Brickonomics

Figuring out trends in housing, construction and property


Posts from November, 2010

Sticks for the North, carrots for the South in the New Home Bonus handicap race

Brian Green

Long before he was in office the Housing Minister Grant Shapps evangelised about the New Homes Bonus in a way that suggested it would lead to a new world where local residents badgered their councils to grant permissions for more homes.

I’ll confess my initial reactions to the early presentations more than a year ago might fairly be regarded as sceptical, even though I am in favour of incentives to prompt development.

Still, in April next year, if all goes to plan, the New Homes Bonus will be in force and this month saw the release of a consultation document detailing how the new regime might work.

The big questions are whether it will work and, if it does, whether it will meet the aspirations of both the nation and those who provide housing.

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Forecasters at Leading Edge see growth after a shallow drop next year

Brian Green

The latest forecast from Leading Edge may provide some comfort to those who are fretful about the prospects of ever deeper declines in the construction industry as public funds rapidly shrink.

Yes, the forecast sees a drop in output next year – 0.9% after 3.2% growth this year. But the Leading Edge team are optimistic that growth in the private sector will accelerate to buoy construction overall and more than compensate for the loss work funded by the public purse.

In truth, the timing of any upturn (or downturn for that matter) can be very hard to predict, as there are so many variables and slight timing differences can significantly alter the shape of the curves.

And if there is any downside risks seen by Leading Edge it is over the point at which growth will return when the private sector expansion actually outpaces the public sector contraction.

But generally speaking the forecasters see strong growth in both private housing and commercial construction next year which will accelerate in 2012.

Growth in these two huge sectors combined with continued strong growth in infrastructure and very strong growth in industrial sector construction will, in the view of Leading Edge, project new work to within a couple of percentage points of the 2007 peak by 2014.

The picture for refurb is a bit bleaker, mainly as a result of expected deep cuts to spending on the public sector housing stock.

So, overall construction is expected to remain about 7% to 8% off peak by 2014.

I have placed the Hewes forecast on the same graph to show how divergent views can be on the future direction of construction output.

Hewes takes a much dimmer view of the overall economic prospects and as a result takes a much more pessimistic view of the growth potential within the housing and commercial sectors.

However the Hewes forecast was produced before the revision to the output figures. It would be a reasonable guess to suggest that, armed with the revised output data, the Hewes forecast would look a shade flatter than it does.

The issue here, I must stress, is not who will be proven right or wrong. What is important to take from this graph is just how uncertain the future is for overall construction output.

Construction’s downward revision yet to show in GDP figures

Brian Green

There will no doubt be eagle-eyed stat watchers checking on the latest official release for UK’s economic growth who are wondering why there has been no revision to the second quarter GDP. It still stands at 1.2%.

If you remember the second quarter growth rate for construction output for Great Britain was revised substantially down from 9.6% to 6.6% and this was expected to have an impact on the UK GDP measure – knocking it from the 1.2% to 1.0%, all other things being equal.

Although the current set of GDP figures show UK construction growth at 9.5%, there is a revision in the pipeline. But the revison to the construction figures has not been processed within the latest set of GDP figures and will most likely be included in the Quarterly National Accounts release to come out on December 22.

So when looking at the current set of GDP figures it is worth bearing that in mind – I’ve mentally reduced GDP for the second quarter to 1%.

That’s living on the edge for you…

RICS survey points heavily to a return to recession

Brian Green

Today’s construction survey released by the surveyors’ body RICS adds more weight to the fears that construction is set for a plunge back into recession, showing as it does that more surveyors are seeing workload falling than rising.

Asked whether workload had increased or decreased on the previous quarter, the survey found a negative balance of 10% which follows on from a negative balance of 5% in the previous survey three months earlier.

This suggests that workload is falling among surveyors, although the survey measures the balance of positive and negative responses and not the quantity of work, so the figures don’t relate to actual levels of work.

Indeed in normal circumstances most firms tend to record their level of work as stable.

But the survey does give a guide to turning points in the fortunes of the industry and because this survey measures surveyors changing workloads it does normally provides a lead indicator of changes in work on the ground.

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House building recovery stalls and a further fall can’t be ruled out

Brian Green

There is no way that you can look at the latest set of house building figures for England in the third quarter of this year and suggest they look good.

Yes it is true that private sector housing completions were up for the second consecutive quarter as the press release points out, but they were lower by 4% than in the same quarter a year ago.

Furthermore, the completions we see in the third quarter represent a view taken by house builders some months before when there was growing optimism. They do not reflect current sentiment.

In terms of the total number of  homes built there was a slight fall quarter on quarter on a seasonally adjusted basis and a significant fall on a non-adjusted basis.

Much of this was a result of the continued collapse in social homes completed. The level of social housing completions is now at its lowest level since the beginning of 2006.

Overall these figures certainly aren’t consistent with a recovery in the sector. But it is in line with the view that house builders have set themselves up to build to more closely match demand and that demand is flagging, as we have been told time and again in recent reports from the major house builders to the City.

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Jobs scene a little brighter today – but what does the future hold?

Brian Green

The rate of construction redundancies in the third quarter of this year returned closer to pre-recession levels with “just” 18,000 employees recorded as being made redundant in the three months July to September.

And if we didn’t know what we do know about the future we might suggest that the latest employment figures taken as a whole provide reasons to be positive.

Across the economy as a whole, more people have jobs, fewer are unemployment and the claimant count is down, which should relieve a bit of pressure on the Treasury.

We don’t know how many workforce jobs there were in construction up to the end of the third quarter, we will have to wait a month for that detail. But it would be a fair guess to suggest that the upswing in construction jobs we saw at the start of the year continued through to the third quarter.

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Inflation – a reason to be cheerful or a cause for concern?

Brian Green

The rate of inflation is important to construction at present, especially to those engaged in the housing market that might be wary of high inflation rates prompting increases in interest rates or deflation prompting prolonged falls in house prices.

But it seems to me that people fall in reasonable proportions into three camps, those who fret about inflation rising, those who remain pretty relaxed and those who fret about deflation.

So here is one graph that oddly might satisfy all sets of proclivities. There is a bit of something for everyone here.

If we start with the latest rise in the headline rate of CPI inflation to 3.2%. That was expected and the Governor of the Bank of England will have to write a letter to the Chancellor – those facts will predictably grab the headlines in the news bulletins.

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Construction industry is £1 billion smaller as official growth rate is trimmed

Brian Green

Construction growth is far less than it was thought to be a month ago, according to the latest official statistics.

And that means UK plc growth was probably slower that we thought too.

The latest figures suggest that output growth for construction in the second quarter of this year was about 6.8% and not the 9.6% previous penned in.

Meanwhile second third quarter growth came in at 4%, which was more or less in line with the estimate for UK construction penned into the latest gross domestic product figures.

The net result is that the construction industry is about £1.1 billion or so smaller than we thought it was a month ago

This will provide some mental easing among the industry’s number crunchers and dipstick wielders, who had raised a torrent of queries about the ONS estimates in the GDP figures that put construction growth at almost 14% over the second and third quarters of this year.

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If the City punters are right brace for a double-digit fall in house prices

Brian Green

City money seems to be pointing to a near double-digit drop in house prices, with derivatives traders buying and selling on the basis of a 4.2% fall in house prices over the full course of this year with a further fall of 5.9% next year.

The figures from Future HPI, the former Tradition Future HPI now published by Peter Sceats and Associates, evaluates derivatives deals made by institutions and other trading parties based on expected movements in the Halifax non-seasonally adjusted monthly house price index.

The deals are undertaken by speculators or firms looking to hedge their exposure to housing market risk. They involve buying or selling against the house prices at a given date in the future.

Crudely put, if you buy at a future price below or sell at a future price above what the Halifax index evenutally comes in at you are quids in and pocket the difference. If the movement is the other way you have to pay out the difference.

As things stand today, the data collected for this future house price index suggests that deals are being made for house prices at £160,317 at the end of this year against the October Halifax avearge house price of £165,275.

Meanwhile, the index shows the price at the end of 2011 at £150,813 and at the end of 2014 at £155,359. That suggests a pretty sickly market.

But as Peter Sceats points out there is a tendency for the direction of future trades in the relatively immature residential property derivatives market to overstate future swings.

Whether this proves the case or not, it does seem that those betting on house prices do see a fall coming.

Buyers and sellers abandon the housing market – that’s bad news for house building numbers

Brian Green

The latest housing market survey released today by the surveyors’ body RICS paints a fascinating picture of the courting process between buyers and sellers of houses.

The headline figure taken from the survey was always going to be that the majority of estate agents are now seeing house price falls. The figure for the balance of agents seeing rising prices against those seeing prices fall was -52, which was the lowest since March last year.

This figure fits with the general trend in the main house price indexes which are showing prices slumping.

But for me the most intriguing figure is the sudden shift in attitude among sellers, from increasingly interested in selling to much less interested.

In September a 22% majority of estate agents said they had received more instructions from vendors. That +22 figure plunge to -4 in October (see graph sourced from the RICS survey). This means that the average estate agent is seeing fewer folk looking to sell their homes.

This represents is a huge change in sentiment. And it will be interesting to see whether this is the start of a sustained period of reduced activity by sellers or just a blip.

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