) released late last year wagged a stern finger at the construction output data.

Intense work is underway to improve the series. But issues remain, not least the effect of a spate of quite significant revisions and how some of the revisions might be incorporated into the back data. We are left wondering how close to its current levels will the time series be when everything has settled.

There are three particular issues, I think worth mentioning, that are hard to factor in. Firstly there has been a problem with the way price changes are factored in to provide a “like-for-like” measure of activity. This has led to uncertainty over whether adjusted data properly reflects the volume.

Secondly, there is a rather odd problem with the seasonal adjustment process that has created a large gap between the seasonal adjusted (table 2a) volume data and the non-seasonally adjusted (table 2b). This leaves doubts over where the problems lie and which table better reflects the actual path of construction.

The third problem is what I regard as a structural break (see previous blog for detail). This was caused, as I understand it, by the inclusion of a new large company into the sample. The effect was, from March 2015 onward, to add about £2 billion or more (my estimate) annually to output. This has had a profound impact particularly on the infrastructure series.

Trying to read the underlying trends through these quirks in the data makes for much less confident interpretation.

Sod it, let’s have a go anyway.

So when we say that construction output increased 3.4% in 2015, as the data on the page suggests, there is no way we can be confident. In fact it seems that this may well be a long way from what actually happened.

Taking out the effects of adding in a new company would leave output looking pretty flat across the year, with new work rising and repair and maintenance falling.

But other data from other sources suggest that activity has been rising. And there are plenty of folk in construction or prepared to talk about construction that are rather bullish. There are many who think construction is on a roll. You’ll, also, hear lots of people completely pooh-poohing the output data.

Still, we can probably be pretty confident that new work is performing better than repair and maintenance, because that tends to happen when the industry perks up from recession. That’s good news. It should also mean the industry is increasing its productivity.

If we are looking for other official data that might give us a better clue of construction activity we might turn to the numbers employed. Well, both the jobs measure and employment measure put the number employed in the third quarter of 2015 at about the same as a year earlier – about 2.2 million. No great growth in employment and the average hours worked seems to be about the same as a year ago.

So, if our gut feel is right and there is more new work in the mix, this most likely means there has been a bit of a rise in productivity. This in turn suggests, on the basis of stable employment, that there has been a rise in activity within construction over the year. It doesn’t however suggest a huge rise. (I am here missing out huge complications in how productivity might be determined, I know, but let’s keep it simple.)

Anyway, the more you look at the figures from different angles, the more sense you get of a flattening out of the recovery with perhaps a bit of a dip at the end to the year. Nothing to get freaked out about, but likewise nothing to make you feel the industry is on that much of a roll.

Put it this way, if I were at the helm of a Government that proclaimed itself to be “the builders”, I’d be keeping a close eye on this data. It is very hard to interpret and it may be telling us things that we are missing.

Two things are certain in my mind. One: construction needs a period of healing after a ravaging recession. Two: if the future the construction sector is in doubt, then this risks damaging future improvements to UK productivity.

I’d put construction on the watch list, George. I certainly wouldn’t take it for granted.

In search of the meaning of “direct commissioning”

Brian Green

The phrase directly commission has been repeated without explanation in numerous news stories following the announcement of yet another Government initiative to push up house building. I wasn’t sure what it meant, though I could speculate.

For the first five years after the crash I was eager (see early blogs here and here) for Government, Labour and Coalition, to act as a developer of last resort to maintain house-building numbers and preserve building jobs and a supply chain that would be much needed in the future. This would have been direct commissioning, whether to rent, sale, rent-to-buy or whatever.

It was needed then. The suggestion was ignored. As well as an ever deepening housing crisis, we now have a skills crisis and a stretched materials supply chain. Supply of “men and materials” has heavily relied on imports. Ironic for a Government simultaneously proclaiming “we will limit immigration” and “we are the builders”.

I’ll put to one side my frustration and irony over its entry into the policy mix after its potential usefulness has waned. What particularly nagged at me was what “direct commissioning” actually meant. Would the Conservative Party really engage in a process it pretty much sought to kill off almost 40 years ago as it wound down public sector house building?

I asked a few well-informed housing market watchers what they thought “direct commissioning” meant. They seemed as confounded as me. I tweeted the question. A few retweets. No answers though.

I googled “commission definition”. I couldn’t find my handy Chambers. Under verb were:

  1. order or authorize the production of (something). “the portrait was commissioned by his widow in 1792” synonyms: order, put in an order for, place an order for, contract for, pay for
  2. bring (something newly produced) into working condition. “we had a few hiccups getting the heating equipment commissioned”

My reading was that the first definition suggested the Government would get a contractor to deliver its wishes. In this case to build homes. The second suggested Government would be responsible for twiddling knobs to make sure things work – so ignore that.

Armed with refreshed insight that seemed to back up my initial understanding, I was more eager to nail down what the Government actually meant? If I was unclear, so would others be.

I rang up the press office. I expected the answers to most of my basic questions to be on a briefing note.

My thinking was that if the Government is commissioning, firstly it is taking an element of the risk and this should reflect in the likely profit margin, but how? Secondly, it must have a say over what is built, but how much? These seemed important issues so they must have been thought through if it was a plan.

My assumption that the answers would be ready at hand at the DCLG press office was a mistake. I did learn that the Government was to commission builders on public sector land to build homes and the builders (the press officer was a bit uncertain here) would be responsible for selling them.

Not much, and it obviously opens up a raft of secondary questions. I was asked to email them in. I quickly knocked out a rudimentary email to cover a few of the basic points. They read:

“My understanding from our conversation was:

That the Government will commission builders on public sector land to build homes.

That the builder will be responsible for selling the homes.

This naturally raises subsidiary questions. The most pertinent are:

  • Who is responsible for the design of the homes? What constraints are there on builders if it is their responsibility?
  • Who sets the price? What constraints are there on builders if it is their responsibility?
  • How much margin and what incentives are there for builders to maximise the price if they set it?
  • What happens if a home does not sell? Who bears what element of the risk?
  • How will the Government ensure fair competition within the commissioning process?”

It took a while and a reminder email to get a reply. But…

Broadly the answers were:

  • The builder would be responsible for design within parameters set by Government.
  • Details relating to pricing would be released in due course, these would be commercial arrangements.
  • Details on margins and incentives would be released in due course. But they would be subject to a competitive procurement process.
  • Details on risk would be released in due course.
  • Competition would be ensured through existing procurement procedures.

It seems to me that without answers to these questions, to say this is “direct commissioning” is stretching a definition if not simply wishful thinking.

Surely on the face of it, this is a simple process of flogging off small plots of building land with planning permissions in place that inevitably come with strings attached in terms of design and social value. How radical is that?

At worst it is potentially a further example of socialising risk, with the taxpayer taking the gamble, and privatising profit, with the builder taking a healthy profit come hell or high water.

Which it is as yet is unclear.

Furthermore, the Government press release says: “This will lead to quality homes built at a faster rate with smaller building firms – currently unable to take on big projects – able to get building on government sites where planning permission is already in place.”

Will it?

This is by no means certain, not on the basis of what we know now.

However, my concern is not whether the idea of selling on small plots with limited risk to builders is a good or a bad idea. I can see merit in it.

My concern is its half-baked nature, still an unformed idea not a plan. It is certainly not radical from what we know.

It is yet another example in a catalogue of ideas pumped out with such rapidity that it is impossible to understand anymore what actually is the housing strategy, what is working and what is not.

It is yet another example of double-speak in the style of the New Homes Bonus. It is not strictly linked to new homes and not actually a bonus, more a carrot-and-stick reallocation of funds based on a change in the level of housing stock that sees money sucked south, as predicted before its introduction.

Perhaps I’m jaundiced. Since the shock drop of the recession we have been peppered with endless radical, game-changing, ground-breaking, unashamedly ambitious policy seemingly dreamt up in the wee hours by some aspiring SpAd. Meanwhile the rise in housebuilding numbers since the shock drop of the recession has been exceptionally slow. Are the two correlated?

Meanwhile the housing crisis gets worse.

Is George’s housing prescription simply a marvelous medicine to boost home ownership?

Brian Green

Much excitement ahead of the Autumn Statement focused on how the Chancellor planned to tackle the housing crisis?

Quite right. Housing has been steadily rising up the premier league of political concerns.

Almost everyone agrees there’s a crisis. But turn your head this way or that and you’ll find a lobby group, angry mob, or a concerned person defining the housing crisis differently.

So what is the housing crisis exactly?

Is it:

  • Homelessness?
  • Awful housing conditions for too many?
  • Poorly allocated housing (under occupancy and overcrowding both rising)?
  • Too many hardworking families unable to afford a decent home?
  • Polarisation in access to housing threatening social mobility and social cohesion?
  • Home ownership falling?
  • Ever more people locked out of home ownership?
  • Disruptive intergenerational housing inequalities?
  • Not enough homes being built?
  • Too few people to build houses?
  • Planning blocking necessary house building?
  • Ludicrously high house prices?
  • Mortgage debt threating the nation’s financial stability?
  • A housing market that restricts labour mobility?

The list could go on. You could certainly add immigration into the mix.

But why bother asking what exactly it is, if we all agree there’s a housing crisis?

Because it’s too easy to bundle all the problems together and conflate them into the single notion of a “housing crisis”. Too often the solution is reduced to a simple single particular remedy – the silver bullet – normally weighted to fix the particular aspect of the crisis most pressing in the mind of whoever suggests the remedy.

So we regularly hear that the solution to the housing crisis is to: relax planning, build on the green belt, provide mortgage guarantees, subsidise first-time-buyer deposits, scrap stamp duty, levy a land value tax, build more council houses, tax the rich and so on.

In reality selecting an appropriate policy prescription to solve these interconnected but equally distinct problems is tough. Some policies may improve some problems but make others worse. Furthermore short-term fixes may have nasty long-term effects. Equally long-term fixes might have nasty short-term effects.

It’s all a bit complicated. (Useful reading from Michael Edwards)

One thing we know. Over the past 10 to 15 years, as housing has steadily crept up the political agenda, we’ve seen many strategies, a host of policies and witnessed huge sums of public cash invested in supposed solutions. Each strategy comes with implicit or explicit promises of fixes to the crisis. The phrase “radical and unashamedly ambitious” from 2011 springs to mind.

Judged against almost any measure on the list above, these have failed. If only on the grounds that more people now seem to accept we have a housing crisis.

To date most policy has tended to frame the housing crisis broadly in terms of a lack of supply of housing, with various broad targets in mind, all far greater than we currently build.

So it is interesting to see the Chancellor choosing to express the crisis differently. In his eyes the crisis is one of home ownership.

Does this matter?

Well, yes, because it will shape the choice of policies prescribed to tackle the housing crisis.

Naturally, house building (and the supply of housing) remains very important. But in a political sense it becomes secondary to home ownership – a means to an end. Though, it must be said, championing house building also has the political by-product of providing photo opportunities to wear hi-viz jackets and talk about being a “builder”. And the Chancellor must be acutely aware of the risk of being politically skinned alive if by 2020 the nation is still delivering far fewer homes a year than before the recession.

The primacy of home ownership has been evident since the election, but in his Autumn Statement speech he spelled it out very clearly: “Above all, we choose to build the homes that people can buy. For there is a growing crisis of home ownership in our country.”

This is very different to saying we must build homes because we need more homes to live in.

Later he added: “Frankly, people buying a home to let should not be squeezing out families who can’t afford a home to buy.” This underpinned his case for raising stamp duty for buy-to-let homes.

The overt shift that placed home ownership central has come with a Conservative majority able to form a government on its own. Interestingly, whether in response or independently, the opposition appears also to be placing greater emphasis on home ownership, with shadow minister for housing, John Healey, commissioning Taylor Wimpey chief executive Pete Redfern to produce a report on the decline.

Certainly driving ownership was key to the Chancellor’s July Budget when he chose to restrict tax relief for buy-to-let landlords.

Clearly he is prepared to hit those who might be considered within his natural electoral base – buy-to-let and second-home owners. They may feel betrayed, as in their eyes, especially those who buy new-build homes, they are providing a service (rented homes) and (for those who are new-build investors) helping to fund the building of new homes.

Meanwhile looked at from a purely house-building perspective it could be argued that making buy-to-let investment less attractive will harm the viability of some housing developments, especially city-centre blocks of flats where investors buying off-plan help to reduce risk.

This suggests that the Chancellor is willing, when he sees reason, to put home ownership ahead of serving his expected electoral base and ahead of house building. So it is totally consistent with his position if he believes buy-to-let landlords are snapping up homes at the expense of home owners.

In reality, the political and construction impacts are probably more muted than they seem on the surface.

The Chancellor has made plain his desire to win a greater share of the “blue-collar vote” from Labour, so squeezing his natural electoral base to give more room for “strivers” with lower incomes is consistent with his broader long-term political plan. Furthermore when it comes to building for rent, the Chancellor will be looking to push institutional investors working at scale.

HA builds OBR 24 11 15Note too, from the Office for Budget Responsibility analysis (Graph 1), that the Chancellor is willing to slow the housing delivery from housing associations, at least in the short term, in his pursuit to boost home-ownership rates.

This illustrates the point that understanding what is defined as the “housing crisis” is vital to understanding the policy approach. It also shapes the challenge the Chancellor has set himself.

Whether you agree or disagree with the focus on ownership as the problem, there is a strong case for having a clear definition. It provides a focus for policy. But, then again, if you define the crisis so narrowly, there is a danger that other aspects of what falls within most people’s interpretation of the housing crisis are made worse.

Let’s however briefly examine the “crisis in home ownership” and what might be the effect and effectiveness of trying to solve this particular problem, asking four questions.

Firstly, what is the crisis of home ownership?

Fortunately for me, Neal Hudson at Savills produced a very useful note in July on this very topic.

But here are a few statistics and comments I might add that I think are important.

Estimating from the limited data available from the Survey of English Housing (SHE) and its successor the English Housing Survey (EHS) and with reference to CML’s research on first time buyers, the decline in home ownership appears to have begun just before or just after 1990. Yes, at a headline aggregate level the proportion of home owners continued to rise into the early 2000s, but the proportion of young home owners dropped dramatically. There are many and complex reasons for this, but the seeds of falling headline home-ownership rates were sown then.

The continued growth in the overall proportion of home ownership was propelled by generations of older mainly renters being displaced by the next generation who were more likely to be home owners. Growth in the overall home-ownership rate was also buoyed by successive waves of pensioners being more likely to own their homes and to live longer than their predecessors. And of course there was the Right to Buy.

Statistics from the SHE and EHS show that in 1977 46% of those aged over 75 owned their homes. Today the proportion is about 77%. In 1977 more than 58% of householders under 45 years old owned their homes, in 1988 the proportion was 68%. Today the proportion is below 45%. Graph 2 shows the change in home-owner numbers aged above and below  45 years old.

Home owners above and below 45Effectively a wave of home ownership passed through the system and is now crashing on the shores, leaving in its wake a trough of low levels of owner occupiers. It is this trough that has steadily dragged down home ownership rates over the past 10 years or so.

It is very important to note that the crisis of home ownership, if you see that as the housing crisis, started in the 1990s, not with the Great Recession.

If Osborne wishes to create a nation where owner occupation is the norm, it would be wise for him to examine what has eroded home ownership for the young in the years that followed the late 1980s boom. I suspect the answer is not simple. But noting the near simultaneous boom in house prices from the late 1970s across many nations might be a good place to start.

Secondly, what is the Chancellor’s aspiration, his target if you like?

I can’t seem to find a simple number or scale against which to judge his efforts. However I am once again indebted to a tweet from Neal Hudson of Savills. At a recent housing seminar hosted by Savills, Melanie Dawes, Permanent Secretary for DCLG, said her department was targeting 1 million new homes and 1 million new home owners by 2020.

This is ambiguous. But given that the number of first-time-buyer loans made in 2014 topped 300,000 we must assume these are extra. Certainly, if I were sat on the opposition benches, I’d be keen to quiz the Chancellor more on the detail of his targets for house building and home ownership and his reasoning for placing ownership central to his housing policy.

Thirdly, is the target achievable?

Because the target appears to be expressed as a number rather than a percentage, population growth will do some of the work.

In terms of the headline percentage figure for home ownership (the one that gets followed), the task appears harder. One force driving home ownership rates up has been ageing home owners displacing older non-home owners. This effect has pretty much run its course. The effect of falling numbers of younger home owners from the 1990s onwards will be feeding through into the upper age brackets and may well erode the currently high rate of home ownership among the retired.

Right to Buy and expanding shared ownership may assist Osborne in his ambitions, raising rates across the age profiles. But in general the flows into and out of home ownership are extremely hard to gauge with any accuracy. Given historically very low levels of ownership among the young, it does seem that declining home ownership at an aggregate level is baked into the data, as a generational trough in home ownership displaces older home owners, reversing the previous trend.

Fourthly, what might be the implications of pursuing a housing policy focused on home ownership?

This is a huge question. I’ll restrict myself to a few observations that may be worth noting.

On the value of high levels of home ownership there are things to be said either side. On the plus side, widening access can potentially distribute wealth and provide financial security for many. It can also incentivise community engagement. On the negative side, it can engender nymbism. It has been found to negatively correlate with labour mobility and the leverage effects can put some unlucky households at high financial risk with some ending up with negative equity. So, while home ownership has many benefits for individuals, society and the economy, it also has drawbacks.

With regard to pursuing a policy highly focused on home ownership, it seems to me very important to look at periods when home ownership has expanded. Naturally Osborne’s mind will gravitate to the Thatcher era. But that period merely built on a pre-existing surge in home ownership post War, which in many ways was built on the expansion of home ownership in the 1930s.

Notably, there is a big difference between those periods and now in that acceleration in home ownership occurred then when prices of houses and land were relatively much lower relative to incomes than they are today.

Many factors influence house prices. Housing supply, interest rates, access to finance, wealth effects delivered by rising or falling prices, regulatory constraints, economic cycles, population growth and migration and income distribution to mention but a few.

But a pertinent question to consider is how easy it is to accelerate home ownership rates when prices are high and what are the potential associated risks and benefits.

Before that it might also be worth considering the role home ownership itself may play in price growth.

International HPI BISGraph 3 compares Spain and the UK, where home ownership is high with Germany and Switzerland where home ownership is much lower. It is not meant to be presented as cast-iron proof, but the data strongly suggest that higher home ownership makes for faster rising prices. I selected Spain because here there can be no question about slackness in house building being the cause of rising prices. If anything over-building was an issue in the run up to the Spanish housing crash.

It certainly makes a strong case for asking whether increasing home ownership creates faster house price growth and then in turn acts as a break to new entrants. If this is so, policy prescriptions should be seen and adopted in this light.

In “normal” circumstances broadly four things mostly influence access to the housing market. So, relative to earnings and wealth: How expensive are homes? How much of a deposit is needed? How high are mortgage rates and can the payments be serviced? Also, how easy is it to get a mortgage?

Currently house prices are high and mortgage rates low. Servicing debt is not overly problematic, unless interest rates rise. But with high house prices saving for a deposit has become increasingly tricky.

So mainly to address this issue we have seen a fifth factor increasingly come into play. Can another person, the bank of mum and dad or the Government help fund access to home ownership?

This is where the government has been forced to look for solutions. The flagship scheme, Help to Buy, directly addresses this issue.

There are many reasons why you might wish to support a given market. And the housing market is critical to the nation’s welfare. But experience tells us when you mess with a market you risk messing it up. Furthermore, the longer you interfere to support a market the harder it is to withdraw that support. Other elements of the market adjust to create a new normal.

Interfering in a market has consequences. That’s the very reason to interfere. One concern with Help to Buy is its potential side effect of raising house prices by increasing demand. If it does this, in the long run its very purpose is undermined. In extreme circumstances and in the short term this may be acceptable if it is needed to kick start normal activity. The danger is it becomes a permanent feature.

Compressing all the above and seeking to draw conclusions my first thought is that the Chancellor will struggle to raise rates of home ownership.

To make any dent in the downward rate of home ownership, his policies will have to raise dramatically access by young people into the market. This process will be made harder by other factors discouraging rising home ownership. Historically high income inequality makes it harder to include those lower down the income scale, and harder still if house prices are running historically high. The flight of the increasingly debt-burdened young into cities where both demand and prices are high makes the job even tougher. Many may choose to delay entry into owner occupation.

More worrying to me is what might be the effects of force feeding first-time buyers, however politically and (in the short term) economically attractive that might seem. It would be folly to forget that the roots of the Great Recession are most often tracked back to sub-prime mortgages that sought to pump up home ownership among those on low incomes unable to sustain the cost.

While using state funding to pump up home ownership may be superficially very attractive to some, it looks also to be courting risk.

I can see there is a temptation for private house builders to lap it up with glee. The immediate impact on their share price rather suggests their investors see huge financial benefits. So who am I to challenge that view?

However, as mentioned at the outset, policies can have very pleasing short-term impacts, but carry nasty long-term effects. The analogy with drugs is hard to resist here.

There is a danger that the “drugs” Osborne will prescribe to boost performance will develop into a dependency. Worse, if taken over the long term they may well have other nasty side effects, making the underlying problems worse or creating new problems.

Ultimately, the best solution and at the root of the expansion in home ownership in the past was the relative cost of homes to incomes.

Yes, you can cheat the monthly burden of home buying with ultra-low interest rates, but we are there already. Will mortgage rates stay this low for decades? You can provide subsidies. But are potential home owners to be offered state aid indefinitely?

Ultimately, as with most essential goods, if you want more people to buy them you make them cheaper.

Over the long term, assuming we are not wedded to ultra-low interest rates for decades, if homes are to become more affordable they have to become cheaper relative to incomes. That will create a much firmer foundation on which to build rising home ownership – if that is what the nation really wants.

This suggests that the policies we need if we are serious about spreading home ownership across the population and more evenly through the generations are those that, over the long term, hold prices more stable and lower relative to incomes than they are today.

This was widely recognised five years ago, and was a view taken by the housing minister of the day, Grant Shapps. But it has been conveniently dropped. Why? Well, a quote from the much-lauded economist Keynes may offer some insight: In the long-term we’re all dead.

Perhaps to understand why the housing crisis is now being framed as a crisis of home ownership we should not seek answers in George Osborne’s long-term economic plan and pay more attention to his long-term political plan: Prime Minister?

He is frequently described as a political Chancellor. He’ll be well aware of the surveys finding that home owners are about twice as likely to vote Conservative as Labour.

The latest construction forecasts: room for optimism, a case for caution

Brian Green

For those trying to interpret the latest set of construction industry forecasts the task is probably tougher than usual.

The move by the Office for National statistics to reclassify a large firm from services to construction has created what amounts to a structural break in the underlying data, which is very noticeable in the infrastructure series.

This made the job of forecasting and creating straightforward narratives much harder than normal. Users should then pay much more attention than they might otherwise to the script in these forecasts when pulling out the data.

However, the underlying message seems clear. Optimism has been shaded down. Certainly the prospects for growth look slightly more modest than six months ago.

That said both Construction Products Association (CPA) and Experian see sound growth that in normal times would be seen as very promising. This is very evident in the graph. But the graph also shows strikingly that there remains a split between this view and that of Hewes, which sees a slump ahead after this year.

Autumn forecasts 2015This is to be expected as Hewes historically tends to factor in more of the downside risk. The gap, however, does help to illustrate the amount of fragility and uncertainty and the potential impact if potential downside risks are realised.

These risks (if we compare the gap between the Hewes view and that of the other two) would fall most heavily on big drivers in new build, private housing, commercial and infrastructure. These are, in the Experian and CPA forecasts, expected to deliver the lion’s share of growth between 2014 and 2017, accounting for more than £10 billion of the near £15 billion growth in output.

Leaving aside issues related to capacity constraints, it’s worth noting that growth in these sectors requires confidence from the private sector to fund the work. And while there is a clear appetite to invest, financial or political shocks can rapidly shift sentiment.

Furthermore, the private sector will take some cues from the Government. It will want to see commitment to the nation’s infrastructure. While the Government may have finally warmed to its role in providing greater capital spending to underpin productivity and growth, much of what it will actually deliver will depend on the political constraints it has set itself on austerity.

More may become clear after examining in detail the Autumn Statement this Wednesday. But it seems clear that the lack of wiggle room the Chancellor has left himself in his ambitions to deliver a balanced budget, places capital spending in jeopardy if sufficient savings can’t be found from current spending.

When we look to the future of construction growth, it’s easy to see the need and imagine the demand that could (should) flow to drive growth in construction. It’s easy to see the appetite within the financial world to provide the finance for the long-term assets that construction provides.

Ultimately, however, someone has to fund the work. They actually have to pay for it. This is the challenge. And to my great delight this was a point made a couple of weeks ago by Sir John Armitt at the launch of the Global Construction 2030.

There is without doubt huge potential for growth in construction. Encouragingly there is a greater recognition than for a long while in its value. This may increase the likelihood of growth and indeed strong growth. But it does not however make it a given.

Another two years or so, another construction strategy – oh dear

Brian Green

The headline and opening paragraph of the Building magazine e-newsletter that popped into my inbox this morning instantly topped up any post-sleep slump in my cynicism.

Government to launch new construction strategy

A new government construction strategy focused on improving client skills, tackling industry skills shortages and further adoption of BIM will be published within weeks, Building can reveal.

Oh dear, not again. My views on the last one can be read here.

The main relief in the story was the comment from Paul Morrell: “Above all, though, let’s have no more damn-fool targets which are there presumably just to catch the eye of politicians and the media.”

Unless I have been lied to persistently, the reaction to the previous strategy of 2013 (the Government and Industry Strategy) – which often, understandably, gets confused with the one before that (the Government Strategy) from the Cabinet Office in 2011 – was mixed. And that is being euphemistic.

We are steadily degrading the notion of a strategy. We appear to have created a production-line that spews out on a regular basis chart-filled, data-packed, analysis-light, infographic-heavy, platitude-splattered,cliché-riddled documents that might grace the table of a low-budget think tank, but are really not what the industry needs.

These “strategies”, as Morrell suggests in his quotes in the Building article, appear to feed the shallow desires of politicians and are mainly exercises in public relations.

As I see it, they muddle tactics and strategy and substitute “aspirations” for clear objectives.

Here, from the current strategy:

  • PEOPLE An industry that is known for its talented and diverse workforce
  • SMART An industry that is efficient and technologically advanced
  • SUSTAINABLE An industry that leads the world in low-carbon and green construction exports
  • GROWTH An industry that drives growth across the entire economy
  • LEADERSHIP An industry with clear leadership from a Construction Leadership Council

Well that’s lovely, another dollop of motherhood and apple pie on my plate.

Worse, we are putting in place arbitrary targets, some with potentially harmful unintended consequences if taken literally.

The targets bear no relationship to the purpose of construction within the economy and society, a tough discussion of which is seemingly absent from the thinking.

We might start with, for example, the purpose of construction being to create a built environment that is effective, efficient, comfortable, inspiring, healthy and safe. One which adds huge value socially and economically.

On that basis, frankly, if we end up investing more in construction and in return get a more-inspiring, more-efficient, more-effective, more-secure economy and society that’s would be a good investment. So why focus so heavily on spending less rather than creating better buildings?

My fear is that we will once again be served up with a strategy, to add to the pile, that tells the industry, albeit nice and politely, that it is rubbish and could do better. And then it will whinge on about how construction needs to improve its image.

But don’t get me wrong. The industry needs a strategy. And by that I mean a strategy.



Housing policy: If the answers aren’t working maybe we need to be asking different questions

Brian Green

Progress exists because we ask questions. The right answer rests on asking the right question. Curiosity is king.

Say what you like, addressing questions builds knowledge, even if you don’t come up with an answer. But asking questions is not without pain. It can undermine what we hold to be true.

Still. No pain no gain.

Metaphorically armed with this array of aphorisms, I recently answered a call for presentations at the excitingly-named Consultative Committee on Construction Industry Statistics.

I promised more questions than answers. I fibbed. It was all questions and no answers.

But the opportunity to tease the minds of statistically-literate and interested construction industry thinkers was far too tempting. I had a question that had bugged me increasingly for best part of a decade to which I have yet to find answers.

Putting together a presentation obliged me to collate bits of data. Here are some edited highlights, mainly charts.

The initial question is this:

Why is it that, since the mid to late 1970s, homes built have closely tracked residential property transactions at a ratio of around 1:10?

It may be that there is a body of work out there on the subject, but I haven’t found it.

Anyway, here are two graphs you may have seen before. The first shows the relationship between annual private housing completions and residential transactions. The inclusion of non-market completions is there for reference and not to suggest a cause. The second, preferred and provided by Neal Hudson of Savills, shows the four-quarter moving total of private housing starts along with residential transactions.  It’s a closer relationship.

Questions 1

Questions 2

On these data new private homes have held pretty consistently a 10% share of the English housing market.

Interestingly the pattern holds fairly true across the regions, although in some regions new-build takes a larger share of the market. In the East Midlands for instance. Below is a selection of graphs showing regional data.

Questions 3

The relationship, as you can see, does not however seem to hold in London.

What has puzzled me for a long while is why more work hasn’t been done on exploring the link. I can’t say if it is true, but clearly if transactions are a key factor in determining how many homes are built this has massive implications for policy – need I mention that stamp duty is a transaction tax.

I have found mention of it. Here’s a chart from a report in 2003.Questions 3a


It was prepared by Geoff Meen of the University of Reading for the Barker Review of Housing Supply.

It makes for fascinating reading. I recommend it, along with a more recent paper Housing Supply Revisited (2011) by Michael Ball, Jennifer Goody, Geoff Mean and Andi Nygaard.

But why is not more work being done to understand what amount to two very important questions:

  • What causes house building to respond to transactions?
  • Why has a fairly stable ratio between existing and new home sales formed over the past 40 years?

Perhaps there is work going on but it is fairly hidden from view.

I would certainly like to know more about what international data can tell us? For instance, is this a particular phenomenon to the UK?

Recently Neal Hudson (he shares a fascination with this relationship) sent me a graph showing a similar relationship had held in the US from 1994 to 2004. Over that period across the nation new homes held a fairly consistent market share of about 15%. I downloaded a longer time series.

This is what it showed. From the late 1970s for almost 30 years, with the exception of a couple of blips, new homes accounted for about 15% of all home sales. It will shock no one that since the Great Recession, which led to a spate of foreclosures, the new homes market share has fallen. Although as we see it has responded to the rise in overall sales.

Questions 4

If we split the data into four broad regions we see that this relationship holds, with the exception of in the significantly more urbanised NE.

Questions 5

The apparent coincidence of experience either side of the Atlantic seems well worth exploring.

For me, just to satisfy curiosity, there is a strong case for exploring this relationship more deeply.

However, there is a far more pressing reason as we see in the graph below.

Questions 6

If new private homes are tied in some way to transactions we are in for a nasty shock. Because, as things stand housing turnover is declining. There is a host of reasons for this, not least demographic. Data suggests that older homeowners (the ones who own an increasing share of owner-occupied homes) are less likely to move than younger homeowners.

Now it may be that the relationship has formed by chance. It may not be important. But then again.

While asking awkward questions may be uncomfortable, not asking them can prove very painful indeed in the long run.


The curious incident of the £2 billion boost to the UK’s official annual construction output…

Brian Green

… and the need for urgent investment in the construction output statistics.

The latest output data from the Office for National Statistics have posed major problems for those seeking to interpret the path of construction activity.

The revisions to the latest set of data, published just over a week ago, were so bamboozling that even I couldn’t construct a narrative sufficiently tortured to describe what I saw. I was truly puzzled.

I might add, whether the figures show a rise or fall over the month is rarely of consequence in an industry as volatile and vague as construction.

What puzzled me were the major revisions and their shape. They added about £1.5 billion to the turnover in cash terms over the months March to July. That’s about 2.4% more over that period than was thought when the count was made a month earlier. The majority of the revisions fell in the infrastructure sector, boosting estimated output over that five months by more than 10%.

This led to much head scratching for me. My concerns however were nothing compared with those faced by the industry forecasters who were in the throes of putting their autumn forecasts together. Suddenly they faced the task of explaining a huge increase in the official estimate for construction and a huge increase in the estimate for new infrastructure work. That would rattle anyone.

So what caused such a large revision?

Put crudely and looked at from the outside the ONS seemed to have “found” almost £1 billion of new infrastructure work and a bunch of other work sometime after the previous month’s release of the July output data.

That left the forecasters wondering what it all meant. In fairness, the Quarterly National Accounts released at the end of September had warned of big revisions to construction output.

Revisions are a normal part of statistics series. These, the release said, were due to several factors, re-weighting and re-referencing the indices to 2012 = 100 to align with the National Accounts outputs and the incorporation of late data.

But this explanation left me with unanswered questions. I thought the shape of the revisions was very odd and my initial reaction was that a reclassification had occurred, or (worse) a nasty computational error.

Fortunately I now discover it was the former, not the latter, that lay behind most of the expansion in construction.

Having explored the issue more, but far from exhaustively, it appears in March there was a reallocation of a major business from the services sector to construction. When I say major I mean a firm turning over significantly more than £1 billion a year, probably more like £3 billion. The name of the firm is confidential, but the work of this firm had previously not been collected within the construction output data, but was allocated to services. It will, I am told, now stay within the construction sector.

(For those interested in the wider implications on GDP, they might wish to note that the services output will have shrunk as a result of this reclassification.)

However there are matters, important for those who take statistics seriously, that added to the confusion in the revision. The firm was introduced in March, but the value of its work was imputed. Unfortunately the imputed value used was very much less than the actual value which was later returned when its survey details were received by ONS. This led to an upward revision in the latest release being back dated to March.

So what we actually have is a structural break in the data series. And my guess – it is only a guess – it that it means that from now on construction will be of more than of £1 billion and more like £2 billion bigger (probably more than 1% anyway), with nothing having changed in the real world.

This is significant. But it is not unprecedented. Shifts of operations between the public and private sectors have caused similar things in the past. On a smaller scale firms in other sectors taking construction work in house or outsourcing construction work also alter the scale of what is cast as construction within the official data.

This major change will inevitably confuse and frustrate many people who rely on the statistics. It may also lead statistically illiterate or disingenuous politicians and lobbyists to a convenient, but wrong, narrative.

comparing output revisionsThe significance of the structural break will vary with the analysis done. The chart I have used to illustrate the scale of the break shows it very distinctly. It is a comparison of the three months total of construction in current prices with the total over the same period a year earlier. The black line is what the data released in September showed, the red line is how it has been revised.

Naturally if we compared the latest release data for total construction with the previous release on a chart with the y axis set at zero the difference might appear quite small.

The point is that there is a structural change which has nothing to do with a change in the real world.

It is important always to bear in mind that the construction output figures do not measure construction as people in the industry might understand it. (For more on this you might want to the CIOB report The Real Face of Construction)

There is a further point of note. The ONS is caught within its methodological tramlines. These seek to ensure that it handles statistics correctly and consistently. However, there will be time when the methodology fails to accommodate quirks in the real world. The methodology can also viciously expose ONS to any errors. Many other surveys offer the scope for fudging, or discretion as we like to call it.

There are of course other problems with the construction output figures. Many. All surveys present problems.

This does not excuse ONS of all blame, not that I approve of the increasingly fashionable game in media and politics of “pin the blame on the donkey”.

Some faults obviously lie within the ONS. For my taste the organisation could be far more transparent and provide deeper explanations when there are changes or oddities in the data, especially when they are profound.

But many problems are not of the ONS’s making or, as some seem to suggest, connected with the move from London to Newport. There were problems brewing in construction data before ONS took on the task. The very nature of the industry was morphing, especially in ways that would inevitably make measuring construction output more awkward.

I do feel however that ONS underestimated the scale of the task when it took over responsibility for construction data produced from the start of 2010 onwards. I felt so at the time.

In my view the problems run deep and start with what it is we actually measure. This is not a glib comment. It is important.

Anyone who deals regularly in construction data knows how easily prone it is to being unreliable. It displays heterogeneity, volatility and vagueness in buckets.

Simply defining the industry in a consistent rigorous way is tricky, as the distinction between construction and other sectors is extremely grey. There will be a large number of professionals such as quantity surveyors, engineers and architects who might think of themselves as being in the construction sector. Most are not. Their efforts are counted in services, unless perhaps they are employed by contractors.

Furthermore, the built environment and constructing it is changing. More technology is being used that means more work is being undertaken by firms not classed as construction. Their work is not counted if they are not classified as construction firms. So, two firms could do broadly the same “construction work”, but one is classed as construction and the other not. How does this work feed into the data?

That a huge firm has for many years undertaken construction and had its work cast in services illustrates the greyness between construction and other sectors.

This brings me to the need to invest in improving the construction output data series.

Many will know that the ONS is working to build a robust long-term solution to the construction prices and cost indices. This is important work. These indices allow for a judgement of trends over time relatively unclouded by the effects of inflation. They broadly allow for comparison of changes in the volume of work rather than the current value in cash terms.

If, however, we don’t really know what it is we are measuring, I would argue we are in danger of putting a lovely gloss on rusty bodywork.

Tough research and analysis needs to be done to improve firstly the understanding of what is being measured and secondly how the survey data that feeds into the construction output data can be improved. This costs money and takes resources.

If we want to have decent construction statistics it would be far better to push for such investment as is needed, rather than sit on the sidelines, often with little understanding of the problem, and carp about how crappy the ONS is at producing statistics.

I think the construction industry should press for greater investment in what are its baseline statistics. That is, if it wants evidence-based policies guiding the way it conducts its business rather than having industry policy run increasingly easily on knee-jerk reactions to political prejudices and preferences.

How do you solve a problem like the ONS construction statistics?

Brian Green

You don’t need a map, satnav or signposts to drive a car from one place you know to another you don’t. But it helps. A guide is handy. It supports better choices. It saves time.

So, too, can good industry statistics. You don’t need them. But a good set of numbers can help to scale your market and provide hints at where it’s heading. Even fairly ropey stats and indicators help.

This brings me to the latest ONS release of the construction output data. These are bedrock figures for scaling the size of the industry. No other short-term indicator seeks to value the actual amount of construction work done each month in Britain.

But there are problems that need fixing and I believe the industry and its representatives should rally to press for a lasting solution to a number of problems that beset the series, those that are known and those that are latent.

These data are hugely important. Sadly their importance is greatly undervalued. Furthermore they have received growing criticism in recent years as a result of major revisions and findings that were seen as at odds with other industry indicators. They have lost the status of national statistics.

For example, a blunt reading of the latest data would say that in April the ONS decided that on an annualised constant price basis the industry was £3.7 billion bigger than it was thought a month earlier. Blimey.

In some ways this actually relieved pressure on the ONS, because the result brought the data more in line with what the industry and analysts expected, whatever the true figure might be. But this is not the first big revision. The construction output series is seen as troubled.

Revisions to construction output that in one go shift annual GDP estimates will raise eyebrows and potentially annoyance, not least when the bragging rights among some economists seem to rest on the slightest tweak in the economic numbers.

Inevitably this all undermines trust and value in the eyes of users and potential users. Sure, no statistical series is perfect and some of the criticisms of construction output data have been petty. But the scale of revisions, including the most recent, have been large. So concern is justified.

But ill-informed criticism based simply on the facts above would be inappropriate, misguided and dangerous. Many of the revisions have resulted from improvements to what is still a young data series that is bedding in.

Wagging fingers of blame and simply casting ONS and its construction data team as the villains here would be unhelpful, with unintended consequences potentially leading to a worse long-term outcome.

The industry should instead press for investment in the data series – a short-term boost to fund a deep analysis of its frailties and find long-term solutions. This I suspect would payback handsomely long term in better data and a better understanding of how to measure construction within the UK.

The alternative could easily be problems emerging periodically with quick fixes applied. That would steadily devalue the data and drain confidence. This could well lead to a retreat in its use and a consequent retreat in the coverage ONS offers in response, leaving the industry to rely increasingly on the partial light cast by trade indicators, useful though they are. Meanwhile, forecasts would have unsteady foundations on which to build a realistic view of future prospects. Our understanding of the industry would be diluted.

It’s worth reflecting on the challenge for ONS. It is relatively easy to set up a trade indicator to provide a reasonable gauge of sentiment and movement in the level of activity in a selected part of construction. I could, so it must be easy.

I couldn’t measure the size of construction output on a monthly basis. It’s a whole different order of task. Construction is an extraordinarily muddled mix of businesses, business interactions, outputs, odd seasonal effects and timeframes. Add to this the potential confusion of how land plays in the mix. It’s highly volatile and the muddled mix is in constant flux, morphing in odd ways. What’s more, simply defining construction is a task in itself.

So hats off to anyone who can measure on a monthly basis exactly how big this industry is.

This was the task ONS took on a few years ago and subsequently produced a new output series starting in 2010, which links to the previous series.

When the ONS took on the role I suspect the complexity of the challenge was underestimated, as would be the case with most people unaware of the idiosyncrasies of the construction industry. It has hit problems on the way and has had to deal with them.

The current set of revisions, which I stress are interim, relate to the output price indices. These provide the deflators used to adjust for inflation so the volume of work over time can be gauged.

Briefly, these inflation rates naturally vary between the various sectors and vary regionally. The previous approach to this has become increasingly unreliable over time. So the ONS needed a new approach. (You should read the background to all this on the ONS website.)

It has put together a temporary fix. This is far from perfect, as ONS recognises.

Those who have read the detail may have spotted that they are based on inflation rates in labour, materials and plant. But what of margins?

The reality is that changes in margins within such a muddled industry as construction are hard to measure. But you might fairly assume they shrink (even go negative) during a recession and expand when things pick up. Yes, the construction industry really does pay its clients for the privilege of working for them during a recession.

So there’s a fair chance that margins are expanding. If they are expanding faster than the other elements (labour, materials, plant) then the deflator will understate inflation in the system. This will lead to an inflated figure for construction activity in constant prices.

So basically the temporary fix has flaws.

The problem is not made easier by the lack of clarity over how the value of the margin appears within the various payments made throughout the life of a long contract and more importantly how this is express within the forms contractors fill in and send to ONS.

Is the overall margin proportionately allocated for each month? If not then how? Also, how do the amounts submitted by contractors monthly account for large and uncertain final settlements left to the end of a project?

Even if there is a neat way to solve this problem (if it is a problem), or to accommodate it, there are a host of other known unknowns. And probably plenty of unknown unknowns.

Consider seasonal adjustment. We pretty much know it is unbalanced across the year, seemingly leading to overstatement in the summer adjusted figures and understatement in the winter. Adjust for this and the growth rate in the latest two quarters may well be higher. But what procedures can you use to improve the seasonal adjustment which are statistically robust and within the protocols that determine good practice?

Furthermore we really don’t know on a month-by-month basis what is actually measured. What I mean is that some firms put in figures for work done that is chargeable, others state the sum invoiced, others point to orders received and some put in data for turnover or income paid in the month. What’s more this leads to a lag between when the work was done and when the work was reported.

This blend of different things measured with different lags will vary month to month.

And, then, we have the problem of what is actually being measured and what comes into the definition of construction. Not all construction is recorded. Construction done by firms that are not construction firms, retailers, manufacturers, charities, non-construction engineering firms would not be measured.

So, in theory, if a non-construction organisation takes construction work in house it disappears from measured construction output, popping up elsewhere in the national accounts.

These are just a few of the major challenges that need to be tackled. They alone represent a major investment in time.

So I think the industry needs to decide how much it values the construction data.

Personally I suspect it needs the data more than it recognises. In that case the industry should refrain from pointing the finger of blame and instead lobby hard for a root-and-branch review of the construction output data. This would require a well-resourced deep examination from the perspective of statistical measurement.

Among its tasks would be to review such basic things as exactly what the construction industry is, how factor inputs vary, how it does business and how this is changing, what administrative and other data it collects and in what form, how efficiently and effectively suitable data might be collected, what factors influence these data and how. The list could go on.

The key would be to build knowledge that would lead to a greater understanding of the industry and a more robust way of measuring it. From this should flow a long-term solutions.

The alternative is carping and criticising. But to what end?

What do the latest construction output figures tell us?

Brian Green

Making sense of the latest construction output release is far from straightforward, not least because the revisions made this month are huge.

The adoption of an interim new approach to determining the output price indices generated major revisions.

The current set of data offer a range of possible stories and interpretations of what’s occurring within the construction industry.

Depending how you read the data you get a very varied sense of what’s going on. Here’s a few nuggets you could smelt into a narrative depending on your interest:

  • The construction industry is £3.7 billion bigger than we thought it was a month ago
  • Construction growth in 2014 was a whopping 9.5%
  • The revisions to construction output will raise 2014 GDP growth from 2.8% to 2.9%
  • On a quarterly basis construction is at its late 2008 level
  • Quarterly construction activity is now shy of its 2008 q1 peak by just 4% to 5%
  • Construction activity dipped in April
  • Construction prices have risen less than 4% over the past two years
  • Prices for private housing repair and maintenance have fallen 2% over two years

From these you can pull a variety of headlines from “major boost to UK”, through “fall in construction output” to “home owners see fall in builders’ prices”.

Pic1 13 06 15The media will of course perfectly reasonably take its pick from the smorgasbord of angles offered by this release. As we see in headlines from the Guardian and Telegraph focused on the general economy, while the BBC decided the monthly drop mattered.

I’d be surprised if anyone spotted the implied fall in the cost of private sector housing repairs and maintenance. Great story, if it’s true, don’t you think. Mind you, you’d have to check that it is not just the result of a higher proportion of repairs being in cheaper areas.

Pic2 13 06 15Meanwhile producers of construction survey data may have found it too tempting to avoid comments that suggest: “I told you so”. We can see in his twitter feed, Markit’s chief economist Chris Williamson take on the revisions.

I too could enter such a smugfest, safe in the knowledge that a month ago I said: “So a more accurate reading of the output survey data might be that the industry has been pretty flat over the past year or so.”

That’s basically what the revisions delivered. They show that seasonally-adjusted constant-price monthly output stayed, plus or minus, within about 2% of £10.4 billion over the past 12 months or so. For a volatile industry that’s flat.

Having now just joined the smugfest to make a point (and obviously to sneak in a boast) I should point out that it is at best naïve and at worst silly and distasteful to derive any smugness here. It may prove short-lived.

Also, in truth I was a bit surprised at the size of the upward revisions this month. I expected a lesser increase in the adjusted data and probably didn’t expect such an uplift in the base data that resulted from late returns of survey data. I’ll not go into why.

Do I believe what I see in the figures is a fair representation of what’s going on in the industry? Yes and No.

But what I do know is that the pattern we see in these figures is far from settled. There will be more revisions and they could potentially radically alter whatever assumptions we might draw from the data we see in the latest release.

As I tweeted when the data were released, the key word when appraising this month’s data is “interim”.

Putting all the above confusion to one side, what do the latest figures suggest?

I suspect they point to an industry on the up, driven largely by the private sector. It may well have been taking a breath in recent months as the effects of rapid restocking ease. (That was bold!)

On that basis, with what we know about the re-establishment of deep austerity, I suspect it all means that the industry’s future will probably rests on the performance of the wider economy. So let’s hope Mr Osborne’s marvellous medicine doesn’t result in below-par GDP growth.

Later I intend to turn some thought to how we might address the issues in the construction output data that are leading to major revisions.

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