Brickonomics

Figuring out trends in housing, construction and property


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.

Construction recovery stalls, but the forecasts remain bright

Brian Green

The latest official output data from the Office for National Statistics show growth apparently stalling in the second quarter.

This may seem at odds with trade surveys and media commentary which tend to point to construction booming. It’s not really.

Despite the zero growth recorded by ONS for output in the second quarter of this year, at the risk of doing a Michael Fish, I think we can be confident that the industry is pretty much set on an upward path. There’s nothing startling on examining the data that would suggest otherwise.

Though I’m not sure I’d call it a boom, more a rebound – finally.

You’d hope so. The gap between output at peak and today is still 10%. Forecasters expect the industry may just about have recovered the lost ground by 2016.

Construction output 2014 q2The latest ONS data release does, usefully in my view, provide a reality check. The release reminds us that recoveries can be bumpy and uneven affairs. Indeed, the data release prompted me to make this point by cheekily tweeting that if it were not for housing-related work construction would be in recession.

But even non-domestic construction is, I think, actually on the mend. It tends to take a bit more time to recover. The data supports optimism that the recovery is starting to spread into corners so far left untouched. But while work in the pipeline is pumping up, at this stage recovery in work on the ground will remain patchy.

So suggestions that things are hunky dory in construction will inevitably jar with many folk who are still struggling.

The ONS figures overall put output in the second quarter up 4.5 % on a year ago. That’s sound growth. But this is down to some sectors in some regions recovering far quicker than others. This is best characterised by the strong housing growth supporting boom-time growth rates in London.

Housing and non-housing output 2014 q2London, incidentally, is where most national policy makers and opinion formers reside. It’s understandable that their view of the national picture is shaped by what they see around them. Many will not be able to look beyond the effects of housing output being double its 2007 level in London to appreciate the effects in other regions of housing output being 30% to 40% down on 2007 while public sector is shrinking and private commercial and industrial building activity is still fairly fragile.

As to the reasons for this recovery in construction, there’s little magical, unexpected or extraordinary. By and large when there’s sustained growth in gross domestic product there tends to be growth in construction. This holds true in the UK as it does in Argentina, Botswana and China.

After a long period flatlining the UK economy has woken up and enjoyed a year and a half or so of sustained and fairly robust growth. Forecasts suggest this period of growth will remain strong for some time yet. So there is a platform that supports growth in construction.

The latest set of industry forecasts support this. Two, Experian and Construction Products Association, expect strong growth from here, expanding the industry by about 10% over two years. Growth will be particularly strong for new work. The Hewes forecast shows growth, but it is weaker and expected to evaporate in 2016.

The Hewes forecast tends to factor in more of the downside risks rather than taking a strictly central position. One of the growing risks noted by Hewes is the rising cost of construction. This, Hewes argues, will restrain the construction growth of output in volume terms – the normal measure used.

Hewes is also pessimistic on a return to growth for the commercial sector. It forecasts persistent falls for a couple of years, compared with annual rises of about 4% to 5% forecast by Experian and Construction Products Association.

But even the more pessimistic take on risk from Hewes shows the industry improving.

Forecasts summer 2014There are upside risks to these forecasts. If they are realised and release greater confidence to build, they might easily out gun those on the downside. There’s huge potential demand for construction if the confidence and finance can be found. The slump in building work will in some quarters have created a backlog of work that needs addressing. The need to address the nation’s energy supply being a major issue. Furthermore the population continues to grow adding pressure for more homes and infrastructure increases.

There are also structural changes in the economy relating to the increased use of information technology. This is changing how we use buildings and where they need to be located. The changes should result in demand for construction as the built environment is adapted to suit.

Naturally the General Election in 2015 represents a real risk. But by comparison to 2010 the risks may be stacked on the upside.

The last election was fought on the battleground of austerity. That is not good for capital spending. This time around it seems that all political parties are increasingly emphasising the benefits of investment in housing and the nation’s transport infrastructure. In the bidding war for voters there is a fair chance this may push spending on construction up rather than down the agenda.

Downside risks remain. When and how fast will interest rates rise and how will rises impact on investment and consumer spending? What might unwinding quantitative easing mean for investment? The current recovery is reliant on consumer spending, despite low earnings growth, how long before we see a more balance recovery? Will the Eurozone troubles remain contained? Will fear over capacity constraints restrain investment in construction? How will global political instability impact on economic growth? What effect might independence for Scotland have on construction? And there are plenty more.

There will always be risks, but in the round construction is in a much stronger position than it has been for some time. Work is easier to find and will become so for ever more firms in the industry. And there are plenty of reasons for optimism in the longer term.

That, however, doesn’t mean everyone is seeing improvements and everyone will. More importantly, while work may be easier to find, the industry has a tough job on its hands rebuilding its own infrastructure, particularly its skills based, as it drags itself out of the slough of long and painful depression.

Government must plan and act as if in the longer-term construction matters

Brian Green

In business certainty is a good thing. It may be less exciting for the crisis-management junkies we seem to be in Britain, but it helps us be more efficient.

There is however one certainty that is painful to experience. This is the certainty that an action or lack of action will lead to an unnecessarily destructive outcome.

Today the RICS launched its quarterly construction market survey. Its headline: “Private sector continues to provide forward momentum.”

It’s all pretty predictable stuff. Most firms see most sectors and most regions doing better than they were. Potted summary, things are on the up.

Sadly when I see such encouraging reports of the recovery of construction I am left pained and I have to say angry. This is not because I’m a miserable git who thrives on recessions, far from it. It’s great news that things have picked up. That we are building again. That we are investing in the necessary infrastructure to improve welfare and prosperity.

So why angry? Well I think there’s a clue in the juxtaposition of two graphs in the RICS survey release (see graphs below).RICS UK Construction Market Survey Q2  2014
With the welcome upside comes the inevitable and totally predictable pain of seeing an industry struggling to cope with the demands put on it. The lack of available skilled people. An already ageing workforce on average four or five years older than before the recession. Frantic scurrying to foreign shores in search or skilled workers while young folk at home remain untrained and unemployed. A backlog of work that needs to be done but that may not be because of calls elsewhere. Inefficiency and rising costs. A supply chain debating on how much to invest in case it all goes pear-shaped again.

As much as anything can be certain in the unpredictable world of construction this was the inevitable outcome of the nation’s political and economic choices made during the recession. This is not smarmy clever-dick hindsight. It was predicted by many at the time.

But it was not inevitable. There were cards that could have been played to avoid it. Here’s just one blog from 2011, despairing at policy. There were plenty more before that.

The policy makers got it wrong. The Government could have invested in construction. Housing and the refurbishment of housing at the very least. We knew we needed it and we had the skills and supply chain in place.

The question we now have to consider is what should policy makers do from here on?

My gut feel is they will do little or any great value. Cut a bit of regulation here or there, invest a bit here or there where the private sector investment is a bit light, so it appears that we are all sharing in the recovery. Who knows?

What it will not do is investigate aggressively how we can boost the level of home-grown construction workers. There are more than a million 18 to 24 year-olds not in education that are either unemployed or not economically active. Surely construction can help here and in the process help itself?

We firstly need to stop blaming the young for their own plight, as if they were a breed apart. For that matter we need to stop thinking that the answer lies in making construction appear hip to the kids.

Much has been done, but we need more solid research to find the barriers and find the incentives that might work. Then we need to devise a plan and appropriate schemes to be tested. This should lead to a massive programme of job training and mentoring that is followed through with proper in-work experience.

This must be led from the top. From the Government.

What will happen is much handwringing, innumerable conferences, seminars, debates, meetings and policy papers from a host of different interested but ultimately impotent parties. This will lead to a few tepid showcase policies.

As they already are, construction firms will reinvigorate labour-agency contacts in Poland, Lithuanian, Latvia and anywhere else where they feel they can find workers of adequate skills. And this will be accompanied by much tut-tutting about how you can’t find a young British worker prepared to put in a full day on a Monday or a Friday because they would rather bunk off and go clubbing.

In an industry characterised increasingly by the self-employed, there will be little room and less incentive to bring on young construction workers, to provide the mentoring they need, to have the patience it may take to turn wayward teenagers into working adults.

Meanwhile, in parallel with this will be the major inquiry into why the Germans and not the English win World Cups.

Here’s my patronising suggestion of the day: plan and act as if the longer-term matters.

More a house-building recovery than a construction recovery – so far at least

Brian Green

Construction output grew 0.6% in the first quarter of this year. That’s up on an earlier estimate of 0.3% in the first release of the GDP figures. Work done in the first three month was 5.4% more than in the same period a year earlier.

That’s the very encouraging headline story from the latest ONS construction output data. And we can be more encouraged given the iffier-than-normal weather at the start of this year. This provides reasons to think that underlying growth is more than the figures posted might suggest.

You’d certainly might expect so, given the multitude of construction trade surveys registering sentiment somewhere between positive and ecstatic. It’s dead easy right now to get carried away with the exuberance in some construction circles.

No doubt things are getting better. There’s considerably more optimism about. But after a seven-year slide with a few bumps on the way from the 2007 peak to now, you’d expect to be enjoying better times.

As a point of reference, construction output in 2014 q1 remained 11.6% below that of q1 2007, according to the ONS volume measure.

So, is there a danger that our excitement is running ahead of us?

Nobody can hide the fact that house-building work has been expanding sharply and looks on track for more strong growth. Construction work attributed to private new housing in the first quarter of this year was up 23.1%, says ONS. Mind you it needs another 30% growth to get back to the level we saw in early 2007, which then was described as too little to meet the nation’s needs.

Public new housing is up too over the year. Here I’d be a bit cautious over drawing too much from this, because the distinction between what’s popped in the figures for the public and private housing sectors is increasingly blurred.

Either way new house building is storming compared to its dark days in the depth of recession. On top of this housing repair maintenance and improvement work has bounced back over the past year or so.

Outputq12014Graph1Bearing that in mind, look at the set of graphs splitting housing from other construction work and you get a clue that this so far is more a story about a house-building recovery than a construction recovery.

Outputq12014Graph2We’ve heard much from the Government over the past few years about the need to improve the supply side of the economy and invest in infrastructure. It’s bandied large figures about telling us of its investment intentions.

Well there’s a strong case to argue that it would be good if the Government’s pockets were where its mouth is. The data suggests infrastructure work is almost 10% lower now than when the Coalition took the reins four years ago and 4.8% down on a year ago.

Public other work is obviously down on the year ago as is public non-housing repair and maintenance work. That’s no shock given the cuts to spending.

But private industrial work (admitted a small sector and so quite volatile) is also down.

Outputq12014Graph3Growth in the private commercial sector has been very feeble to date. It’s down more than 10% from where it was when the Coalition took over and inherited what looks like in the figures a mini-revival.

Outputq12014Graph4Looked at in these terms the argument that the Government has built what looks like a recovery in construction on the back of late-in-the-day controversial sector-specific support (Help to Buy) appears to hold more water than George Osborne might like to drink.

Critics, myself included, long argued for more direct Government support for construction much earlier. This would have left the industry with far fewer supply headaches – a depleted and ageing workforce just one – than it now suffers.

Leaving irritation over the past aside and looking from where we are now, there’s plenty to cheer us, despite the rather lacklustre performance to date of non-housing construction work.

All the indicators worth looking at that illustrate what’s coming down the pipeline, architects and surveyor surveys for instance, suggest there is a surge in work heading for building sites around the UK.

There’s plenty too that has convinced the industry forecasters that construction growth will spread out from the housing sector this year.

However, today’s figures are a sober reminder that the recovery we see still has a way to go before it is established as a construction recovery rather than a house building recovery.

Even so, just the smell of better times ahead must make it hard for the wider construction industry not to get excited after seven lean years.

Forecasters see spring in the step of construction with fewer dark clouds on the horizon

Brian Green

The latest set of construction forecasts from Experian, the Construction Products Association and Hewes all exude greater confidence than those released at the start of the year.

There were few radical changes to the expected numbers above adjustments that would naturally be made to accommodate new data. But the sentiment is more encouraging, with concerns over downside risks easing.

Three forecasts compared April 2014Indeed Experian suggest that the balance of risk within its forecast has probably shifted to the upside. The downside risks of squeezed real earnings and renewed problems in the Eurozone have eased.

But the Experian forecast does highlight the relatively newer threat of a house price bubble as a growing downside risk. Meanwhile Hewes points to interest rate rises as a threat.

This does not take away from the fact that all forecasters expect strong growth this year and this in the eyes of Experian and the CPA will be maintained in the medium term.

Hewes, which tends to factor in more downside risks, sees the rate of growth slowing sharply after the election.

The consistent feature of all the forecasts is the strength of the new housing market. The consensus suggests more than 20% growth over the three years from 2013.

Both Experian and CPA are bullish on infrastructure, suggesting growth of about a quarter over the three years from 2013. Hewes view is significantly less optimistic with relatively low growth expected, but no contribution from Hinkley is included as it has yet to secure EU approval.

Another key difference is that Hewes does not foresee a sustained strong recovery in commercial building, whereas both Experian and CPA see a solid and increasing rate of growth. This is a huge sector and so has a large impact on the overall output. Hewes says its relatively cautious position relates to the susceptibility of the sector to higher borrowing rates.

The takeaway from these three forecasts is that the picture is brighter and there are more upside risks emerging while the downside risks ease.

But fragility remains with particular concern over inflation in the housing market and the potential impact of higher borrowing rates, should they come sooner rather than later.

The sorry side of the upswing in construction and why posturing politicians got it wrong again

Brian Green

For me there’s something dreadfully sad about the timing of the Government’s announcement that it is backing £36 billion worth of planned investment for 2014 and 2015.

It will, say the Prime Minister and Chancellor of the Exchequer, support 150,000 construction jobs.

This should be greeted with unfettered joy. But I’m afraid I can’t see it that way.

How do I see it?

Well imagine Government leading a construction industry motorcade, ignoring the road ahead, too busy scanning the crowd for adoration, unaware when to use the accelerator, the brake, or for that matter the gears. Behind all is in chaos.

A tortured metaphor, but hopefully you get the drift. Leaders should lead not preen and posture.

The right time to invest in construction was when industry output plunged and remained low. The Government suggested such spending then would upset the international money markets. Rubbish. Even in the extremely unlikely case that a well-judged increase in capital spending had annoyed these folk, it would have been worth doing in the long run.

There were warning calls: spend on construction or lose a generation of construction workers, professional and trade. Strong arguments were made: the taxpayer would get bargains if it spent more on construction in a recession.

The Government didn’t spend more on construction. It cut. The Construction Products Association estimate publicly-funded construction output, including PFI, fell 14% from 2010 to 2013 where it sat 27% below the pre-recession level. The industry lost a generation of professionals and skilled trades.

Now, conveniently timed before the General Election you might think, the Government parades its spending prowess and how it is “helping hardworking people and backing business with investment in better infrastructure”.

Good timing? For whom I wonder.

RICS1

Today what do we see? Yet another trade survey reveals the strains of an industry desperately trying to fill the gaps created by a prolonged and deep recession (see graphs).

The indicator of expansion used by the surveyors’ body RICS is a balance of those seeing growth against those seeing contraction in workload over the past three months.

It has hit a series high of 43. It’s the highest for 20 years. In the relative boom years before the crash the highest was 33, in the summer of 2004.

And the effect: rapidly rising input and outputs prices; rapidly rising skills shortages.

RICS2

Given that we most likely have yet to experience the full force of this upswing, there is every reason to expect these problems will increase. And fast.

For businesses and for the workforce this is great news. More work, more turnover, bigger margins, more profit, more pay.

But for clients, is the sudden surge in work a good thing? More cost, more delays, more uncertainty and the risk of lower quality.

There’s a further rather twisted irony, given the Government’s wider political priorities. Where will we find the 150,000 skilled folk to fill the jobs created over 2014 and 2015 by this investment? Increased immigration?

RICS3

It is absurd that the industry should be expected to go from famine to feast so swiftly, yet again. This is not the sign of a “well-run economy fixing the roof while the sun is shining”.

Construction should be seen and should have been seen as investment not consumption. Build now and build sensibly for the nation and you have it for many years ahead. Build now for the nation and your economy should run more smoothly. Build for the nation in a recession and it will cost you less in the long run. Build for the nation in a recession and you will preserve the skills you will desperately need when things improve.

When the private sector is steady on its feet again you can build for the nation a little less, having already put in place much of what you need. This will help to avoid overheating and skills shortages and uncertainties and rampant price rises. And it will cost the taxpayer less.

This is not knew wisdom.

It was wisdom ignored.

Now the consequence of this folly must be managed carefully if we are not to further damage the long-term future of the construction industry.

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…

 
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