Figuring out trends in housing, construction and property

George, if you are dredging dodgy policy ideas from old blogs, get the timing right

Brian Green

“20% discount on your first home announces PM” reads the press release headline describing one of David Cameron and George Osborne’s latest moves to keep their mitts on the tiller of power.

Ostensibly it’s a new bold initiative to give a leg up to 100,000 wannabe first-time buyers. Desirable, you might think.

In reality we all know it’s yet another policy aimed at a key but unsettled element of the electorate to ease fears about their potential or the potential of their children to own a home. Devious, you might conclude.

It also smacks of recognition by Osborne that the housing numbers might not look quite as rosy as he’d like in the run up to voting. Worrying, I might suggest.

The plan has been wrapped up as part of a scheme to change planning rules in a way that will “unlock” more “under-used” or “unviable” brownfield land. The new homes will also have to meet a high bar on housing design. Now all that’ll be cheap.

Somehow it’s also linked to hardworking young (perhaps flatteringly defined as under 40 years old) people and the Government’s long-term economic plan.

The scheme, it appears, will mean 100,000 new homeowners being given a theoretical bunce of say £20,000 or so in housing equity they can’t release until a few years down the line. So boiling it down and tearing away the tinsel it might look to the more cynical like a £2 billion piece of Yuletide pre-electoral bribery.

I have to take a more generous view. I’m obliged to. I suggested a not dissimilar scheme in 2009 when house building was in freefall. It wasn’t as complicated, but I don’t have endless time to concoct marketing-friendly public policy. I suggested a more modest 20,000 “deserving” first-time buyers be given £10,000 to buy a new home. I admit it was a slightly flippant blog, but one that I hoped at the time contained a grain of an idea to provoke sensible thinking.

There is of course one major difference between this latest policy initiative and the idea outlined in the blog. Five years. Timing is all.

When I suggested the idea it could have preserved construction jobs, reduced unemployment and kept the fabric of the house building supply chain more intact.

I estimated then it would save the Treasury £20,000 a home sold despite paying out a £10,000 gift.

As seems so worryingly clear to me after penning the previous two blogs, the timing of this policy is like so many of Coalition creations in the housing market. They seem to arrive after the train has left the station. This rather suggests this Government recognises far too late where it should have been heading.

Anyway George, in case you or your advisors are reading this blog here’s a free policy idea for the Budget to support hardworking families and plumbers. 50% discount on kitchen sinks for everyone in marginal seats.

What have we come to?


ps I’m rubbish on keeping to house style, but I expect more craft from Government press release writers. So please be consistent with whether it’s hardworking or hard-working.

Restructuring stamp duty should provide a boost to housing, interesting timing don’t you think?

Brian Green

So the Chancellor’s big idea was a reform of the stamp duty land tax.


Certainly few people with an appreciation of either taxation systems or the housing market think SDLT is a good tax.

The Mirrlees Review: A proposal for systematic tax reform, a highly-regarded document in tax circles, had this to say for it: “There is no sound case for maintaining stamp duty and we believe that it should be abolished.” It recommended it be replaced by a land tax.

However, earlier in its discussion of SDLT the review did say: “The ‘slab’ rate structure … is especially perverse, meaning that transactions of very similar value are discouraged to completely different degrees and creating enormous incentives to keep prices just below the relevant thresholds.”

It is that “slab” bit that the Chancellor has seen to, leading to much joy, especially, I’m sure, among estate agents.

The various likely effects of George Osborne’s restructuring of SDLT can be read, to some extent. The overall effect is much harder to compute fully.

One potential effect is flagged up in the Mirrlees review. It suggests that “removing it would create windfall gains for existing owners, as it will largely have been capitalized into property values”. So those who are looking to sell a home currently priced in a range where the tax take would fall will probably raise their asking price and make gains on the sale. This might cause a spurt in prices at particular price points.

Meanwhile, buyers are also likely to share in the gain. They, after all, have to find the cash to pay for the duty in a lump sum. This can be prohibitive, as they also seek to build up a deposit and look for cash to cover the other fees needed to buy a home. So the change in the SDLT structure should create a boost to sales, again differently at different price points, but especially among first-time buyers with limited equity. The Chancellor’s change should increase demand and transactions, at least in the short term.

This surge in transactions should also be supported as sellers seeking a price just above a threshold in the old SDLT rate will now find buyers more willing to accept that price rather than seek to push it below the threshold. This should mean more acceptable offers and more deals done.

So, broadly speaking, we should expect to see dotted at points along the price band (up to £1 million) more transactions and slight spikes in house price inflation.

Looking at the new-build sector we should expect a large cheer from house builders, as they capitalise some of the SDLT reductions into selling prices and see a jump in interest from buyers (especially first-time buyers).

transactions and completionsWe might also expect to see subtle changes to the new housing mix, as builders pitch homes into the market more freely around what were awkward price points around the SDLT thresholds.

Importantly where the SDLT take is set to fall is where most action takes place in the market. This should help to increase the overall level of transactions.

And, just as more points mean more prizes, more transactions should mean more new homes built. As we can see from the top graph, this has been the case for the past 40 years or so.

So a lot of relatively positive things should happen in the short term in the price ranges below about £1 million, at which point the tax increases for all sales (see lower graph taken from the HM Treasury Autumn Statement 2014). Naturally the effects of the restructuring will vary regionally.

SDLT new vs oldWith all tax changes there are short and long-term effects and they can be very different. Ultimately, the change in SDLT will increasingly seep into house prices and land prices where it is reduced and be sucked out of house prices and land prices where the tax take is increased.

But a word of caution, SDLT is still a rubbish tax, although slightly better without its slab structure. A land tax would be a more reasonable, fairer and economically efficient option and, in theory at least, would do more to stabilise house prices.

The net result of this move by the Chancellor may be to make it easier in the short term to step on the housing ladder, but lead to higher house prices in the long run. This would increase the gaps between the rungs of the ladder, making it harder to climb.

There is, of course, one other issue to chew on. Why has this change been made now as a last throw before the election?

This tax has been a potential drag on housing transactions and house building for a long while. Certainly it has been a greater drag than normal through the nearly five years of George Osborne’s tenure as Chancellor, when the problems faced by first-time buyers trying to raise enough cash to buy into housing have been severe enough for him to introduce incentives such as Help to Buy to reduce the burden.

Interestingly the restructuring of SDLT should, as we discussed above, give the market and house building a short-term boost, neatly ahead of next May’s election.

Surely, as a servant of the public, the Chancellor cares more for the long-term housing needs of the nation than his short-term appeal ahead of the polls?

Or is there something I’m not getting about politics?

Northstowe and why I am so angry with George Osborne

Brian Green

The Government’s plan to commission, build and sell 10,000 homes at Northstowe just north of Cambridge have been heralded by some in the media as radical. It hasn’t been done since the 1970s.

That anyway is a line taken by a slice of the media as it absorbs carefully-crafted press releases that complement the thin detail in the National Infrastructure Plan 2014.

Unsurprisingly as we head deeper into the run-up to a General Election, the media was duly given some extra spice for its stories by the Liberal Democrat Chief Secretary to the Treasury Danny Alexander, who seems to want to claim ownership of this idea. He provided a quotable quote that seemed to suggest a threat to house builders: “If you don’t build them we will”.

In reality the plans are far from radical, even taking the most radical interpretation of the little detail revealed.

Meanwhile, they represent no real threat to traditional house builders as far as I can see. If anything they present potential opportunities.

Most importantly, in my view, this sort of approach should have been adopted by this Government at the start not the end of its stint in office. It is five years too late.

In his blog Sky News economics editor Ed Conway uses an interesting phrase. He writes: “In a sense, it is hinting that it may soon be a developer of last resort.” This is exactly the role I suggested the former Chancellor Alistair Darling should take almost six years ago as the house building industry went into freefall. Homes and the fabric of the house building industry, however, it seems, are less important than banks.

I remain convinced that Mr Darling should have taken this advice and so too should George Osborne and David Cameron taken similar advice subsequently.

If you accept the broad thrust of various calculations made over the past few years (and the assumption that the housing market would broadly recover by 2014) we would now have hundreds of thousands of new homes (mostly in or destined for home ownership), the construction industry would have 150,000 more in its workforce. The supply chain would not now be struggling to respond to an increase in demand from private sector houses builders.

The nation’s debt would now be between £10 billion and £20 billion less (far better off if the building programme had been bolder) and the wider construction industry would not be faced with a bill of similar proportions to rebuild its beleaguered supply chain. And builders would not be facing rapidly rising costs for materials and labour, with the associated delays and uncertainty.

To this we could add a large figure for the benefits of wider multiplier effects, such as those created by employed construction workers spending in their local shops.

Further we could add the cost of lost opportunity. The Government is far better placed to test new ideas. Some may fail, but some will succeed. But the state’s size and role mean that it can be entrepreneurial in ways firms cannot (see Mazzacato, The Entrepreneurial State for clues here).

It could, by way of example, have trialled bespoke building to deliver the type of homes that would suit institutional investors. This may have kick started an aspect of the industry that has received more hot air than hot action over the past decade.

So what’s this plan?

The detail is hazy on exactly what is the “new delivery model” mentioned in the National Infrastructure plan. But a conveniently-readable news story at GOV.UK tells us this:

“One of the key proposals is for the government to master-plan, directly commission, build and even sell homes. A pilot programme on a government-owned former RAF base in Northstowe, near Cambridge, will see the Homes and Communities Agency leading development of 10,000 homes, twice as fast as conventional approaches. This is the first time in a generation that the government has owned land, led a development on it at this scale, and considered commissioning homes directly for sale. This approach will fast track the development by providing certainty making new homes available more quickly.

“The government will make an upfront investment but expects that later costs will be met through the sale of land and homes. The government will also evaluate the feasibility and economic impacts of rolling out this model on a wider scale, to support and accelerate housing supply.”

Is this really radical?

No. Someone would have to stump up huge sums to provide the infrastructure needed to deliver this massive site, roads, schools, affordable housing, health services (on the site or nearby), drainage etc. Given a broad figure of £20,000 a plot (possibly an underestimate on industry estimates), it would mean finding £200 million to fund the infrastructure at Northstowe. Yes, you could try any number of financial mechanisms from TIFs to CIL to Section 106. But such arrangements can get messy and slow progress.

So as a major landowner at Northstowe with a desire to get things moving fast it makes perfect sense for the Government, through an agency, to deliver this infrastructure directly and deliver serviced plots. This it clearly intends to do. But it can’t wait around once it has cash in the ground, so it must be prepared to directly deliver homes if it is to protect its risk and realise its investment. Furthermore as it shapes the development, most likely, it will become more attractive for private builders to bid for land on which to build. This could be major builders, smaller builders or self-builders, all of which the Government is seeking to encourage.

Is it a threat to house builders?

Not as far as I can see. They are quite happy to build what they build controlling as much as they can their risk and profit. What’s more, the text is clear: “… later costs will be met through the sale of land and homes.” This means the way is open for house builders to operate at Northstowe. There will in all probability be nice “oven ready” plots on sale on which house builders can build homes within a market where both prices and demand have been established. This means risks and rewards are much more narrowly defined and easier to calculate, free (hopefully) from uncertainty over price or time-consuming negotiations over planning obligations.

So it’s no surprise to see the Home Builders Federation welcome the “commitments by Government to bring forward larger sites”.

Its take on Northstowe was this:

“… successive Governments have been trying to develop land earmarked for housing for 20 years now. If contracts can be developed that bring sites forward quickly, in a way that is attractive to developers, the area could contribute to much needed housing numbers. Such a model could be particularly attractive to smaller developers if upfront costs are reduced. Delivery must be closely monitored and if sites don’t come forward as anticipated, alternative sites must be allocated elsewhere to ensure housing needs are met for the area.”

So it’s not radical. It’s not a threat to traditional house builders, other than, perhaps, adding extra suction to a desperately weakened supply chain.

This leaves the big question. Why didn’t the Government do this earlier?

I can see excuses for Mr Darling. The heat of the global meltdown was still fierce. He can be forgiven for eschewing this path of action. And in his defence that administration did pull forward planned spending on housing and helped house builders shed some overhanging stock, freeing their balance sheets.

For Mr Osborne there is no excuse. He has had the best part of five years in which house building completions have remained pretty much at or below the level he inherited. The inevitable consequence was that the supply chain rebased to a lower level while homes were not built.

His half-baked notions about debt and deficit and his ideology appear central to why such action was not delivered earlier.

His inaction is made more painful by his argument that the Government has had a long-term credible plan, which today seems farcical. The long-term qualities to Osborne’s economic plan only seem to have definitional value on the basis that the plan’s very failure means it is taking longer than originally planned to reduce the deficit (the central measure of its effectiveness). On this measure it would seem the plan currently appears in danger of working in reverse. Worse, the plan for me clearly lacks credibility when even his Prime Minister appears unable to distinguish between debt and deficit.

What is intriguing, since his original position was established in 2010 he has seemed increasingly to be undertaking a slow verbal if not actual volte-face on his position on more interventionist capital spending (a point hinted at in Ed Conway’s blog). We see this too in his growing fondness for announcing grand projet.

This is (partly) why I am so angry with George Osborne.

Under his watch the house building supply chain has sustained needless damage, jobs and skills that could have been saved were squandered, more people live in worse homes than they need, we spend more on housing benefit than we need and the nation’s debt (his central focus, ironically) is larger than it would otherwise have been.

If George Osborne can sanction this approach now, when his deficit reduction plans are going awry, why could he not have done so at the start of his reign as Chancellor?

Or have I missed something?


ps. While I see merit in the Northstowe announcement, I have reservations over what type of organisation is established to oversee the development. The organisational body established needs to be carefully considered. I sense for it to be successful it must be a single-purpose time-limited organisation with a clear remit and with highly-transparent oversight and accountability. It needs to be capable of responding to changing local and national political imperatives, but be set free from ad hoc political interference.




A £20 billion repair bill to fix the UK construction industry after the recession

Brian Green

Just what has been the cost to construction of the recession? Could and should policymakers have made the slump in activity less painful? Were there better policy options?

These questions need desperate attention. Mistakes were made. Bad and avoidable mistakes, in my view. Lessons must be learned.

Construction is a strategic industry. Having a construction industry is not an option for any nation. That makes it special, like health, education or defence.

Recessions can disproportionately hit construction. The damage, however, will eventually need repairing and that comes at a higher or lower future cost depending on policy decisions made when the recession bites.

In any sensible world, policymakers would estimate that cost and factor it in before deciding whether to cut or boost public investment and whether to incentivise or not private investment. They should be aware of the cost of recovery when assessing the value of investing in the fruits of construction.

From what I have observed over the past six years, I doubt that crosses their minds for more than a fleeting moment.

So let’s see if we can start exploring what damage was done and put a figure on the cost to put things right, even if we start from back-of-an-envelope sums.

The severity of the damage caused to construction by the Great Recession is patent. Two impacts on the UK industry are hard to ignore. They are currently a source of grave anxiety for businesses and policymakers. The loss of skills, or human capital as economists might describe it, has been huge. The depletion of physical capital and capacity within the whole supply chain is significant.

There has been, however, massive but less immediately evident damage caused by half a decade in an economic quagmire. The construction industry’s reputation, never that splendid, as a career choice for young folk has once again been tarnished. And a particularly worrying concern must be the potential damage to UK contractors, particularly large firms, caused by six years of less-than-prudent bidding.

It was all rather predictable, but the fallout from imprudent and suicidal bidding is yet to be realised and is very unpredictable. Many contract periods are long, so the final bills are yet to be settled. And the final settlement on a contract is far less straightforward than many might suppose. While the effects are being seen in the accounts of contractors, it will be sometime yet before we can measure the full damage.

As Warren Buffett would say: “Only when the tide goes out do you discover who’s been swimming naked.”

The cost to repair the damage to corporate structures is hard to assess. There will be loss of goodwill, expensive restructuring and thousands upon thousands of hours spent sorting out the mess. Organisation knowledge will be lost as yet more human capital is thrown to the wind. On the upside, change might force some improvements.

In finding a figure for the cost, it might be worth starting by examining human capital. The concept may seem a bit wishy-washy, so it might be instructive to see the estimates by the Office for National Statistics. ONS estimates the loss of human capital between 2008 and 2012 was £1.1 trillion. Falling from £18.2 trillion to £17.1 trillion

Just playing with the figures and assuming human capital were spread evenly among the nation’s workforce, which it isn’t, the value of the human capital in construction in 2007 would be about £1.18 and in 2012 about £0.93 trillion. That would be a loss of £250 billion.

The scale is mind-boggling. Now while this huge figure may be within an order of magnitude of the loss of human capital to construction, it’s clearly miles away from the replacement cost. Most human capital is accumulated out of the workplace and work-related training, but much is associated with working.

A more pertinent question might be how much would it take to train a replacement for each worker lost to the industry? We should be able to come up with some reasonable guesstimate figure for this.

I was given for a blog some years ago a rough-and-ready figure of £30,000 for the total cost to train person and provide on-the-job experience from scratch to become skilled in construction. It must be remembered that formal training is just part of the cost. Skills are acquired over time when productivity is lower than it might otherwise be and supervision higher, representing a cost to the firm.

This figure can only ever be crude given the range of skill levels and ages within the industry. It is probably light when all costs are taken into account and the cost to train senior people will be much higher, but let’s work with it.

The costs associated with raising human capital are generally absorbed in the normal scope of business, they may attract grants, but the process is in normal times generally a continuous one.

However the industry lost about 400,000 people to the recession. Much human capital was lost for good, much was not replenished as it would have been, which means the industry would have made savings through the recession on training costs.

But now for the flip side. Filling the gap that is left, if it is to be done without a huge influx of foreign workers or be overcome through innovative building techniques, will now mean an expansion of training, formal and on-the-job. This will cost the industry, based on our estimated average figure, £12 billion. No wonder “importing” skilled workers from Lithuania, Latvia and Poland looks attractive.

We can do similar figures for physical capital. Let’s look simply at some figures for net capital investment for the construction materials suppliers from the Annual Business Survey (many thanks here to Dr Noble Francis and his team at the Construction Products Association for the base data).

Ignoring 2008 as it represents a transition into recession, the estimated average net capital investment in the years 1997 to 2007 was £1.41 billion. The figure 2009 to 2012 was £750 million. That means there was an average annual drop of about £660 million. The 2013 provisional ABS figures don’t suggest a major recovery in investment.

A rough count would suggest that over the five years 2009 to 2013 inclusive, the total net capital investment was £3.3 billion less than it might otherwise have been. An investment more or less of this scale will be needed to bring things back to where they were in the material supply sector before the Great Recession.

We then need to consider the collapse in capital investment by contractors, by plant hire firms and by the distributors. The damage to the industry’s infrastructure here will also have to be rebuilt if construction firms are to deliver as effectively today what they could in 2007.

It would not take much consideration of these and other factors before we might reasonably estimate the degradation of the industry from recession will cost at least £20 billion to repair. That’s about £300 per person in Britain and this leaves aside the damage caused to the image and reputation of the industry.

To put that £20 billion in the context of the industry itself, it is about 10 times the total pre-tax profits made by the top 100 contractors in 2007.

Now you can quite rightly argue with these figures. You may feel they wildly underestimate or wildly overestimate the challenge. But it’s hard to dispute that the recession has left the nation with a huge bill to pay if it the construction industry it desperately needs is to be restored to what it was before the Great Recession.

Now ask yourself, was it such a good thing for the government not to invest more heavily in construction when the recession hit?

As I hope to explore in future blogs, there were clear alternatives, what’s more they could have made and saved the government money and, ultimately, reduced the nation’s debt.

How seriously should construction take Cameron’s “red light” warning?

Brian Green

The Prime Minister decided yesterday to highlight dangers of a fresh global economic crisis. This will impact on the UK construction sector. How much? Who knows?

His words printed in the Guardian were: “Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy.”

That was a sentence designed to gain maximum media attention. In that it was a success. And he seemingly chucked all but the kitchen sink into the pot of potential problems as he went on:

“The eurozone is teetering on the brink of a possible third recession, with high unemployment, falling growth and the real risk of falling prices too. Emerging markets, which were the driver of growth in the early stages of the recovery, are now slowing down. Despite the progress in Bali, global trade talks have stalled while the epidemic of Ebola, conflict in the Middle East and Russia’s illegal actions in Ukraine are all adding a dangerous backdrop of instability and uncertainty.”

But what of investors in major construction works? They need confidence that long-term prospects are good. They will assess David Cameron’s comments. If they think they provide fresh insight they’ll recalibrate their view of risk.

This might mean that marginal projects, mainly in the commercial sector or in London high-end residential development, would be reassessed. Intriguingly, if London is seen as a safe haven in a global economic storm, residential developments may be viewed favourably.

But it’s hard to know how seriously investors will take Cameron’s comments. They are pretty well informed on economic risk and most likely will be better placed to judge the impact than the Prime Minister.

They may dismiss his remarks. He does after all display a rather loose adherence to economic convention, as illustrated in his written party conference speech. He seemed to claim the nation was paying down its debts. It isn’t. Worse still the latest data available to Cameron at the time showed public sector net borrowing excluding public sector banks was £11.6 billion in August 2014, up £0.7 billion on the August 2013 figure, hinting if anything at a rising deficit. Debt, meanwhile, had risen by best part of £100 billion over the year.

How ironic, you might think, that Cameron has then the brass to chide his opposition leader for omitting to mention the deficit. Politics eh?

All that aside, even if Cameron’s comments on global economic woes are dismissed on the grounds that they providing no new information, the chances are that the comments will linger in the thoughts of investors.

That the Prime Minister chose to deliver such a warning to the nation will have effects. Investors will be assessing whether the public perceives this as fresh insight and how seriously that might impact on consumer behaviour. The UK recovery is supported by growing consumption. If nervousness about the future increases caution and leads to a drop in spending, growth will be weakened. This probably is where the most serious fallout lies.

Cameron’s comments do however have echoes of the highly publicised warning of Alistair Darling in August 2008 when he was Chancellor. His holiday interview with Decca Aitkenhead of the Guardian was explosive. I welcomed his comments at the time and the piece is well worth re-reading.

There is one big difference between Cameron’s comments and those of Darling. Despite being proved right Darling faced a huge barrage of criticism at the time, which I and a few others found perplexing at the time and find the more so with hindsight.

There is another difference. Cameron’s comments are considered by most to be purely political, aimed at deflecting potential unfavourable economic and political news ahead of the General Election.

The Conservatives face a second by-election loss to UKIP. Meanwhile, the government’s reduction of the deficit (That’s deficit, not debt, David) has been significantly less impressive than originally planned, despite lower interest charges on the debt than expected resulting from interest rates staying lower for longer.

In truth Cameron’s comments also do add little new to the knowledge of the global economy. We’ve bumped and bounced between crises, especially in the Eurozone, for more than six years now. And you only have to consult Wikipedia to see how Japan’s “Lost Decade” after the 1990s recession is rapidly becoming “Lost Decades”.

Yes the data are perhaps worse than a couple of months ago. But should we take more note of Cameron’s comments yesterday than, say, the regular comments made over the past year or so about secular stagnation by Harvard Professor Larry Summers, who served as Secretary of the Treasury for President Clinton, or the persistent warnings of many other eminent economists?

No. But they should not be dismissed.

Those of influence in the construction industry might wish to reflect on how they responded to economic warnings, how they prepared themselves and how they sought to guide the government ahead of the Great Recession into which we plunged six years ago.

I’ll consider that and some of the lessons we might draw in future blogs.

Forecasts paint a brighter future for building, but infrastructure data clouds the picture

Brian Green

The latest batch of construction industry forecasts out this week paint a brighter picture of growth for building in Britain, but a confused picture for prospects in the infrastructure sector.

I’ll turn to the confusion later, but for now it’s safe to say that, taken as a whole, the forecasts reflect and seem to support the general improvement in confidence within construction.

Despite recurring concerns over persisting fragility within the global economy, Europe in particular, the Construction Products Association (CPA) suggest a strong bounce back over the next five years.

Forecast autumn 2014 aIt expects growth rates ranging from 3.3% and 5.3% for each of the next five years. This should swell construction by 23% in real terms from 2013 to 2018.

As the graph shows, Experian is equally as bullish over the next three years. Hewes provides the usual useful counterpoint, as this forecast tends to factor in more downside risk, so is inevitably much less optimistic.

All three are extremely bullish about housing in the near term and, while Hewes sees growth fading, the CPA takes the view that growth will continue through to 2018.

Experian and CPA also expect strong growth from the commercial sector, with growth of around 15% over the three years 2013 to 2016. Hewes takes a far more pessimistic view.

Overall new work is expected to be a bigger driver of construction growth than repair and maintenance over the next few years. This is consistent with strengthening growth in the economy and growing confidence among investors.

But the forecasters do see respectable increases ahead in repair and maintenance work.

Pulling all this together the forecasters all upped their expectations for building.

There is however one big twist in the tale of these forecasts this time around, the variation in expectations for new infrastructure work. Rather perplexing official data has led to big disparities in the forecasts for the sector.

Experian and Hewes show new infrastructure work falling this year. The CPA penned in growth of almost 9%.

What is extremely interesting and pretty unusual is that CPA appears to have stepped away from using the ONS construction output figures as its datum for new infrastructure work.

The forecasts says: “Recent statistics from the ONS report that Q2 infrastructure output was 8.2% lower than one year ago and new orders were 32.0% lower than a year ago. These declines contradict surveys within the sector that suggest increasing activity. As a result, the infrastructure forecasts are not purely based upon recent output but also take account of survey and pipeline evidence.”

The suggestion here is that the CPA suspects there may be a problem with the Office for National Statistics (ONS) construction output new work infrastructure series. And, indeed, the performance of the series has raised a few questions of late.

But the CPA decision to forecast away from the data currently presented in the ONS infrastructure series raises some intriguing issues.

Unless the figures are revised upward, for the official output figures to hit the CPA forecast for this sector, on my calculations new work infrastructure output in the final four months of this year would have to be 40% up on the final four months of last year.

That would be a phenomenal and, I sense, an unlikely turnaround in work on the ground.

Then again, a problem may be found in the data and the CPA view could end up matching the official figures through revisions to the back series.

But ultimately whether the CPA forecast and the ONS figures end up matching is just part of this puzzle.

What is perhaps of greater concern is whether there is actually a problem with the infrastructure figures or not. This is a moot point. It reveals just how hard it is to forecast change in construction industry activity and just how hard it is to know with certainty the level of work within the various parts of the industry.

Certainly civil engineering contractors have seen strong growth for a year or so. And there has been much rhetoric and bullish talk about investment in infrastructure. This all points to the data being misleading.

On the other hand we must consider what is actually happening within the industry. Inevitably some of the buoyancy civils firms feel is down to the rising tide of new building work and the ground works and services associated. Could it be this that is boosting civils work and disguising weaker infrastructure work?

Certainly, we have a problem in understanding how much infrastructure spending actually goes on construction work – that is how much goes to contractors suitably coded as being in construction and how much to other firms not classified as construction, such as process engineering firms.

A road job has a large construction element, a windfarm far less. The construction content of water projects will vary depending on the proportion spent on mechanical systems and controls.

There are of course other potential sources of confusion within the data classification and within the collection process.

Are we missing some specially-formed joint venture businesses in the sampling, or underplaying their importance?

Are firms not classified as construction undertaking what is construction work and so work is being wrongly allocated to, say, manufacturing?

Are firms correctly allocating construction works within the forms they fill in for the ONS?

There are a host of possible effects that can distort a data time series.Forecast autumn 2014 bCertainly a variation in the mix of work will have an impact.

So let’s out of curiosity compare the proportion of each subsector within new work infrastructure in the four quarters to Q2 2007 with the four quarters to Q2 2014.

We see there has been a profound shift in the mix of work. Road, water, sewerage and harbour works have declined, while rail and electricity work has increased.

Could it be that a big headline investment in electricity gives the impression of lots of work, but in reality only a low proportion of that work is recorded as construction?

These are questions that need research before we know if a problem with the ONS data is likely or not.

Ultimately without deeper knowledge it is extremely hard to know for sure if the ONS infrastructure time series is a reasonable or unreasonable reflection of the path of construction’s share of the investment in infrastructure.

It is certainly a conundrum and once again illustrates the extreme difficult in measuring each month how big the construction industry really is.


Note: the bottom graph has been replaced since first posting as it originally had 2017 not 2007 in the title.

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

Brian Green

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

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

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

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

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

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

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

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

In any sensible world this would be a given.

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

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

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

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

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

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

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

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

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

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

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

Back, then, to the real world.

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

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

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

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

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

Later in the BBC piece we read:

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

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

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

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

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

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

Brian Green

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Brian Green

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I had similar concerns on inequality.

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

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

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

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

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

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

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


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


Construction jobs growth appears solid but not spectacular

Brian Green

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

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

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

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

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

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

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

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

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

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

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

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