Brickonomics

Figuring out trends in housing, construction and property


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

Brian Green

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Brian Green

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

Brian Green

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

 
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