Brickonomics

Figuring out trends in housing, construction and property


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

Brian Green

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

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

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

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

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

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

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

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

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

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

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

production of aerated blocks

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

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

production of facing bricks

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

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

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

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

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

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

 

 

Postscript

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

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

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

Am I bitter? Perhaps we all should be.

Women lead the charge as construction employment rises

Brian Green

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

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

Employment

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

But below this overall figure lies a few interesting nuggets.

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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

Brian Green

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Brian Green

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

But is this really the case?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hence the reaction and fears over shortages.

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

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

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

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

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

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

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

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

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

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

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

More on that later…

Don’t panic over construction output drop. The industry remains on a growth path

Brian Green

Don’t panic. Construction is still growing. The first estimate of gross domestic product may show that quarter on quarter construction output was down 0.3%. But there’s no reason to suggest underlying growth has stalled.

Getting obsessed with a single quarter’s figures, let alone a single month’s figures in construction is a bit… well… obsessive.

Construction for GDP story

The graph shows clearly how erratic monthly data are and how, even averaged over three months, the figures still bounce quite a bit. Looking at this chart you’d have to be a real pessimist to see construction activity flagging.

Here are four points that I think should be noted in relation to the latest construction estimates in the GDP data.

The first point is that the data are very preliminary and will be revised. They could well go up and you may well find that the fourth quarter was flat rather than down. Then again they may be revised down.

The second point is that the construction industry is very hard to measure. Things like seasonal adjustment and inflation are extremely hard to get right so they can cause distortions from reality. Furthermore there are uneven lags in the data caused by the difficulty of collecting consistent responses from businesses, so the monthly data are in effect in blurred vision.

The third point to note is that construction is a pretty lumpy business and big swings are not unusual.

But there is, at the moment, a fourth point I think is very important to bear in mind – restocking. That is to say the amount of output needed to lift the amount of work in progress, within the production pipeline, to a level that better matches the expected level of future demand.

This is going to have quite a big impact on private housing at the moment given the sharp rise in expected sales. The impact will be even greater if the stock of homes for sale had fallen sharply just as demand from Help to Buy kicked in. Not only will firms have had to be doing more work to finish more homes to sell, but in the early stages they will have been doing more work to increasing the amount of infrastructure and part-built homes in the pipeline.

Sure enough the figures provide some support for this notion. You see an impressive near-10% rise in private housing output between the first and second quarter of last year, before a more subdued rise in the third quarter, with activity flattening out a bit by August.

This surge of activity is consistent with house builders suddenly opening more sites and starting many more homes to meet the pace of future demand.

There was a similar jump pattern in the commercial sector between the second and third quarter when output jumped by almost 7%, with growth calming a bit in the autumn.

Now restocking the production pipeline will not be the only thing at work here. It may not be that much of a factor. But it could be. A step change in production levels can cause a big surge in work on the ground, so it should not be surprising that we saw such a surge and then a subsequent easing in growth.

Taking all the above points in to account it seems pretty clear to me that we have to look beyond monthly and even quarterly figures to appreciate the underlying growth pattern of construction at the moment.

For what it’s worth, my take is that the industry hasn’t stalled it probably just expended a lot of effort earlier on in the year building a platform for growth in the future, so bulking up the second and third quarter output. I suspect there is reasonable underlying growth and most other indicators would seem to support this view.

Just how sustainable and strong this underlying growth will prove in the longer term is another question. There are plenty of problems ahead yet and awkward issues that I suspect will remain unresolved until after the General Election.

But I’d be surprised if for the next year or so the industry, as measured by ONS, didn’t show pretty reasonable growth, even if it the rate of growth does bounce about a bit.

 

More optimism, some caution, as all main industry forecasts see construction bounce back

Brian Green

Two more construction forecasts came out over the past week that added to the consensus that suggests construction is set for strong growth up to the General Election.

Indeed, with the exception of the Hewes forecast, the view is that strong growth will continue well after 2015.

Forecast 2014 2The Hewes forecast tends to embrace more of the downside risks and in that respect charts a more cautious approach to potential growth.

On that basis it seems reasonable to assume that it would take a nasty and a much unexpected economic storm to deny construction solid growth for most of the next couple of years.

The question then is: What happens after the General Election?

The view of three of the four forecasts covered in the graph, Construction Products Association, Experian and Leading Edge, is that growth will continue above trend through to 2016.

These three forecasts suggest that the end of the recessionary period is with us and, all other things being equal, the industry should by 2016 be on a much better footing with a few years of growth behind it.

It’s also worth noting that the Experian forecast says that the upside and downside risks over the forecast period now look more evenly balanced than at any time over recent years. Many of the bigger downside risks, such as a Eurozone meltdown, have eased.

But why then does the Hewes forecast appear to take a different tack after the General Election?

The first thing to point out is that these forecasts are based on the convention that there is no significant change in the current policy framework after an election, unless there is very good reason. These forecasters are not in the business of trying to guess which party will win.

Certainly looking at the timing it might be assumed that the Hewes forecast is suggesting a pre-election surge followed by a post-election squeeze. That would misrepresent the message.

Yes, it would be naïve to suggest politicians in power didn’t seek to pump up economic activity before an election. And there are plenty of reasons to suspect this is occurring now and helping to improve the fortunes of construction.

However, what the Hewes forecast seems to be suggesting is that there will be a pause for breath that checks the growth path after the General Election. There is no suggestion of construction once again falling back into a full-blown  recession.

What lies behind this suggestion is the need to address some of the more awkward imbalances currently in the economy. Added to this there are some negative structural problems which Hewes believes may inhibit growth.

The underlying economy is far from normal. The path of the Bank of England base rate is historically unprecedented. We have quantitative easing. We’ve Funding for Lending and Help to Buy. Compensation for Payment Protection Insurance misselling has recently pumped billions of pounds into consumer spending.

As the effects of these fade or the stimulus is unwound there is likely to be a drag on demand for construction.

Meanwhile the underlying economy is delivering a shabby performance on wage growth, exports and business investment. And, of relevance to the construction sector, we are seeing a revolution in retail that is seeing the virtual shop undermining the prominence of the physical shop.

These impacts on the economy, and more specifically construction, lead Hewes to forecast, among other things, a flattening out of private house building and commercial building in 2015.

This Hewes argues would lead to a check in the overall growth rate. But the impact rests very much on timing.

For my money there may be a bit more time for the industry to build up a head of steam before the full effects resulting from resolving these issues bears down on construction growth.

But, the key point that is emphasised by the Hewes forecasts is that troublesome issues remain and there is significant uncertainty over when and how they will actually be addressed.

That said, it will be a reassurance to the much-bruised construction industry to have a set of forecasts all revised upward.

Forecasters see strong growth for construction – but, then again, the General Election is coming…

Brian Green

The latest industry forecast will put a smile on the face of the UK construction folk. The recovery is now expected to move faster having arrived earlier than forecasters expected just three months ago.

The Construction Products Association now expects to see growth in 2013 of 1% instead of the slight decline it forecast three months ago. It has also raised its forecast for 2014 to 3.4% against 2.7%. Its 2015 forecast was raised from 4.6% to very strong 5.2%. Its projections for 2016 and 2017 however were trimmed.

The twice-yearly Leading Edge forecast was also revised up. It is, as the graph shows, even more bullish short term.

Forecast 2014 1For what it’s worth, the forecasts suggest that construction will be back on its long-term (since 1955) trend line by 2015, although changes to data collection and industry definitions does make that observation a bit iffy.

So, inevitably there will be a sense that things are getting back to normal.

Certainly, compared with earlier forecasts, there seems less of a sense of downside risk and uncertainty. And the growth figures are significantly large to suggest that a dip back into recession over the next five years seems very unlikely. Indeed this year is expected to be the last to see a decline in any of the major sectors.

All great news then?

Yes, but you’d be a nutter not to recognise that there will be risks and not to spot the political convenience of a rising economy in a run up to a General Election.

So what are we seeing here?

Part of the uplift in the numbers, at least near-term, will be down to revisions made by the Office for National Statistics a couple of months ago. These revisions added about £1.5 billion to the official estimate of construction output.

But strip that out, the main reason for the greater optimism within the forecasts is the recent stream of more upbeat data. The economy and construction are on a much steeper upward path, finally, after bumbling along in the valley of recession. The RICS construction survey and the Markit/CIPS PMI data have gone pretty much stratospheric and it’s hard to find a downbeat construction trade survey.

On the ground the uplift in house building has received much attention, but what is most noteworthy in these forecasts is the revised outlook for commercial building.

Housing and commercial building dominate the new-build sector. So having both of them growing strongly does provide a big impetus to growth overall.

But importantly the recovery is spreading out from its heavy reliance on housing in London and the South and, to a lesser extent in the public’s eye, infrastructure.

There now seems to be a more widespread improvement. This was a point picked up in the previous two brickonomics blogs. It also helps explain why trade surveys appear so bullish. A large majority of firms now appear to be enjoying some growth – how much and how well spread is harder to tell.

This suggests improving economy generally, along with fewer worries over economics risks, is helping to lift the boats of more construction businesses around the nation as investors take the plunge and commission construction.

Certainly the regional prognostications produced by Leading Edge suggest much more widespread growth than in the previous forecast.

This is very encouraging.

But when we look at what’s driving the economy things are a little less comforting. Since the summer of 2012 consumer credit has been rising. Over the year to November 2013 the stock rose 5%.

It’s true that mortgage debt is not growing as fast, currently at about 0.6% a year. But interpretation here is important given the asymmetric distribution, where long-term mortgage holders have low debt and are enjoying low interest rates. There are about 1% fewer mortgages than a year ago.

So consumer debt seems to be a factor buoying the economy. Meanwhile, business investment doesn’t look anywhere near as rosy, having a negative contribution to growth along with exports in 2013 Q3. Government expenditure, meanwhile, has been contributing to GDP growth.

This is a long step from the nicely-balanced economy of the Chancellor’s hopes and dreams. And with George Osborne still highlighting the need for austerity in the future, have we just witnessed an easing of austerity before it is re-emphasised after the General Election?

Meanwhile, the economy is still receiving the economic equivalent of the stimulants and analgesics you’d expect of a patient in intensive care – Help to Buy and Funding for Lending, combined with quantitative easing and a Bank rate that hasn’t been this low for this long for as long as there has been a Bank of England.

This all needs to come out of the system, we would expect.

The real uncertainty I see within these forecasts is how well embedded and sustainable will the recovery be in early 2015. Because there seem to be some very awkward and uncomfortable policy manoeuvres to come.

But looking on the bright side, whether these forecasts are a bit on the optimistic side or whether they actually understate the momentum building behind the construction sector, they certainly provide plenty of scope for the industry to invest in itself and boost recruitment and development of talent.

Jobs data shows the very uneven recovery for construction

Brian Green

The latest set of Office for National Statistics figures for jobs in the economy does provide reason to be encouraged.

The national construction jobs figures provide relief in that there were at least as many jobs in September this year as last. Indeed the figure of 2,070,000 workforce jobs (seasonally adjusted) is the highest for three years.

So we may be seeing a turning point with potentially sustained growth in employment in the coming months. Though in fairness most of the improvement in the construction jobs scene has come from self-employment rather than direct employment.

A closer examination of the construction jobs figures regionally, however, leaves plenty of scope to get a little bothered if you live and work near the M62 corridor. Construction jobs in the North West were 3.5% fewer in the three months to this September than a year ago, while Yorkshire & Humber saw a drop of more than 11%.

This contrasts with those plying their trade in and around London, who are seeing a very different construction jobs market. There was a rise of more than 5% in the number of construction jobs in the capital over the same period. Meanwhile in the abutting Eastern region jobs were up almost 7.7%.

This further strengthens and existing trend. While , according to the workforce jobs data, the industry has lost about 256,000 jobs across the UK between September 2007 and September 2013, in London there was an increase of 37,000.

Before the crash jobs in London accounted for about 11% of those in the UK. That figure is now above 14%.

We have seen a structural shift in the industry. Half of all construction jobs in Great Britain are now in the south (London, South East, South West and Eastern regions). This compares with about 45% before the recession and about 44% 20 years ago when the industry was pulling its way out of the 1990s recession.

The proportion seems to have been similar to that 44% back in 1981, according to census data. So the current regional spread of construction employment appears unusual.

The real question these figures pose is how successfully will the recovery, evident in London, spread to the rest of the nation and boost employment there. Or are we looking at a permanent and marked shift southward in construction workload and the jobs that go with it?

How the recession changed the pattern of spending on home improvements

Brian Green

Look at the TV ads that tease you to tart up your home and guess the age of the actors.

I’d say from recent ads I’ve seen they tend to be young 30s to young 40s, with a few young-faced 50 and 60 year olds making it into ads promoting replacement windows.

They seem a bit older than in ads of a few years ago, but from what I can make out, the message we have drawn from these ads over many years, and it still seems to hold true today, is that home improvements are things done by fairly youngish families.

Well that seems to be changing.

Despite a fall in spending among families with two adults and kids, they remain the biggest cohort of spenders on home improvements on average. But the growth market is definitely retired folk if we believe the latest family spending data produced by the ONS.

HI chart 1The Family Spending data provide an annual stab at the weekly average amounts spent on various items and services for households across the UK.

The data include spending on “maintenance and repair of dwelling” and “alterations and improvements to dwelling”. Within this the data also highlight spending on “home improvements – contracted out”.

What is clear if we track the data back a few years is that the shift in spending patterns has been dramatic. I took a look at the changing level of spend in an earlier blog, but the really fascinating stuff lies in the detail and the way the recession has impacted on spending within different groups.

Because the data are pretty bouncy when finely sieved, I have looked at the change in spending by comparing the combined spending in the years of 2006 to 2008 with the years 2010 to 2012.

The top graph showing the change in spending on all home improvements, maintenance and repairs says a lot. The young are spending less the old more. Certainly younger households today are more likely to rent than in the past while more among the older folk own their own homes. But this change over the timespan shown will not be sufficiently great to shift the data as much as we see in the graph.

For firms who contract and or supply in this market the changing pattern of spending is important. The total spend in 2012 grosses up to about £33 billion a year of which more than £18 billion is contracted out. That’s a fairly sizable market.

HI chart 2

Looking just at changing patterns in spending on contracted out work we can see how things have changed in the regions, by age, by socio-economic group, by income and by household composition.

So I’ve put a set of graphs together to illustrate these changes. Again, it must be remembered that the different groups will have different proportions of renters and homeowners, so this will influence the pattern of average spending.

When we look at the spending by income group what is interesting is that all five groups have cut spending. The biggest proportional drop has been in spending by the fourth quintile income group. In fairness this tells us not a lot, except that those with bigger incomes spend much more, but probably not as much more than they did, on home improvement. But it is worth noting that a group of higher middle-income folk have cut spending more than the average.

The age of the household reference person is more interesting measure. As we saw earlier with the overall spend on home improvements the older are spending more and the younger less on contractors to carry out the work.

The regional story is also interesting, if not surprising. Households in London have increased their spending, in cash terms at least, on home improvement contractors while elsewhere it has been cut. What we see is a more even pattern of spend regionally in the pre-recession years.

The pattern now has very much a north-south divide flavour to it. And we should note that homeownership in London is less common than elsewhere, so the bulk of the spending comes from a smaller proportion of the households.

For me however, the most informative is the graph showing spending by household composition. This suggests that retired couples are increasingly driving the home improvement market. And given the expectations that pensioners may well continue to be the most protected group while austerity reigns, this trend may be set to continue.

One encouraging thought is that perhaps with savings rates so low, older folk are spending more heavily on improving the energy efficiency of their homes.

There is one gem from the family spending data that I haven’t charted this. It suggests that students have almost tripled their spending on home improvements in recent years. Why? I really don’t know. but intriguing nonetheless.

So, the next time you visit Homebase or B&Q or Wickes and you are puzzled by the number of pensioners and students, you can be comforted in the fact that it is not your imagination. Home improvers are getting older and there appear to be more students among them.

The construction industry is £1.5 billion bigger and growing faster than we thought last month

Brian Green

The annual turnover of the construction industry is about £1.5 billion bigger than we thought it was last month and it is growing much faster.

That really is the big story from the latest estimate of construction output made by the Office for National Statistics.

This is pretty big news. It means that the estimate for GDP will be boosted by about 0.1% as a result of the revisions to the construction output data. So we should expect to see the consensus forecast for GDP growth in 2013 rise from 1.4% to 1.5%, all other things being equal.

OutputMeanwhile these revisions leave industry forecasters scratching their heads wondering what it all means for the direction of construction growth.

The chart shows output on a three-month (blue) and 12-month (red) moving average basis. There is not much impact on the annual figure, but as you can see from comparing with the previous months three-monthly data (orange) the recent growth is far stronger.

The reasons for the upward revisions, which added about £2 billion to the volume measure of work done by construction firms over the past seven quarters, are broadly down to late data, revised seasonal adjustments and, it seems, some changes to how inflation is measured.

Within the data filed late category the worst laggards seem to be civils firms. So this sector has been boosted quite a bit, although there appears to have been some reclassification from repair and maintenance to new work. There was also a fairly large upward revision to the current price data for housing repair and maintenance, private industrial and private non-residential repair and maintenance work.

To add to this uplift there were adjustments to the seasonal adjustments and there also seems to have been some changes to the indices used to adjust for inflation. The upshot is ONS now think there was more work done than they thought last month.

Looking through these revisions and at what the data might all mean, the signs seem very positive.

There’s no surprise that private housing is driving growth, with about 8.5% more work done in the first 10 months of this year than last year. But, in part due to the revisions, private commercial also now seems to be cantering along nicely and looks on track for a rise of about 4%. That represents a major turnaround since the last set of industry forecasts, when there was fear of a further fall this year.

The message ONS is sending to construction firms with this latest estimate of output is clearly seasonal:

“Have a Merry Christmas and look forward to a Happy New Year”.

 
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